Quick Thoughts: Buy American!
Chrysler decided to declare bankruptcy last week but the Obama Administration decided that would not be allowed so they intervened. In doing so they decided that they would give over half the company to the United Autoworkers Union, keep a chunk for the U.S. Government, give a sliver to the Canadian Government, and sell the rest to Fiat, an Italian auto-manufacturer. In the process, the Obama Administration has told Chrysler’s bond-holders that they will be forced to write down 2/3 of the value of the debt they hold and will not have the opportunity to sell off Chrysler’s assets, as would be not only customary but the legal steps in a bankruptcy.
The most serious problem with this is the blatant disregard for contract law and the general rule of law that has been exhibited by our Government.
However, just a little anecdotal piece is how ironically absurd it is that the Obama Administration has been trying to save the American auto industry while attempting to convince Americans to “buy American” only to then sell a large chunk of a large American auto-manufacturer to an Italian company!
Once again, I have underestimated the absurdities that the people of this nation will allow from their Government.
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I don’t see it becoming a trend for the government to fast-track and broker deals for failing companies. I think Chrysler’s bankruptcy is a highly unique situation. Chrysler and Fiat’s product lines are complementary to each other as well. A Fiat deal might transfer upper management to a company based in Italy, but Fiat is a publicly traded company nevertheless. Factories in the U.S. (and Canada) will be utilized and most dealers will remain open for business.
On the issue of financing, I really don’t think it is right to value these creditors over the employees or labor union. The creditors could have always opted out of their investment, whereas the employees have no opportunity to liquidate their healthcare or pension contracts to other investors. The creditors are just whiny that they overpaid for Chrysler debt, and I don’t think anyone should really feel sorry for them. Chrysler has been a welfare queen for going on 6 months now in hopes that they could keep the lights on and buy some time to get through the period of awful demand. The creditors were boosted by this artificially inflated debt price as Chrysler was able to pay its bills. With an uninspiring line of cars, especially those lacking fuel efficiency, it’s pretty clear the debtors should’ve known that the US government would not bankroll their investments indefinitely.
So what if ownership was transferred to the debtholders? It would’ve resulted in a languishing uninspired company until it was liquidated altogether, I would imagine.
I doubt an all-out liquidation of Chrysler would have yielded as much money as the secured creditors would have thought anyway. Does anyone really think that U.S. manufacturing capacity is in demand? How about real-estate that dealerships sit on? It isn’t right now, but a pent-up demand for cars will materialize and they will start selling again, inevitably. It doesn’t make sense to dismantle factories and jobs if the demand is bound to pick back up in perhaps as little as 12 months.
The government will be paid back for their loans in the long-run. Having Fiat and their solid product line should help.
Tyler, I don’t mean this to come off as flippant, but why does it matter if you (or I, for that matter) think it is right to value the creditors over the employees? Let me clarify… it certainly does matter what you think inasmuch as you are going to vote to change the current laws, but what you think is right doesn’t really matter when we live under the rule of law. We can fight all day about what you think is right versus what I think is right, but that will get us nowhere.
The question is whether you think the law was violated or not. I’d be interested to hear whether or not you agree that the law has been circumvented here, and, if not, I’d be interested to know why it is you don’t think the law has been circumvented.
The law here is simple: Those who hold secured debt in the form of corporate bonds are entitled – by long established corporate law, specifically bankruptcy laws – to first dibs on all corporate assets to repay their loan. Only after those loans have been repaid can any of the money be used to pay any other creditor.
The problem here is that the Obama administration has circumvented long-established rule of law in the area of bankruptcy.
(As an aside: you say that the employees didn’t have a choice, but that the bond holders did. Think about this: if the bond holders hadn’t given money, the corporation would have eaten through its cash long ago and the employees wouldn’t have had jobs for awhile. So, the employees have already been paid in the form of employment on the bond holders’ dime.)
When the government is allowed to abrogate even a single contract, contracts become irrelevant. Why would anyone buy secured debt in the form of bonds when they know that the government can come in and abrogate those contracts?
The secondary effects in the corporate bond market of an action like this by the federal government is absolutely devastating.