More than a few TTAC commentators pooh-poohed the risk to the capital markets by Obama giving the UAW cuts ahead of senior creditors. Now the chickens are coming home to roost. There was that thing I sent you yesterday about Indiana, burned in the Chrysler bankruptcy, announcing the state won’t invest in bailout companies. Legislators giving tax incentives and other state aid to business is one thing, the state treasurer managing pension funds and state investments has a higher level of fiduciary (and legal) responsibility, and he’s not going to risk getting sued or worse. Today, Bloomberg reports that a bunch of hedge fund managers say they won’t invest in unionized businesses. Also, Jack Welch described the governments actions as “The creditors’ rights were trashed and the unions got 55 percent of the company.” People may not always be rational actors, but when you have everyone from economics professors to mom & pop investors asking “who will buy bonds if the terms are rewritten by the gov’t?”, it shouldn’t be any surprise that institutional investors act accordingly.
Belvidere is in Illinois.
Chrysler’s Belvidere plant is in Illinois, for gosh sakes. Try and get at least one fact right.
There was a time when there were stakeholders in business…not just the management and the shareholders, but the communities, the states, the workers. It was then thought that everyone rose or fell together, that all the stakeholders had a part.
Then the spreadsheet mechanics took over business practices and the only thing that mattered was ever increasing profits and the payoff to management and the shareholders. To paraphrase Jack Webb, ‘Just the numbers, Ma’m.’
So management NSFWed the other stakeholders and hollowed out the companies in pursuit of Only-Profit-Matters until the roof fell in.
So before you go raining on the all those people who’ve been burned, you might put the blame where it belongs: with the bone-headed, venal management and the stockholders that uncritically went along with the ruination.
What comes after now may not be pretty and it may not work, but bone-headed free-marketeering has failed miserably. It and its apologists should shut up and step aside.
It was a quick email to RF and I didn’t do my normal fact checking. I apologize for the factual error regarding Belvidere.
The point still stands since Chrysler is still a major employer in in Indiana. Chrysler has four plants making transmissions and transmission components in Kokomo, Indiana, the largest of which employs 5,000 people. Well, none of Chrysler’s plants are making anything these days, but I’m pretty sure that the Kokomo transmission facilities are supposed to be part of “New Chrysler” aka Chrysler Group.
I should point out, for clarification, that the hedge funds mentioned in the Bloomberg item as saying they won’t invest in unionized companies included, among others, Pacific Investment Management Co. and Schultze Asset Management LLC, both of which I believe were Chrysler bond holders.
It sounds like capitalism is still working. Despite government efforts to bailout the industry, there are unanticipated market forces and corrections at work.
If investors (state governments, bond holders, hedge funds) wisely avoid further investment in these bailed-out companies–they will have no choice but to relocate outside the US where Unions are less of an influence, and they can continue to raise investment capital. Production will shift to cheaper countries, stockholders will get dividends, the bailed-out companies will make profit.
Did we really think that the Wal-Marting of America wouldn’t extend to mass produced goods like automobiles? How much of Wal-Mart’s, or Target’s annual sales are on domestically-produced goods?
I’ve decided that all GM and Chrysler dealers that are losing their franchises are ingrates if they bitch.
Every GM and Chrysler dealer, their employees and the folks that supply them have been on welfare since Oct. of 2008.
Now when the welfare is running out 8 MONTHS LATER, some are bitching.
Without welfare checks, they would have failed 8 months ago when GM and Chrysler liquidated.
Sure they showed up at work for the last 8 months, but only to collect the welfare. Some of them sure got used to the entitlements awful fast.
Ronnie, come on now… You gotta try just a little harder here…
People investing in things basically dried up last fall when the Banking industry collapsed. The main reason that we are in Ch11 discussions right now is because GM and Chrysler were basically unable to get financing from anyone OTHER then the government. Why was that? Oh ya, ’cause these companies were going broke an people figured they would lose everything if they declared BK (which most people, including this site, were expecting, predicting, calling for)
People refusing to lend money to these companies is not new… This has been going on for months.
No laws have been broken changed or rewritten.. this has been covered over and over. This was tested in Federal court and the bond holders lost.
The fact that hedge funds won’t invest in this or that, shouldn’t surprise anyone… most hedge funds are broke and have nothing to invest.
It is a GOOD thing that Ma and Pa won’t invest in these firms now… As we covered in a previous blog clearly they had no clue what rights they had or didn’t have before… most of them had no clue they were buying junk rated crap and most seem to be completely surprised these companies ended in Ch11. All the small investors who “put all of their eggs in one basket” that have been interviewed so far were NOT paying attention and ALL of them were in WAY over there heads.
The fundamental problems with these companies still exist.. (terrible reputations, bad marketing and no sales) It is not news that no one is willing to invest in these firms… The response to that is “Well Duh”.
If these companies can turn things around (and that’s a big if) the investors will come back. But to say that investors aren’t going to be investing in companies that might go broke.. since they could lose everything in a BK (Government driven or otherwise…) Again… “Well Duh”… Government changing the rules isn’t the issue (since rules haven’t been changed) going broke IS the issue.
Need a counter example? On May 11 2009… in a day and age when no one is buying any debt from anyone… Microsoft managed to sell 3.75 Billion in long term debt in one day… How about that… if you have a AAA bond rating you can still move corporate paper… Aren’t these people afraid that the government might change the rules? May 11 is an interesting day isn’t it… That was only 3 days after the Federal BK judge said that the Chrysler Bond Holders had no case and yet.. People were lining up to buy Microsoft paper.
If this is news to you… that you could lose everything if the company ends in a BK then you should be buying Treasury Bills.
I’m not sure what your point is anyway about IN. Do you think IN state goverment should be investing its pensioners’ funds in a politically motivated way?
If you think taxpayers would be happier watching the larger portion of their funds going to hedgies ahead of workers and pensioners you are mistaken. Even at 29 cents on the dollar these whiners will be making $$$ whereas the workers and retirees are facing an uncertain future and the possibility of losing everything.
Check the USD/EUR and USD/YEN pairs for interesting action ….
