I Don't Think It Will Work This Way
the United Automobile Workers "¦ can own half of Chrysler's stock and a third of General Motors' stock if everything goes through"¦
anti-labour activists might also feel a bit of cheer. As Conor Clarke points out, today's events can only have one of two consequences:
It will change the incentives of the unions"”such that they realize their demands were bad for the company"”or it will run the company (further) into the ground and leave the union to pick up the pieces.
Worker ownership rarely works the way it's expected, so it's entirely possible that the UAW has sped up its own demise by cutting this deal.
I don't have any hope that it will work out this way. The only incentive alignment that will exist is that union ownership of GM will align Congressional incentives to issue GM a near infinite stream of subsidies, bailouts, tax breaks, import restrictions, consumer incentives, etc.
We are switching ownership of GM from a politically fragmented and unorganized group (ie current GM shareholders) to a single organization that already has political clout and massive political lobbying infrastructure (UAW). Just look at the large corporate states of France and Germany. Union involvement in corporate management doesn't change union practices, it changes government practices.
There's some interesting stuff out there to read about the Chrysler bankruptcy, like people asking "why wasn't this done in the beginning"?
Simple answer - in the beginning there was no way to secure the UAW a majority stake in the company. Now, as Felix Salmon points out, that's been accomplished
morganovich:
further, no group, no matter how well intentioned and skillful can turn Chrysler around quickly. it simply cannot be done. even a wholesale adoption of fiat's lines (which are not applicable in the same way in the US) would take 18-24 months.
this company needs new products. their cars, for the most part, rank at the very bottom of consumer reports. they are not attractive to customers.
bringing this pig out of bankruptcy in 60 days is an asinine idea. it cannot possibly be ready. it will hemorrhage money for years to come and the taxpayer is going to pay for it.
the best option here is for a flat out dismantling. sell the assets. get the factories back up and running making someone else's cars. it would be cheaper to just flat out have the government pay the UAW workers their salaries to stay home than to keep these plants open with chrysler products in them over the next 2 years.
but, because that is too naked a union handout, we will pretend we "need" the company and waste piles more cash on an ideological smokescreen for what is a pure and simple purchasing of votes.
May 1, 2009, 7:30 amTim:
A correction. This is a 363 sale under Chapter 11. This will split the company into good and bad parts. The good parts will emerge in 30-60 days; and the bad parts will be liquidated to pay off the creditors.
The bad parts will include at least 8 plants, Chrysler financial, and at least some of the dealer network.
The good parts will include the rest of the plants, the majority of the vehicle lines, and GMAC financial.
As to the original point, the VEBA fund managers have a fiduciary duty to limit the impact of government regulation/intervention on share prices; which should set them at odds with the UAW leadership's political priorities. If they don't; they're vulnerable to suit by the rank and file.
A side note. Most of the bond holders bought credit default swaps, so the Federal government is going to make them whole either through paying via Chrysler or via AIG's bailout.
A question about the proposed ownership structure. Will the government/UAW nexus provide a competitive advantage, sort of an insider trading, on NHTSA/EPA/DOE rulemaking? GM/Chrysler develops feature x; and then pushes it as a required; or the government wants feature y pushes their owned companies to implement, and then uses "established in the market" to make a short notice rule to put the rest of the OEMs behind the 8 ball. And when you add to this the other groups that bought access, like Kids in Cars or Public Citizen, forcing stuff via government ownership......
May 1, 2009, 8:13 amFrederick Davies:
"Union involvement in corporate management doesn’t change union practices, it changes government practices."
Any Briton who lived through the 1970's can give you chapter-and-verse of how right you are about that.
May 1, 2009, 8:52 ammorganovich:
tim-
exchanging a bond for common equity would likely invalidate a CDS. if the bondholders own CDS's as you suggest (and i have no idea, certainly sounds plausible assuming anyone was fool enough to write them) then it would go a long way toward explaining their resistance to a conversion.
do you know who wrote the swaps and do you know the coverage ratio ? are you just speculating it was AIG or do you know that for a fact?
May 1, 2009, 9:13 amMesa Econoguy:
Ron Middlefinger is quick to point out that the UAW doesn’t actually “own†shares of Chrysler under this agreement; rather, the UAW pension plan (whose beneficiaries are presumably current or ex-UAW members, though one never knows with these people) was “forced†to accept stock in lieu of cash.
Now, it remains to be seen if 1) the UAW will have 2 seats at the negotiating table, effectively functioning as both management & employee, and 2) they can capture value from the sale of stock in the plan. Given the massive obligations of the pension (caused by bloated benefits negotiated by the very people now reliant on the fund) and the required large effective dumping of shares, this will likely have massive adverse price effects.
Also of note was Obama’s offensively blatant lie that shareholders and speculators were to blame for Chrysler’s demise. The opposite is true: Cerberus, the private equity firm, took a size position after the Daimler divestiture, and had a majority stake in it’s success or failure. When it became apparent that bankruptcy was the best option, government stepped in, effectively to protect the UAW, and steered the process to their liking, ensuring a majority ownership stake for their supporters.
This is basically fascism, with a back door twist. But watching it fail will be outrageously funny. Paying for it won’t be.
