Oh where is that filmmaker gadfly when you need him. Michael Moore got his start in gadfly-iness when he filmed his tribute to the Detroit auto industry, and specifically GM with Roger and Me. The plot, loosely – Moore chases after, Roger Smith CEO of GM and confronts him about the harm that closing plats and ending 30,000 jobs did to Flint, Michigan.
Too bad we’re not getting daily webisodes of the impact Obama’s economic team is having on business. Let’s take a close look at the Chrysler/Fiat deal.
Ever since the Obama administration sacrificed the rule of law
protecting secured creditors to achieve a desired political outcome in
the Chrysler bankruptcy, have you been wondering how long it would
take before this precedent began transforming other sectors of our
economy? Would you believe that this is already impacting hockey
teams?Recall the deal, now blessed by a Supreme Court asleep at the switch,
that awarded the lion’s share of equity in the new Fiat-run Chrysler
Corporation to politically connected unsecured creditors, namely the
United Auto Workers Union. Meanwhile secured creditors, vilified by
the President for their refusal to make sacrifices in order to “save
or create jobs,” were given the bums rush.Perhaps you believe that the “special circumstances” used to justify
this historic taking will limit its impact. Only lenders to vital
American companies deemed “too big to fail” need to be concerned,
right? That was the argument when the administration’s Auto Task Force
recently upped the anti in the ongoing Delphi bankruptcy. Did you
notice that the president’s men are trying to throw
Debtor-in-Possession (DIP) creditors under the bus in favor of a
no-bid buyout offer from a well-connected Beverly Hills private equity firm?
Ah good old special circumstances, tossing our the rule of law, now where have I heard those arguments before? Oh yeah right, the Bush Administration and the Patriot Act. But I digress. Here we are with a bailout deal and now for the Hockey part. Oh, and what’s with Hockey playoffs in June?
Extraordinary times require extraordinary solutions, you say? The Administration must take unprecedented steps if it hopes to save the critically essential Detroit-based auto industry. Of course the auto czar has to reach down into the supply chain and do whatever it takes to keep this increasingly expensive house of cards from collapsing. After all, there are more jobs to “save or create” amongst the top tier auto suppliers than there are in the big three themselves. Given the “special circumstances,” why is it improper to ask yet another set of creditors to sacrifice for the greater good? It’s the outcome that matters not the process, right? Even the Phoenix Coyotes agree.
The Phoenix Coyotes?
Yep. The bankruptcy lawyer representing the hapless Coyotes is invoking the Chrysler “363 sale” precedent insisting that an emergency offer to buy the National Hockey League franchise must be accepted right away because … because … the NHL draft is looming! The NHL, which holds the rights to the franchise, prefers to continue funding the company to conduct an orderly sales process. Will the law protect their rights? Who knows.
Extension by analogy is how our judicial system interprets the law. Precedents invariably ripple into the future. This is why using political muscle to achieve an outcome that feels good today despite trampling the rule of law has unintended consequences tomorrow.
Well there you have it. Unintended consequences rides again.
source: Rear Clear Markets, Chrysler’s Bankruptcy Roils the National Hockey League?, By Bill Frezza June 15, 2009
Some things never change
http://www.europac.net/Schiff-CC-6-9-09_lg.asp
The unintended consequences of this will linger for some time.
A secured creditor gives a company a loan with the understanding that they come first in payouts from the company’s assets. In exchange for the lower risk, the interest rate of the loan is lower than an un-secured creditor. (Think Mortgage (secured) vs Credit Card (un-secured.)
Now that a union has precedence over the secured lenders a thousand credit officers across the country are re-evaluating loans to companies with unions.
A loan to a car company? Even backed by hard assets? That will be a tough sale to the guys watching out for our money.
Some of the speculation was that this act will kill the unions faster than any other. Got a union in your company? Forget the loan.
Three fold: one; the rule of law wasn’t tossed out, there was a bankruptcy judge, US Circuit Court and the US Supreme Court all of which had the chance to review the bankruptcy plan and none of which found the rule of law “tossed out”. It’s actually their job to ensure the rule of law is abided by. A Supreme Court writ requires four judges to grant certiorari; John Roberts, Clarence Thomas, Anthony Scalia and Sam Alito, would have no problem granting certiorari if this was an improper taking (fifth amendment). Secondly, this was not a Chapter 7 liquidation but a Chapter 13 Reorganization, its not unusual in such plans for ongoing employees to receive some “special” rights to future income, the unions gave back a lot when their contract was renegotiated. Thirdly, President Bush authorized $25 Billion loan to the Auto industry to keep it afloat rather than having 100s of thousands of employees become unemployed overnight (including suppliers) and was criticized for not having a “plan”. The Obama administration would’ve been rightfully criticized had they allowed the auto industry to fail or given them money without ensuring special rights for the government. People seem to have little idea how close this country’s (and world) was close to the precipice and how vulnerable it now is to any shock. Economists from Paul Krugman to Martin Feldstein have all favored substantial fiscal stimulus, this is no ordinary recession. There are a lot of arm chair quaterbacks who criticize a lot, sometimes w/minimal information, and often with no alternative plan. The scenario just a few months ago, which may not be much different today was a vicious circle of soaring unemployment ,(600k+ lost jobs a month!), a frozen credit system and massive foreclosures. The last major recession (1982) was purposely engineered by the Fed Reserve (Volker- Carter/Reagan appointee- currently advising Obama) to end spiraling inflation. The current recession was not Fed engineered nor a simple matter of the business cycle and that’s what’s so frightening about it!
Nicely stated “Sono Resident.”
You are spot on! This economy is extremely delicate right now. It is unfortunate that people don’t understand the severity of the situation last Sept, Oct, & Nov.
Employees, including union employees, always are first in line to get paid when an employer is in financial trouble. That is a very basic principal in the law to protect workers from being cheated by unscrupulous employers. In the case of the auto companies, the unions agreed to give the companies time to pay off obligations they could have demanded immediately, essentially loaning the campanies millions, after already forgiving a lot of money owed to employees. It is so easy to blame Unions for an employer’s problems when you think of the well-paid union executives, but stop to think a union is only a group of workers, united in a common cause, who pay dues to be represented, and protected from unfair labor practices. Union employees have taken substantial losses in this process in efforts to keep the employers in business, while watching their own net worth shrinking. The hardest hit are employees approaching retirement who now discover the retirement benefits they worked many years for, are not what was promised when they started.
There is a lot going on in the Obama administration across a number of different fronts. The auto bail-out is just one, but the common thread is big government control. Obama leads the auto industry to the trough with big bail-outs. He leads the banks to the trough with threats and bail-outs. He will lead us to the healthcare trough with impossible promises. Soon all of us will be feeding from the government trough eating the same promises and wondering why our stomachs ache. A few politicians, union execs, and CEOs will benefit, but only on the back of the rest of us.
One more note: Obama has been handed this opportunity after years of bad policy decisions from both republicans and democrats lining their political pockets with favors from many of the same special interests. As voters, we failed to hold our representatives to the standards necessary to have prevented this.