God it will be so much more fun to write about cars, instead of the car biz, whenever carmageddon, the carpocalypse, cartastrophe, or whatever you want to call it, finally bottoms out and the focus goes back to the machinery.
I’ve always liked small cars. My brother had a Mini long before anyone heard of FWD and the first car I bought was a Lotus Elan. So even though we won’t see many 500 and 600 HP cars for a while, there should be some skunk works in some companies making cars that are fun.
Actually, there are some interesting angles with the investor stuff. The Chrysler deal benefited one labor union, the UAW, giving them 55% of the new Chrysler Group, at the cost to another union, Indiana’s teachers, who lost about $1 million on Chrysler bonds. Indiana’s unionized public safety officers’ pension fund lost even more, $5.6 million. Now I’m never going to cry when a public employee or teachers’ union suffers, but it’s still interesting to see how some of those nasty speculators and hedge funds are really Obama supporters. Maybe not the cops, but certainly the public school teachers. And yes, those amounts are relatively paltry when talking about billions in debt or trillions in public debt.
Politics makes strange bedfellows. I suppose it also determines who gets kicked out of bed too.
Ronnie, come on now… You gotta try just a little harder here…
Read the link. I’m not the one saying that investors are backing away. The hedge fund managers themselves said they’ll avoid unionized firms and the state treasurer of Indiana said they’d avoid bailout recipients with their investments.
I’m not sure what your point is anyway about IN. Do you think IN state goverment should be investing its pensioners’ funds in a politically motivated way?
I think it’s stands to reason that some state investment favors employers in that state. That’s just political reality. The fact that the Indiana treasurer is so pissed off that he won’t let funds be invested in such an employer, I think, says something.
If you think taxpayers would be happier watching the larger portion of their funds going to hedgies ahead of workers and pensioners you are mistaken. Even at 29 cents on the dollar these whiners will be making $$$ whereas the workers and retirees are facing an uncertain future and the possibility of losing everything.
Those “whiners” and “hedgies” actually represent a lot of workers and retirees. It was Indiana state employee pension funds that were some of the Chrysler bondholders.
That’s the problem with playing class warfare, you sometimes end up with friendly fire.
Also, Jack Welch described the governments actions as “The creditors’ rights were trashed and the unions got 55 percent of the company.”
Jack may have a point – but 55 percent of $0 is $0.
‘The creditors’ should have demanded part of the new company. In that way, they benefit if New Chrysler actually works (or is subsidized with tax or TARP investor dollars until it works).
hal:
Even at 29 cents on the dollar these whiners will be making $$$ whereas the workers and retirees are facing an uncertain future and the possibility of losing everything.
If workers/retirees make more than 29 cents on the dollar when they cash out their New Chrysler shares, they’ve managed a good deal. Of course, the law suffers. As does future confidence in the secure bond offerings of any unionized firm.
Regarding whiners, some of the most vocal I know are ex-unionized steel and airline workers whose excellent pensions/health care benefits were thrown under the PBGC bus a decade+ ago. They wonder why the UAW is so different…
I’m sorry Ronnie but you are the one looking for class warfare in this and I’m not sure why you would be happy to see any class of investors lose money. You have a few hedge funds who overplayed their hand in this situation, had their bluff called and are now crying foul, they can pursue their case or they can issue press releases. They are issuing press releases.
I’m not the one saying that investors are backing away. The hedge fund managers themselves said they’ll avoid unionized firms and the state treasurer of Indiana said they’d avoid bailout recipients with their investments.
Of course they are saying this… This is another “Well Duh” moment.. These are the same guys who went to court, lost… and now are playing a game that most would call “sour grapes”.
To summarize the link…”We invested in Chrysler junk bonds, a border line Bankrupt company, we lost our shirts, we fought our case in court, we lost that too… we won’t do that again.”
When you think about it… Its kind of funny.
To people who invest with these hedge funds you can rest assured that the managers there do learn from their mistakes… eventually anyway.
If you are looking at the USD/EUR and USD/YEN pairs then you’ll see that mass desertion of the USD has begun. No wonder with the printing presses in high gear. However, the confidence in the former safe haven is shattered, and money flees to Europe and Japan – despite the bad numbers from there. A low dollar is
good for the U.S. car industry as it makes imports pricier. Bad for the people as it makes imports pricier and leads to inflation.
CamaroKid:
If this is news to you… that you could lose everything if the company ends in a BK then you should be buying Treasury Bills.
Even the T-bill ain’t what it used to be:
FXstreet.com (Buenos Aires) – The U.S. credit ranking remains at AAA Moody’s Investor Service spokesman said Today. Fears of a probable downgrade triggered a selloff of U.S. assets starting early in the American session, with Wall Street and S&P closing to the downside, and dollar falling to record lows against major rivals.
Ronnie makes a good fundamental point, and if you don’t see it, it’s because you don’t want to see it. Predictability is paramount in legal affairs. The rules about payment priority in bankruptcy have been set since at least 1978 (when the Bankruptcy Code was enacted) and largely since 1898 (date of the Bankruptcy Act).
Obama chose to overturn those rules in the Chrysler case, apparently to favor the unions and the government. He also appears poised to do the same thing in the soon-to-be GM bankruptcy case. Everybody has noticed. Does Obama care about the rule of law, if it gets in the way of his perceived “fairness” or assisting one of his core constituancies?
It doesn’t look like it. If you are one of the hated “speculative investors” you have to act accordingly, and stay as far away from him as you can. I don’t think we’ve ever had such an anti-business, anti-capitalist President.
Public pensions should not be holding on to subprime debt, which Chrysler’s has been for some time.
“Today, Bloomberg reports that a bunch of hedge fund managers say they won’t invest in unionized businesses.”
Well, one, a good rule of thumb is that nothing a hedge fund manager publically says is true, and two, this was the last unionized US private industry, so this is an empty threat to begin with.
When the government starts nationalizing profitable companies wake me up. Investor threats based on the wind down of massive failure like Chrysler are just political posturing to get a better place at the bailout trough.
The bondholders were silent when the government got involved with Chrysler, but now they aren’t getting bailed out as much as they hoped and the tears are flowing.
