Friday, May 1, 2009

The President and the Rule of Law

President Obama says he doesn't want to own auto companies--but his actions are speaking louder than his words.

Mike Shedock summarizes the current deal being negotiated with GM:

If the deal goes through as currently proposed....
  • The Treasury (taxpayers) would be stuck with 50% of GM's equity (currently worth $625 million) in exchange for forgiving about $10 billion in federal loans.
  • The UAW would get 39% of GM's equity (currently worth $488 million) in exchange for giving up $10 billion in health care benefits
  • Corporate bondholders would get 10% equity (currently worth $125 million) in exchange for giving up $27 billion in bonds.

The UAW will own 39% of GM, and the US Government will officially own 50%! As the Wall Street Journal points out, this also means that the US Government will receive 87 cents-on-the dollar, the UAW receives 76, and the bond holders only 5 cents-on-the-dollar. Bond holders are, not surprisingly, trying to hold out for a better deal.

But the government's defacto control of the auto industry has been going on for decades: forced negotiation with unions, CAFE regulations which required the manufacture of cars customers did not want, threat of anti-trust actions effecting pricing and other key business decisions (read a summary here.) These interventions into the management decisions of a private company have served to hobble it into its current state of failure.

It's a classic example of government intervention causing a "market failure" which is then used as an excuse for further government intervention.

More recently, taxpayer bailout of GM was accompanied by government control over the choice of the company's CEO, the imposition of limits on executive compensation, and threats of "green" requirements on future car production. The government's heavy hand is playing a major part in trying to resurrect this business which it helped to kill. It is incredible that there is not more outcry against these overt acts of statism.

The latest "news" is that Chrysler is also bankrupt.

This proposed deal includes an attempt to run rough-shod over Chrysler's bond-holders. (See the pattern?) The Washington Post had this to report on the negotiation process:

A group of about 20 firms who declined to go along with the 11-th hour deal struck by the Obama administration to save Chrsyler from bankruptcy, has just released a statement claiming that the deal was unfair...

The holdout lenders -- who said their combined debt holding represents about $1 billion of the $6.9 billion owed to senior secured lenders – ... said they had offered to accept 60 cents on the dollar, despite “long recognized legal and business principles” that gives senior lenders such as themselves the right to be repaid in full before others recover anything in bankruptcy court.

“Our offer has been flatly rejected or ignored,” the group said. “In its earnest effort to ensure the survival of Chrysler and the well being of the company’s employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades.”

Another WSJ article captures the essence of these actions through the experience of one man's struggle against President Obama's calls for "sacrifice" versus standing on principle against "government's strong-arm tactics."

Usually secured lenders are paid back in full before other unsecured creditors, which includes employees. This time, he says, the government is brokering a plan that he says goes against decades of bankruptcy law...

"We did not contemplate having our first liens invalidated by a sitting president...I feel personally threatened because of what the government is doing at Chrysler and General Motors and how they are changing the rules of the game, instead of allowing bankruptcy laws to be carried out the way they are written."

The chief executive is supposed to execute the law, not rewrite it.

One more ominous twist: As part of the proposed plan for Chrysler, the UAW will end up owning 55% of the company.

With the UAW as a significant owner in these two large auto companies (don't forget the UAW's 39% share of GM), doesn't that mean the Union will be negotiating against itself in setting up contract agreements? And what about the relationship between Ford and the Union? When it goes into contract negotiations, won't it be negotiating with it's main competitors?

Private property rights and the rule of law are two essential bastions of liberty and civilization. Our chief executive is trampling on both. He justifies it in the name of averting an economic disaster. But the real disaster is the long term effect his policies will have on our future liberty and prosperity. You can not save the economy, or anything else of real value, by destroying the very foundations of civilized society.

UPDATE:More on this over at Rational Capitalist, and Instapundit.


The Rat Cap said...

Awesome post. This succinctly summarizes exactly what is happening. You said:

Private property rights and the rule of law are two essential bastions of liberty and civilization. Our chief executive is trampling on both

I have often wondered what would happen if the police chose not to enforce the law, or the judges, or the chief executive? All that holds our civilization together is the willingness of those elected officials to do their sworn duty and enforce the law or for the people to hold them accountable.

We are fast approaching rule by brute force.

Anonymous said...


I'd add one more "ominous twist" that shows how truly bad this situation is and underscores one of your points.

The holdout bondholders in the Chrysler deal only represent 1/7 of the outstanding debt. The major bondholders have agreed to the deal. Why would they agree to such horrendous losses? Because these banks have already been bailed out by the government and are therefore much more inclined to respond to government pressure. Instead of the union negotiating with itself, in essence, the government is negotiating with itself.


HaynesBE said...

I had no idea of that. Truly alarming. Can you recommend a source for that information?

Anonymous said...

Yesterday's WSJ; sorry, I already tossed it.