Government vs. Investors, Round One
Last week President Obama declared: "I stand with Chrysler employees...I do not stand ...with a group of investment firms and hedge funds who decided to hold out for the prospect of an unjustified tax-payer funded bailout."
This was the first shot in the war against investors.
The second shot was when the President announced the administration has begun looking into changing compensation practices across the financial services industry, including at companies that did not receive federal bailout money.
This ambitious, controversial and legally dubious agenda is of little surprise given the government's huge new purview in the economy and politicians' natural inclination for power grabs and mission creep.
The Wall Street Journal says (Monday, May 11) that the conclusion of the Chrysler negotiations "would upend a longstanding tradition concerning rights in a bankruptcy...secured lenders usually get paid in full before lower priority creditors get anything."
Remember, the United Auto Workers were unsecured creditors while the Chrysler bondholders had senior position in the capital structure. The bondholders received only 28% of their $6.9 billion in bonds (in cash), and the Union will receive 82% of the value of their claim (in stock worth approximately $4.2 billion plus a note for $4.5 billion).
The law gives bondholders certain protections and rights. There is a very good reason why they are given those rights. Indeed, the White House role in restructuring Chrysler sent a shudder through bankruptcy lawyers and bankers. A major principle of American capitalism has been violated, and financial firms, so essential to our economic recovery, are being put on notice.
This bring to mind the time when President Theodore Roosevelt asked his attorney general Philander C. Knox to come up with a legal defense to the questionable manner in which the United States acquired the Panama Canal Zone, and Knox said: "Mr. President, do not let so great an achievement suffer from any taint of legality."
Those investment firms that held out on the Chrysler deal have clients, and their fiduciary duty is to protect the capital those clients entrusted to them. This is not in any way unpatriotic, no matter how much meretricious demagoguery is being spewed.
President Obama chose to side with the UAW. That's his prerogative, although fleecing lenders to pay off powerful electoral groups sounds politically motivated. But instead of resorting to cheap populism he should admit to helping the UAW at the expense of the bondholders, many of them are retirees, teachers and police officers.
More importantly, a world where the president bristles at contract rights to marshal the huge resources of government in a war against investors is a world where companies will find it very hard to borrow. Who would provide capital knowing the government capriciously demonizes investors and arbitrarily confiscates their assets? Who would provide capital to have Washington as a foe, ready to subvert the law and pulverize investors on a moment's notice? And how will banks attract the brightest employees if they become a slavish ward of Washington, with compensation restrictions in effect?
This is not an insignificant concern given that a modern capitalist civilization cannot function without a sound banking industry that is able to provide credit regularly.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.
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Firs the gov should have let AIG fail, and then you hedge funds would have gone bankrupt.
]You probably have CDS investment Insurance with AIG on the car company bonds.
This is desperate PR.
End hedge funds.
Eliminate most derivatives,
Eliminate leverage.
wind back regulate at least 20 years.
See my profile for links.
You are of course right,
The US government should have allowed Crysler to fail and allowed the creditors to try to get money for the vacant factories they would then own.
I am sure they would have gotten far more than 28% for the value of depreciated, specialized car factories in a time when every carmaker is closing shops.
/end snark
There may have been a reason the creditors negotiated to get cash instead of holding debt in a company whose going concern was questionable, the UAW now owns the company, so it will be "negotiating with itself," to cut salaries.
Hmm. The war against the investor class?
Correct me if I'm wrong, but were it not for the government BAILING OUT private enterprise, many millions of investors who invested in these companies would have been wiped out. I didn't see your post complaining that the Administration was bailing out private, shareholder owned companies. If i missed it, please provide the link. Thanks.
all right!
Dear Alan,
Sorry Alan but the war is between investors and workers. The government is just a tool. The aim of the investors and their partners', the corporations, (I&C) is to get as much money from workers as possible. This aim is counter to the aim of the USA’s constitution, which is to allow our citizen’s to pursue happiness not just wealth. I applaud the President for upending some of those bankruptcy traditions that allow the I&C to have priority over working people.
I think populism is better than the I&C's greedy power that creates rules that take away the bread and butter of workers. Credit card companies can charge 40%. Companies can go into bankruptcy to break their pension contracts with workers and they can hold special meetings during work hours to intimidate workers about joining a union. The I&C have a major control of the media. NAFTA....
So, Obama would create a world where companies would find it very hard to borrow. That dastardly dud! I mean, who would provide capital if they can’t earn 40% interest or provide capital if the rules are not stacked totally in their favor or work in banking for less that several million dollars? The anwer is American workers who care about the happiness of their friends The current bankers/gamblers are political thugs who are the greediest and the most ruthless, not necessarily the brightest. Have you ever read of The Shock Doctrine?
Nate England
it is to bad that we bailed out the financial industry bcz now they are the slavish wards of DC. I really wanted to see the captains of industry pull themselves up by their bootstraps and correct the mess they made without any government help. Obama made a decision to protect the benefits of retirees who gave 30 or more years of their life to a company that promised them security when they were older and no longer able to work. Are you implying that it is ok to renege on this commitment in favor of the bondholders? Had Obama favored the bondholders over the retirees it wld have been political suicide.
meant 'simultaneaously he...'
So, one time in the last 30 years (at least) the investor class has to take a hit for the good of the economy. This hedge fund guy forgets that the government is basically bailing out the whole financial industry while,simultaneously threatening to withhold funds to help revive economic activity. Most of the productivity gains of the last 30-40 years have gone to the investor class with little concern for the working class, especially unions. Threatening the working class again displays the crass selfishness within the finance industry. Go ahead and cloak it all in 'free market' language all you want, essentially it is all a lie. The working class will be subsidizing the 'investment' industry for at least a generation.
who do you think are the investor class? its not only hedge funds. its me, you, your neighbour. anyone who has money in pensions, 401(K), IRA. wake up !!