The clearest violation of the rule of law was when Bush (with or without Obama’s blessing, he was still his own man) used TARP money that, in the constitutionally dubious statute, was clearly only supposed to go to financial industries, to bail out GM and Chrysler. Nothing currently going on comes close to that initial disrespect for the rule of law.
The weak dollar driven inflationary pressure that Bertel is hinting at is what really scares investors, although, as he said, there will be export advantages.
Ironically the inflationary pressure is coming from TARP and the other bailouts that investors demanded when their 401(k)s started tanking last year, before any government intervention, when President Bush, Henry Paulson, and every asshole on every business channel were saying that the world would end if TARP wasn’t passed.
Bertel, the Japanese Gov’t announced they wouldn’t intervene to prop up USD/JPY, but its only a matter of time before they have no choice. As far as EUR/USD is concerned, the European Central Bank has been freeloading off the Fed’s quantitative easing for months now. In any case, I’m waiting patiently for the right time to short the Euro and the Pound, all it takes is one failed Bund or Gilt auction, or more likely a resumption of the stock market decline.
Ronnie makes a good fundamental point, and if you don’t see it, it’s because you don’t want to see it.
Obama chose to overturn those rules in the Chrysler case…
Take another look… This wasn’t Obama… This was a federal BK Judge… If you have a beef.. it is with him… Take a minute and try Google… Its not immediately obvious… But this Judge was originally appointed by Republicans… Or are they in on this too? After all it was Bush who Socialized AIG, Freddy, Fanny, Citi Bank… (long list *snip*)
Take another look, there are no appeals why? this is a $300,000,000 dollar case? Why aren’t they fighting a 1/3 of a billion dollar case in court? Why aren’t they appealing? Why the “Well Duh” press releases?
Why? ‘cause they have no case. No rules have been broken. No funny business. No new law. These investors sunk 300 million into Chrysler junk paper… Chrysler went (was already going actually) tits up and they lost 2/3rds of that… This is not news… That is what happens (sometimes) when you invest in Junk.
And even if it was Obama, who put Chrysler in this position in the first place? Yup that Socialist “W” guy again… It was he who lent GM & Chrysler the DIP bridging loan and said “You have about 3 to fix your mess or we are going to call the loans…” (Google what happend on Dec 24,2008)
It is clear that Bush was planning to do exactly what Obama is now implementing. But then again he was an Anti-Business Socialist too.
Obama chose to overturn those rules in the Chrysler case
If the Non-TARP Saviors of the Universe (TM) had the case that you describe, they could have litigated it. As it turns out, they folded like a house of cards in a windstorm once the judge set a date for selling the assets.
The bondholders had a lousy case because the liquidation value of the assets was low. It’s not about ideology, it’s about money.
I would no sooner take their promises seriously than I would expect a guy who promises that he will “work for food” to actually work in exchange for food. I tend not to take people literally when they handle large amounts of money for a living.
Alcibiades:
“Ronnie makes a good fundamental point, and if you don’t see it, it’s because you don’t want to see it. Predictability is paramount in legal affairs.”
Gold star for you sir! One of the reasons that Delaware is a haven for incorporations is that their legal system when it comes to disputes between businesses is well known with a lot precedents already set by the courts. No matter which side of an issue a lawyer is on he likes predictability and shuns uncertainty. Funny, investors are like that too.
Most of you have missed Ronnie’s point. Investment funds of all stripes are going to think twice about investing in heavily unionized businesses because of what is happening with Chrysler and GM. These funds are not saying they won’t invest in Chrysler or GM again (duh) – they are saying they won’t invest in Catapillar, Boeing, or Case New Holland, all successful companies that most would conclude have a future. What if they get into some kind of trouble and get Obamma-ized to save the Union’s bacon at the expense of their investments? I would think twice about it too. Actually I would think about it once and just say “no thanks”.
they are saying they won’t invest in Catapillar, Boeing, or Case New Holland, all successful companies that most would conclude have a future.
If they think that they can make money, they’ll invest in them.
They’re engaging in what a lot of us would call “bluffing.” They’re good talking points for the politically inclined, but in practice, it’s a lot of rhetoric that won’t be put into practice.
The WSJ had a good news article on some of the behind-the-scenes aspects of the deal. That made it pretty clear that they expected the government to roll over like wimps, and were surprised to get pushback.
That’s a good thing. If the lesson from this is that the government isn’t always staffed by morons who are completely oblivious to how the real world works, then that’s a net positive. It’s just horribly naive to regurgitate what the bondholders are telling us, as if they’ve always been straight-up humble fellows who would never game a situation or tell a lie.
Pch101,
Like the Billy Joel song says “You may be right, but you may be wrong”. I hope you’re right because both the US and Canada need investments of capital to prosper. People who are burned by just one car will swear off that brand forever, no matter what else they may being to market, no matter how much they improve in various ratings and reviews. It’s understandable, if not totally rational. People run investments firms. They can behave in the same irrational way.
Sorry, that should have been “You may be wrong, but you may be right”.
“a bunch of hedge fund managers say they won’t invest in unionized businesses.”
pure unadulterated bs.
Most of you have missed Ronnie’s point. Investment funds of all stripes are going to think twice about investing in heavily unionized businesses because of what is happening with Chrysler and GM. These funds are not saying they won’t invest in Chrysler or GM again (duh) – they are saying they won’t invest in Catapillar, Boeing, or Case New Holland, all successful companies that most would conclude have a future.
Ronnie has already conceded that this isn’t his point… He was merely “posting a link.”
And You miss the point that these Hedge funds won’t be investing, not because of some “anti-union” policy or some “afraid of Obama” policy… but because they lost all of their money when Bush was in charge. They basically have no money to invest. This press release is more about politics then it was about law or investing.
It was: We played the market, We lost… Someone call a whambulance.
Since we have become “Truth about Investing”
You need to understand what is a “Hedge Fund”
Hedge funds are typically open only to a limited range of professional or wealthy investors.
This provides them with an exemption in many jurisdictions from regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity of interests in the fund. Hedge funds by definition are HIGH risk funds playing in the Wild Wild West.
A hedge fund will typically commit itself to a particular investment strategy, investment types and leverage levels via statements in its offering documentation, thereby giving investors some indication of the nature of the fund.
Having a hedge fund say that they won’t invest in this or that again isn’t news… it is yet another “Well Duh” moment… That is what they do…
This press release was pure marketing… It was “Are you mad at Obama and Unions? Invest with us!”
The press release is a joke. (as was their court case)…
I have a question. Who is going to buy cars from Chrysler and GM now? In an informal survey at work, nobody I talked to will now buy their products unless they are total steals. How do you run a company when your buyers are gone? These companies are now like the newspaper industry, with a big chunk of their customer base hating them.
Uh… right. Capitalism is at fault. That’s why Toyota, Nissan, Honda, Fiat, Volkswagon, etc. are closing their doors and demanding bailouts.
OH WAIT! They aren’t. Hmm… what distinguishes those companies from their American counterparts? You’re saying it’s their investors, right?
Can you explain that? My background in corporate finance is apparently somewhat murkier than yours.
CamaroKid: People refusing to lend money to these companies is not new… This has been going on for months.
According to the article, the reluctance to invest in a particular company isn’t limited to GM and Chrysler. It goes on to list specific companies.
If it were limited to those two companies, I agree that there would be no story. But that’s not the case.
CamaroKid: And You miss the point that these Hedge funds won’t be investing, not because of some “anti-union” policy or some “afraid of Obama” policy… but because they lost all of their money when Bush was in charge. They basically have no money to invest.
Really? These excerpts are from the article:
Schultze, whose firm had about $247.7 million under management in February, according to a regulatory filing, declined to disclose which company debt he may avoid. (emphasis added)
And this:
“Creditors are justifiably concerned” about what precedent the auto bailouts are setting, said Mark Kiesel, global head of corporate bond portfolios at Pimco in Newport Beach, California. Pimco managed $747 billion as of Dec. 31. (emphasis added)
That doesn’t sound as though they have no money to invest. Actually, quite the opposite. There is still money for investment.
The events of late 2008 did not vaporize all available money for investment, just as the collapse of the housing bubble of last year has not resulted in everyone being thrown out of their houses, despite the impression given by the media.
Hey RF, please move the “manage your subscriptions” link to above the comment box (or move “submit” to the right side, and “manage to the left”)… maybe I am the only dumb one, but about 5x now, after typing a particularly insightful, pithy even, comment (which makes me a little brain dead), i hit that damn link instead of the “submit comment” button… and then the text gets lost, and back-arrow brings no joy… thx.
I won’t try to reprise my earlier comment, but to plinko i’ll say that look to the size of the gov’t subvention being given to the various companies you name, and you will see that GM and Chrysler are in a whole different league (even if adjusted for sales, or their market caps of long-long-ago days.)
I hope you’re right because both the US and Canada need investments of capital to prosper.
These guys are generally buying distressed assets in the secondary market, in the hope of flipping them for a profit. They aren’t really direct sources of capital for funding going concerns.
I know BS when I smell it, and this sort of thing just caters to populist hype.
According to the WSJ, the bondholders were offered 100% of the equity. All of it. They rejected that; they wanted cash.
There is a lot of naivete being expressed by the conservative ideologues about what is happening here. The bondholders ultimately wanted cash, and they got the cash that could be expected, given the lousy asset value. It’s not a complicated story, but dragging politics into it just mucks up what should be a fairly easy analysis.
Pch101,
I’ll have to disagree with you on this one. Of course the bondholders didn’t want equity. The companies were not worth anything. At least for the time being. Maybe in the future. Maybe. I commented as much in some of the posts about the bankruptcy proceedings. But these funds have to make returns this year not somewhere off in the future. They did think they could get the government to fork over more money or at worst case sell assets in bankruptcy. Instead they got a BR and a 30% deal. They may have gotten out better than if they liquidated but we’ll never know. Problem is they were told what was going to happen to their investment and that they were going to like it. This may have unintended consequences. I think that is point of the post.
Pch101,
What’s your critique of Richard Epstein’s essay for Forbes:
The Deadly Sins Of The Chrysler Bankruptcy. Epstein is the James Parker Hall Distinguished Service Professor of Law, The University of Chicago, and a visiting law professor at New York University Law School.
Of course the bondholders didn’t want equity. The companies were not worth anything.
Right. Which is why it’s absurd for the right-wingers to have a conniption fit over the UAW equity piece.
Everybody in this deal would have liked to get cash. The only ones who did are the bondholders and Fiat, the latter of which is getting DIP financing.
The union basically got hosed. But at least the federal government didn’t get stuck with the pension liability (at least not yet), which was part of the motivation for proceeding with this, I’m sure.
What’s your critique of Richard Epstein’s essay for Forbes
Part of what you don’t understand is that bankruptcy courts are “courts of equity”. They are not law courts in the strictest sense; they are trying to do the “right” thing, which varies from individual circumstances.
Here you have a debtor that can’t pay, but wants to reorganize. The judge has to decide whether reorganization creates equity (as in fairness) or not. That means balancing the needs of the creditors with the debtors, and cutting an equitable (fair) path.
The basic issue in 11 for the creditors is that they get at least as much as they would in a 7. If the assets are near-worthless, as is the case here, that wasn’t hard to establish. The debtor had an argument for value, and the creditors never bothered refuting it. When pushed with the prospect of using an auction to determine value, the holdouts punted because they knew that wouldn’t end well for them. Not worth the legal fees at that point.
Bankruptcy attorneys tend to fall in either the creditor or debtor camp. Most of them fall in the creditor camp, because the creditor side of the legal practice is more lucrative.
It’s an equity court. Both sides can make a reasonable argument. It’s like any good debate — there are good pro and con arguments for both sides.
Here’s what’s wrong with your politically loaded way of doing things. First, you pick a side. Then, you try to find people who say things you want to hear and repeat them, as if having them in your camp “proves” your point.
That pursuit of ideology-at-all-costs is a waste of time. Here’s what I do — I start with the business issues, apply that to what I’ve learned about business bankruptcy cases, and try to figure out what will happen based upon those things. Politics doesn’t factor into my method.