There is no investor class. And of all the news, this may not be the worst.
There are only investors and people with more or less of their retirement or other benefits in investments. Of course there are professionals in financial services such as asset management, but that doesn't make them more or less of investors than anybody else. There are some people who really do nothing else, but they're not a class. They're a country club.
"who do you think are the investor class? its not only hedge funds. its me, you, your neighbour. anyone who has money in pensions, 401(K), IRA. wake up !!"
More important is We the People. Or did you forget that you are a citizen of a democratic republic before you are an investor? Now hit the snooze. Your corporate masters don't want you too awake.
Forget the working class, it's the hedgedunders who are getting a raw deal.
The stock the U.A.W. got was was for the health care fund. The health care and retirement benefits were negotiated for by the U.A.W., and part of a signed union CONTRACT.
" This ambitious, controversial and legally dubious agenda is of little surprise given the government's huge new purview in the economy and politicians' natural inclination for power grabs and mission creep."
Huh?
Obama's efforts to staunch the bleeding created by the misuse of banking power are laughably small, but here you characterize them as draconian.
Right to cramdowns for your home mortgage? Nixed. Usury limits on credit cards? Nixed. Appointments to head Treasury? NYFed alum.
Yah. Definitely something to worry about for das Kapitalistsas.
Your point of view is in keeping with the times but way off base in regards to sanity and fair practices. When CEO and IB pay was merely 42 times the average worker and not 450 times, the economy still grew and America was still prosperous.
How you can talk about "fleecing" investors and not notice that the taxpayers have been fleeced BY many such investors is laughable. What would these investors have had the government (funded by the people) done nothing?
If investors of such grand scale do not wish to be demonized, they ought to stop displaying such wanton avarice, gluttony, and greed. No one would begrudge modest profits, but the idea that one should earn mountains of profit while slothfully sitting aside letting "your money work for you" is immoral.
And by your estimation, most of the country's citizens are in the slavish ward of companies and the investors who own them. No one seriously believes or advocates that investment bankers should work for 12k a year like an unfortunate propjet copilot. However, we do think that 500k or millions might be a bit excessive, seeing as how the average american makes not a tenth of that. Something (perhaps it is history) tells me that you'd still find capable employees by paying merely triple or quadruple the national average.
This first battle may have gone to Obama and his UAW croonies, but the war is long and when investment firms and banks refuse to lend to unionized companies... you will know who was to blame.
Well, princemarko, the world is a smaller place now.
If you seriously think that banks can blackmail firms into being their customers, then you're not only dead wrong about globalization, you also haven't understood the first thing about free markets.
Maybe in medieval Florence it was enough to read your Machiavelli when you're a prince. These days: nope.
Princemarko was wrong in generalizing the statement.
Going forward, the unionized companies will still be able to borrow from the debt markets. Its just that it would be a a higher rate (which is completely fair).
If you are a secured creditor, you know that collateral that is backing your bond is not so secure any more. the govt can surpass your claims by someone else's claims. so you will still lend, just will demand a higher interest rates for the risk you are assuming.
to say that no body would lend to union companies is ridiculous. they will lend, just at a much higher rates (which the unionized companies deserve anyway)
"A major principle of American capitalism has been violated, and financial firms, so essential to our economic recovery, are being put on notice."
Sorry, you're not going to get much sympathy around here. Those financial firms you're so concerned about were also essential to creating the economic disaster we're all "enjoying" at the moment.
The bankers and captains of industry made a decision to abuse the population for their own enrichment while blithely ignoring the possible consequences, despite the obvious warning and history lessons of the first depression. As Gore says, we are "entering a period of consequences." And characterizing the UAW and therefore the workers it represents as an insidious "powerful electoral group" is yet another transparent attempt to dehumanize the ordinary people who make up a part what should the MOST IMPORTANT electoral group: the working citizens of this country who pick up the slack and bear the brunt of the taxes you so cleverly avoid paying.
Yes, it's terrible that lenders are getting "fleeced". But they signed up for the risk; last I checked no hedge fund or investment bank has ".org" at the end of their domain name. Your sudden concern for little old ladies and retired cops and teachers now starving in the streets is pretty ironic considering their plight, no matter how much you'd love to pin it on Obama or the UAW, is the fallout of YOUR disaster.
I'm your dittohead : )
2/2
But then you really fall off a cliff: 'And how will banks attract the brightest employees if they become a slavish ward of Washington, with compensation restrictions in effect?' Is it a law of nature that banks must attract the brightest employees? What's that? Sounds to me like you're seriously deluded. Are you asking the government to make sure that the brightest people work for banks? Did you just say that? Listen to yourself.
'This is not an insignificant concern given that a modern capitalist civilization cannot function without a sound banking industry that is able to provide credit regularly.' If we were finally any closer to a perfect capital market, then we would finally have no need for banks. What no modern civilization needs - and I am certain about that - is banks that get money for free from the central bank and still can't be profitable.
Brightest and best employees is code for greedy and most underhanded and nefarious.
You're raising an important question:
if the most underhanded and nefarious no longer work at banks, where will they work? As long as they work at the banks at least we know where to look for them.
It's almost as delicate as bringing down dictatorships...
:=)
1/2
Most of the time I agree with much of what you write in your columns, but now you're really crying wolf. And I am afraid you are even being hypocritical.
Whatever the details of the restructuring were, and there may have been some very uncommon things, there's no daemonization, no confiscation, and even to speak of a violation of capitalist principles seems like a stretch, given that the firm has been in a coma for a long time. And to assume that this has anything to do with power-grabbing is quite farfetched given that the administration and treasury in particular have no shortage of tasks to keep them busy - why would they play games in such circumstances?
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