I told you before this happened that it would come down to valuation. Sure enough, it came down to valuation. All of your political buddies missed it, because they don’t get the court isn’t what you think it is.
It is not a “law court” in the strictest sense, so it does not work like a criminal case. This pursuit of equity allows both sides to make arguments that are plausible and in conformance with the law. If you can’t start from that basis, you’ll never figure it out.
“Government changing the rules isn’t the issue (since rules haven’t been changed) going broke IS the issue.”
The rules weren’t changed? Are you serious? They certainly were changed. And you give the MS bond offering example after that. Which tells you that there’s plenty of money waiting to be invested. But not in a failed, losing model that the government is determined to protect at all costs, only because of the UAW cadre that voteed for this administration in lockstep. Please.
The rules weren’t changed? Are you serious? They certainly were changed.
Care to explain how…
This has been tested in court and the Hedge Funds lost the case in less then 72 hours…
I’ve seen shoplifting cases last longer… If the case was so good, so strong, so tight… Why did it collapse so fast?
Lets review…
1) DIP financing trumps all other bond holders
2) Everyone agrees that the Bush loans are DIP loans
3) The judge was willing to listen to the Bond Holders case if they could prove that Chrysler was worth 2 bits more then 2 Billion… They could not.
4) Once a DIP financier takes control of a company they can pretty much do what ever they want with it.
Again, what rule of law was broken?
Preferred bondholders should have been settled before the rest. That’s OK, they were just pension funds and stuff.
Preferred bondholders should have been settled before the rest
And they were, they got 30 cents on the dollar.
Why is it so hard to understand that once A DIP finacier takes over they can basically do what ever they want with a company… They could give it to McDonalds to run if they want to, a new Chyrsler with every Big Mac meal…
In this case they gave it to Fiat and the Pension holders…
This was SMART… if they hadn’t we would be bailing out the Pension holders next. I ask you how much money do you want to pour into this pig.
You don’t really know anything about this settlement (in detail) do you? I don’t have time for this one, nevermind. I’m glad you’re happy.
You don’t really know anything about this settlement (in detail) do you?
And you know even less about bankruptcy law and Debtor-In-Possession Financing (DIP Financing).
“The debtor in possession may be able to keep the property by paying the creditor the fair market value, as opposed to the contract price. This is often the case where the property has depreciated in value since the time of the purchase.”
I’m equally glad that you’re unhappy.
Heh! Quit beating that mule, it’s dead. Gotta run, like to change out the air in my tires every Friday.
Richard Epstein’s essay for Forbes:
The Deadly Sins Of The Chrysler Bankruptcy.
Our education system must really be failing us, because our students come out the other end unable to even identify fake rhetoric.
I don’t see any factual linkages in these dumb articles that people keep linking to. For example, the guy talks about “priority”, then fails to identify the specific ordering that he has issues with (or if you just take the careless innuendo of priorities he offers, he’s just flat wrong). This is the kind of reading comprehension we should be testing for in primary school standardized exams.
If charlatans like this can become a law prof, I can see why the disrespect for academia amongst conservatives has merit.
Indiana already had a love/hate relationship with Chrysler.
There are a ton of automative industries in the state, but the domestics have done a pretty good job of burning Hoosiers lately; Tipton was hosed when the half billion dollar transmission plant that was supposed to be built for Chrysler never came online. Ford and GM have both announced that they’re closing a couple large facilities within Indianapolis. And I think everyone knows what happened to Elkhart.
Meanwhile, Honda actually made good and opened a new Civic factory in Greenwood.
Believe it or not, I am now believing PCH on the fact that these guys will start investing in those companies before too long.
Why? No, not because it’s not about ideology. That’s a lame line that doesn’t apply here. It’s practically a cheap shot.
The why is because they are foolish, and because it’s mostly other people’s money. They know in the end that the investor will blame the government for stealing rather than the manager for not seeing it coming. I had brunch with a New York money man a couple weeks ago, and asked who was going to invest in many of the same companies discussed here after this Chrysler thing. After he had just talked about how mad everyone on Wall Street was for 20 minutes it was obvious he had never even considered that the same thing could happen to any company the government thought was critical. It was like a light bulb went off in his head when I asked the question!
He is no dummy, and he will likely watch out for a few months or more, but eventually, this thing will fade in his, and all the other manager’s minds. For Pete’s sake, the multi nationals go back to Russia for a new smack down every decade or even more.
I am torn about whether to pull out of all my mutual funds and start buying more stocks directly. OTOH, I know they are foolish. OTOH, those fools control billions, and the money moves in ways they understand because it’s a market of fools. It doesn’t matter if you invest in IBM, and that IBM makes the most money. What matters is if everyone in the market wants IBM stock whether they make money or not.
The bond holders had two choices put the companies into liquidation where they would get less than the government was offering after how many years of expensive legal wrangling or take the government money now and walk away.
Unless I am mistaken there is still a Supreme court and if the bond holders were hard done by they would have been complaining to the judges not to reporters.
I think this is just the bondholders kicking up an imagined stink so that they get an better deal with GM.
And you can see by the posts that a large number of the voters think that the government should steal the money from the investors and give it to the comrades in the UAW. This a payback to the tens of millions the unions gave to the Democrats.
Yup, and I’ll bet they will do just as good as a job as Paulson and Bush did running the Banks and AIG. I guess that was payback for the tens of millions the banks gave to the Republicans.
Meet the new Boss, same as the old Boss.
The government can’t even build modern roads or maintain what they have.
That would be because this costs money and there’s a pathological call for middle class tax cuts (and effective repeal of upper class taxes) in this country which is the source of that money.
We generally don’t hear complaints about the hundreds of government agencies that do pretty essential work (or that OMG the government is interfering in people’s lives by building roads). I wonder if this is due to ignorance of those agencies or whether it doesn’t suit the argument.
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On the topic of this news item, the vast majority of “investors” they mention are not such at all, but instead speculators. The whole point of much regulation out there including our monetary policy is to smooth out speculative bubbles and integrate them into a normal cycle instead of something destructive (like we just saw, or do these people not read the news). So it’s all pretty mundane that the speculators are bitching about not being able to enjoy a free for all and taking their toys home, which is exactly the point.
Agent,
Now you are baiting me, aren’t you?
The problem with the budgets has nothing to do with roads. Even the graft and useless roads aren’t the problem. Certainly it’s not about too little taxes. Everyone knows it’s about all the non-essential, non-governmental items in the budget. Corporate welfare and subsidies seem to be a favorite thing that most idealogues want to cut, yet never seem to be cut. The government is simply doing things it should not, and doing them poorly. I don’t want to hear any anti-libertarian nonsense on this one either. We could cut half the budgets without getting anywhere near where the libertarians think things really should be. People of all parties want cuts. Even an intelligent Keynesian will tell you that not all government spending is good to ease a recession, and that whole theory depends on NOT spending like drunken sailors during expansions as well. Stimulus spending should be acceleration of things that will have to be done eventually anyway – roads, buildings, etc.
As for speculators, they are investors. They aren’t necessarily bad either. If it was left to speculators to do the speculating the bubbles would never get out of hand. It’s when the man on the street jumps on the speculative train that it leaps the tracks. Just about every time this happens the root can be traced to government interference in the economy, and most of those times it was them trying to get a free lunch. The point of the markets is to use them to do what men are not capable of doing – predicting the future and managing the economy. Somehow, our leaders can’t or don’t want to learn that lesson.
Blaming speculators is like blaming the boogey man. If you don’t name names you are being a demagogue. Who exactly are the people you mean when you cry foul about speculators?
As for speculators, they are investors.
Actually, they aren’t. I refer you to Benjamin Graham, the father of value investing and mentor to a small-time investment guy who you may have heard of named Warren Buffett. Graham made the distinction:
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
The funds that bought this debt on the cheap were not “investors.” I don’t dislike them, but they did not place their money into Chrysler for the same reasons that an investor would commit money to a venture. They had different motivations.
I have little doubt that a lot of these guys assumed that the government would lavish huge sums upon everyone, because they assumed that government would be dumb and indifferent to the pricing. They surely didn’t buy on the fundamentals of the company’s operations — obviously, there weren’t any.
Unfortunately for them, Rattner has a private equity background, so he is quite price sensitive, as PE guys tend to be. He drilled them just as a PE guy would have done in the private sector.
It’s an interesting contrast between Paulson, who came from a more dignified clubhouse of investment banking, and Rattner, who came from a grittier side of the business.
When push came to shove, Paulson rolled over like a dog begging for treats while Rattner stuck it to ’em. Paulson was so respectful of the halls of capitalism that he forgot how to negotiate. Ironically, it took a Democrat to put a ballbuster on the payroll and get a better deal than did the Republicans who enjoyed handing out cash with almost no strings attached.
First, the UAW did not get 55% of Chrysler, or 5%, or even one share. Its really annoying that this keeps getting repeated when it isn’t true. That stock went to VEBA, a trust that manages the health plan for retired workers. Its completely separate from the UAW, has a completely separate and independent board, and is charged with looking after the interests of retirees – not current workers. UAW, VEBA: not. the. same.
Second, Chrysler and GM were finished without huge loans from taxpayers. No intervention and both would be liquidated, by the time you paid off secured debts there would be nothing for bondholders. They bought junk bonds in companies whose debt was FAR higher than their net worth, the economy went south, they lost on that bet. Invest in high risk/high return instruments, you might lose your money. The lost.
It is arguably a good idea for taxpayers to spend money saving the car companies, the associated jobs, and the supplier companies. But its ridiculous to expect taxpayers to also put money in the pockets of the gamblers who invested and lost.
The government rewrote “the rules” when it bailed out Chrysler and GM, otherwise it would have been liquidation and the bondholders would have gotten nothing. Their complaint is that they didn’t rewrite them *enough* to also send taxpayer dollars to cover the bond holders’ losing bet.
Sorry, I don’t see a need to transfer wealth from middle class taxpayers to high risk investors. As for this “we won’t invest in union firms!” b.s., does anyone really believe hedge funds and institutions will direct their money based on some moral stand, or hurt feelings? Puhleeze, they’ll invest in whatever they think will make them the most money – if, say, VW or Fiat (both unionized) look like good investments, they’ll park their money there in a heartbeat.
Hearing hedge fund managers declare they’ll be guided by some ethical principal in selecting investments is nothing short of hilarious.
Landcrusher sez: “Stimulus spending should be acceleration of things that will have to be done eventually anyway – roads, buildings, etc.” So I guess the massive spending on WWII was an error? Seems like it ended the Great Depression, created a market in Europe for US exports, and lead to massive economic growth for the US (and much of the rest of the world) in the post-war period.
You say that bubbles are almost always created when: “the root can be traced to government interference in the economy” Uh, doesn’t explain the Dutch tulip bubble, the South Seas investment bubble, the railroad investment bubble in 19th century America, the stock bubble that lead to the crash of ’29, the dot com bubble (unless you consider creating the internet government interference in the economy), the real estate bubble. Bubbles appear when regulation is inadequate, allowing people to invest money they don’t actually have (huge margin investing leading to the 1929 crash, buying houses with pick-a-pay mortgages they couldn’t afford, AIG insuring via CDS products when they didn’t have the capital to pay off the losses, the SEC lowering capital requirements for the five biggest investment banks circa 2003). And when regulation is inadequate (repealing Glass Steagall, the SEC ignoring warnings about Madoff, letting AIG be regulated by the OTS which only had one insurance specialist on their entire staff). Government “interference” doesn’t create bubbles, a lack of government is what allows bubbles and outright frauds to exist in the first place.
PCH,
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Semantics. Words are an imperfect method of communicating a concept. Graham intended to put speculation in a bad light, he didn’t intend to change the language. If you use money on something with an intent to gain profit you are investing. All investors are not speculators, but all speculators are investors.
So, we then come to the real rub – not everyone will ever agree on where to draw the line. Is the government supposed to decide, and then change the rules on us when they find we were speculating? Do the property rights of speculators somehow get reduced? Who still does not understand that one man’s speculator is another man’s only buyer for his distressed property? When you attack the speculators, you steal from the investors. While I do not think many of the investment guys learned the lesson they should have, I bet the real speculators did. Bondholders in the same situation will not be able to find buyers at nearly as good of terms next time.
Lastly, not all of the non-tarps were secondary buyers either. That’s the whole thing with this speculator boogey man excuse. You label some people, smear them in the press, and then justify screwing them. The fact that many of them are lower middle class public servants is just inconvenient? It doesn’t matter how much money an investor has, or what his intent was. Play by the rules, keep the white house out of it, and don’t federal power to sway a bunch of people while ostracizing those who refuse to bend. Most all of the argument that they weren’t screwed is based on speculation that there is no liquidation value and that the newco is worthless. Well, here is a question, why the hell are we investing so much money in a worthless company?
Boraxo,
The smart money is on the eventual discovery of a scandal involving UAW officials and the misuse of VEBA money. Betting against it would be some serious speculation. The idea that the UAW didn’t get the money will then be shown to be the farce that it is. Besides that, the retirees ARE the UAW. Not all of it, but some of it.
WWII spending may have been stimulative, but I hardly think that’s why it was spent. If your point is that buying more weapons, or hiring lots of Americans to solve some of the world’s greatest problems may be good stimulus spending then you may be correct. However, the problem we have today is people misquoting Keynes to justify any spending bills they can dream up. Spain spent fortunes when it ruled Europe, but failed to grow an economy at all. There is good stimulus and waste, and we are getting a lot of the latter.
Lastly, you want to pick just one bubble, so I can then do a little research and show the government involvement? I would appreciate one of the more modern and US ones, but I can likely to do any of them for which the info is on the internet. I am not going to go to the library to win an argument on a forum. I don’t care that much.
Landcrusher, I’ll concede you may be right about the UAW having a hand in the VEBA pot (union corruption? Like Claude Rains Casablanca, I’m shocked). But for now its speculation – the UAW doesn’t own 55% of Chrysler, that’s just a fact.
And I agree with you on the point about Keynesian stimulus – it isn’t all equally good. The velocity of the funds is a big factor – but that’s exactly why bailout out the car companies is good stimulus: the money is going to suppliers and keeping workers on the payroll, which means it gets spent and moves through the economy. Compare that to bailing out AIG, which paid most of the money out to the likes of Bear Sterns and other investors who bet short on housing. That money gets used to pay down debt, shore up capital ratios, or safely stashed in T bills – lousy capital velocity.
Finally, bubbles. I’ll give you your choice: the 1929 stock market crash, which I contend was caused by a lack of government intervention. Or the internet/tech bubble, which was unrelated to government action. You think some government intervention made people invest in a stupid business model like pets.com or other companies which had no profits? What government policy made Time Warner hugely overpay for AOL?
One is the largest bubble in US history, the other is a very recent one. Show me how either one was caused by government intervention in the market or the economy. Don’t think you can do it.
Boraxo,
I agree and disagree about velocity. It’s secondary to proper spending. The bailouts are not proper spending. That’s injecting money for the sake of it, and it’s a bad, bad thing. OTOH, if the government decided to renew it’s fleets and replace every car over 4 years or 60,000 miles, that would be okay. If buying the cars was not enough to help, then obviously, the bailouts are throwing money at a bad cause, and that’s never good. The whole problem is that during the good times, no one wanted to save! Somehow, both parties got corrupted with the spend, spend, spend game. Now they are wanting to raise taxes in a recession. Effing brilliant, and not at all Keynesian.
Let’s skip the depression. There is a huge debate on whether government made it worse or better, so we won’t solve that here.
As for the internet bubble, it wasn’t so bad was it? Without looking up anything I will throw some stuff at you. It’s actually a pretty good example of how bubbles tend to not be so bad the more government stays out of things. However, one of the biggest reasons for the bubble was how most internet businesses were cleverly avoiding taxation that their brick and mortar competitors couldn’t avoid. Also, there was the whole bias in the tax code against dividends that had to get fixed. Furthermore, the bias against work over capital gains had a big effect. There was some interesting telecom laws that were in the mix, IIRC as well. Overall though, good pick. The government was really not at the root of that one, and it was a big contributor to a recession. Not a bad recession though, really more of a market correction than anything else.
Still, when Time Warner overspent on AOL, few innocents got hurt. The net move of wealth was from the wealthy to the workers for the most part. OTOH, when the housing bubble burst, caused almost 100% by government meddling, it was messy on a much more dangerous level.
Don’t get me wrong, I am not a cowboy capitalist. I believe that government has an important role in keeping free markets free. The problem is that so much of the regulation is searching for free lunches and desired outcomes over a level playing field. A level playing field is the goal, not an equal score, not a minimum score for each player, etc. Level is it.
Landcrusher, the government definately made the Great Depression much worse (Smoot Hawley, cutting spending in ’36).
In fact, reading over your whole post, I think we’ve come to pretty much agree. And had a civilized, intellient debate to get there.
This has to be a first in the entire history of the internet :)
I’d guess you will agree with me on one other thing: Chrysler and GM bankruptcies are unavoidable: only way to shed those dealerships, which is essential, and pretty much wipe out the bondholders and current stockholders (who own something with a negative net worth, and therefore own nothing).
Everyone knows it’s about all the non-essential, non-governmental items in the budget.
Absolutely. The by far largest part of the discretionary budget is the military. Everything else is cheap and more necessary in comparison.
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I don’t want to hear any anti-libertarian nonsense on this one either.
It’s only the most poisonous ideology of our times alongside its pal “conservatism”. Don’t worry, I think I’ve made that point sufficiently clear. There are still no takers for the challenge to identify successful civilizations or anything really based on those principles.
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Even an intelligent Keynesian will tell you that not all government spending is good to ease a recession
This is a good point to support the above. For example, after the dot com bubble in early 2000’s, amassing a large and expensive military campaign in response to cave dwelling provocateurs was a really bad idea.
Subsequently, allowing excessive creation of capital through the banking system to support both housing and consumer credit bubbles (a subtle but significant form of government supported spending) without consideration for the inevitable burst was a terrible idea.
You shall note that both disasters were promoted to the plebs with the manufactured ideologies above without regard for what intelligent, rational, and educated people correctly predicted as inevitable results.
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In this context, speculators are prime contributors to the propagated memes of “investment”, due to the wealth of the successful ones. Most people are unaware of the massive and expensive PR (ie. propaganda) industry paid for by the profits of capitalism (that’s also your money).
If humans were nearly as rational as usually claimed by free-market theory, such a clear inefficiency would be unnecessary. Since instead humans are easily and predictably manipulated, that cycle of profit becomes a systematic evolutionary advantage and therefore naturally perpetuated.
Actually research on speculation is not impossible. For example, math sims of commodities futures markets find that a few percent of transactions as speculation can help speed accurate pricing without significant side-effects. However, large proportions inevitably end in bubble dynamics, which benefit the few at the expense of many. Those few use the new wealth to further promote bubble friendly policy, and so the cycle continues.
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However, one of the biggest reasons for the bubble was how most internet businesses were cleverly avoiding taxation that their brick and mortar competitors couldn’t avoid.
This and many things about the internets in your post are hopelessly geriatric. People should stop trying to learn anything technology related from conservative websites. They are uninformed about such matters due to their general backwardness.
Agent,
Seriously?
Military spending by the US allows your country to implement so many silly liberal schemes you should be happy about our spending.
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Conservatism and Libertarianism have actually done quite well every time and place they are tried. Unfortunately, the statists and purveyors of scarcity based economics keep grabbing control and otherwise sabotaging the movements. Whenever I hear one of the standard rebukes about how something conservative failed it is always about how the path was strayed from, not how the path led us astray.
For instance, your examples of Keynesian stimulus are perfect examples of liberal plans failing. There was no conservative or libertarian ideological root to invading Iraq or to subsidizing housing. None at all. The Bush family have always been socially conservative statists, and not especially pro military either until it suited their purposes. The spending on Iraq didn’t help the economy, so that is evidence against Keynesian theories. Also, the subsidized housing and securitization were government free lunch attempts that didn’t pan out at all. What part of conservative or libertarian ideology do you connect to those policies?
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Your theories on speculation are interesting, but what’s the point?
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Lastly, the geriatric thing is nothing other than a label and dismiss move which is no more valid than an ad hominem attack. Perhaps if I could recall the best latin, I could coin a new phrase that would mean “to the theory” or “to the ideology”. Instead of actually making a case against a theory, the sophomoric debater simply labels an argument as being fruit of an ideology, calls the ideology names, and then dismisses it without one bit of useful argument.
Military spending by the US allows your country to implement so many silly liberal schemes you should be happy about our spending.
This is a misconception because the reason given for many military excursions are virtuous ones whereas the primary objectives tend to be more selfish.
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Whenever I hear one of the standard rebukes about how something conservative failed it is always about how the path was strayed from, not how the path led us astray.
This is the same excuse the communists or any other crackpot ideology have. Any time their idiotic ideas fail due to inherent crappiness, they blame impurity of the implementation. To be fair, they have the tendency to be promoted by parties well aware of this and just use the conveniently appealing bits to fool the undereducated who are unaware of the long history of failure.
But to communism’s credit, it’s actually a reasonably complete ideology (instead of something completely fake) that has shown to work in smaller primitive communities unlike our libertarian friends who even screw that up.
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For instance, your examples of Keynesian stimulus are perfect examples of liberal plans failing.
This’ll be funny because all evidence is against this and you will end up being humiliated. Please do continue past your assertion and provide us with educational insight into how conservatives view economic history. Even terribly poor spending like that for war has shown to be fairly successful.
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The spending on Iraq didn’t help the economy, so that is evidence against Keynesian theories.
This is because it was done extremely poorly by extremely corrupt people. Investigation afterward into the fairly opaque process found that priority was given to expensive mantelpiece projects that were profitable to certain US interests (and still poorly done due to lack of government oversight; who needs that, right?). Almost nothing has been spent on bread and butter infrastructure. By spending standards, this is criminally poor. Remember it’s your money entrusted to appointees of the last admin who pretty much all the “conservatives” voted for because they were supposedly more responsible with cash.
This goes to earlier points I’ve made that stupid people think things they’re incompetent at must be shared by all. There’s all manner of pretty successful government program which look out for the public interest; just because crooks you somewhat identify with can’t be trusted with them doesn’t mean they cease existing.
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Your theories on speculation are interesting, but what’s the point?
The point on speculation is to tie in to my larger point to discuss the hows and whys of public opinion. People like to think they form their own opinions, but it’s generally led by more sophisticated forces. It’s quite easy once you understand the fundamentals to pick out what individuals believe in, why they were led to this, and how they think because of it. This is valuable because becoming more sophisticated than the opposition (propagandists perhaps in this case) tilts the playing field to your favor.
Now I do tend to pick on conservatism, but it’s what’s popular here and leads to a very significant portion of comments, and it’s absolutely true the ideas are poison.
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the sophomoric debater simply labels an argument as being fruit of an ideology, calls the ideology names, and then dismisses it without one bit of useful argument.
This only works well if you can do it in an accurate and amusing way. Otherwise, humiliation inevitably results when you are called into question.
For example, few of the internets companies were competing against traditional retailer, and most where not much profitable at all, which is not terribly relevant in crazy bubble economics. Even in the exceptional cases of successful e-retailers, their inherent advantage lies in their excellent physical stock turnover, potentially double that of even by far best B&M stores like costco, extremely low minimal stock levels, and free cashflow due to all this plus net payment terms.
Thus, the case rests that people should stop learning about technology and innovation from groups unfamiliar with them.
Don’t be mad at me, get angry at the people who gave you the poorly supported ideas that are impossible to defend.
BTW, think about the psychology behind that. How would one consider ideologies with such a fixation over people that subsumes their entire thought process and they would toe the line in the face of overwhelming objective informed evidence to the contrary.