May 1, 2009, 4:20 pmStephen Macklin:
I would not want to be Toyota or Honda, or even Ford that matter right now. Yes, the UAW had large ownership stakes in GM and Chrysler but so does the Federal Government. I would not want to be in competition with an organization that can regulate me out of business.
May 1, 2009, 5:26 pmMesa Econoguy:
I am currently in direct competition with such people (financial industry), and the correct analysis was, and is:
My God, these people (government, and those left at decrepit firms) are complete fucking morons.
The genius of government intervention is that it retains the least competent people in positions most likely to generate productive ideas and revenue.
May 1, 2009, 6:35 pmMesa Econoguy:
In case the usual useful idiots read this blog, this is what actual fascism looks and sounds like, not that innocuous tripe you worried about under Bush:
"One Obama administration official, speaking on the condition of anonymity, said Cerberus’s equity stake no longer holds value and said the firm’s ownership will come to an end. In term sheets released by the Treasury Department on Monday, the government said Chrysler’s restructuring “at a minimum will require extinguishing the vast majority of Chrysler’s outstanding secured debt and all of its unsecured debt and equity.â€"
[<a href="http://blogs.wsj.com/autoshow/2009/03/30/718/" target="_blank"Cerberus’s Equity in Chrysler’s Auto Company to Be Eliminated]
Oh, ok. Seig heil.
Jawohl, mein Herr.
May 1, 2009, 7:16 pmMesa Econoguy:
Sorry, here.
May 1, 2009, 7:27 pmTim:
morganovich:
Just to update, I was incorrect that the VEBA would not be able to tap the pension guarantees -- it would, but there would be no way for the VEBA to pay back the US$4b note that it owes the Feds.
DCX, DaimlerChrysler, had ~US$2.3b in CDSes; it is unclear how many were spun to Chrysler when they divorced. Daimler wrote down their remaining equity in Chrysler a couple of months ago. And no, I don't know who wrote the CDSes. AIG seems as likely as any of the others. Either way, the transitive closure of CDSes will eventually find their way to the Department of Treasury.
Mesa Econoguy:
That's how Chapter 11 works. The existing stock issue is voided; the secured debt is retired for pennies on the dollar -- and is usually funded via asset sales. The existing ownership stake is wiped out. And, if you look back when Cerberus got Chrysler, they had no intention of running it as a car company. Their plan was to prune some dead wood and quick flip on an IPO. That's how Cerberus works. However, they'll wind up getting the 21st Century's "Worst Timing Award", because they couldn't execute before the market got flushed.
The only reason Treasury made that announcement is that they're providing the Debtor-in-Possession financing *and* the recapitalization financing for the 'Good Chrysler'.
May 1, 2009, 9:42 pmMesa Econoguy:
Tim, yes, but that was pre-Treasury negotiations (i.e. gov’t takeover-land).
What Obamarama did was rig the game: he threatened all stakeholders with regulatory death.
And the morons least likely to succeed were the ones who came out on top.
Government is such a wondrous mechanism……
May 1, 2009, 10:22 pmMesa Econoguy:
By the way, in case you are a complete fool, Der Fuhrer's next target is....
Hedge Funds
These are the financial instruments actually absorbing much of the brunt of current financial market risk.
It's quite nice that such an erudite charlatan can singlehandedly destroy incentive on a Friday nite, like a bank seizure.
May 1, 2009, 10:33 pmBillare:
Mr. Meyer, what the government is doing under the Chrysler bankruptcy plan is eminently criminal and fraudulent. Look at this post here at Volokh that made this much clearer. The government is trying to engineer a sale to a new Chrysler entity, under the section 363 provision of Chapter 11, which would basically abrogate the rights of secured bondholders to receive maximum value from the bankruptcy under rule 1129(a)(7) of the bankruptcy code. It is relying on a collective action problem to enable this - while the dissent of some creditors can block a re-organization plan, alternative bids to block the proposed sale requires the coordination of those same creditors, some of whom are TARP-financed. Obama is literally lying through his teeth when he's pretending that this is just normal bankruptcy procedure. He enabled this roundabout procedure in the first place by justifying the majority stake in Chrysler through the misappropriated TARP funding that our idiot Congress gave to him. Cleverly the stock the UAW was "forced" to receive to back its health care fund means that they ironically are more powerful in this process than the secured creditors who should outright *own* the company at this juncture. The Obama Administration is trying to rush this dubious sale through to the complicit and really, irrelevant "Fiat" so that by the time their outrageous behavior comes to light, the creditors will have no legal rights.
I'd implore to write this up in your clear, explanatory style so that the blogosphere can clearly understand the thoroughly fascistic machinations of the Administration. Its actions expressly rely on the fact that normal people don't know the intricacies of the bankruptcy code.
May 2, 2009, 3:49 amBillare:
Oh, and the Pension Benefit Guaranty Corporation is assuming their pension plan liabilities, as well.
May 2, 2009, 3:52 amBillare:
Better condensed my thoughts:
This government is undertaking, in my opinion, criminal action in the Chrysler bankruptcy. Moreover, Obama is fully aware that what he is doing is illegal, which is why he hasn't asked Congress to intervene, but doing it through his twisted executive schemes. His actions would cause a huge scandal if exposed to the political process.
First of all, this isn't the normal method of Chapter 11 bankruptcy; instead, the Administration is negotiating a sale to another, different entity, a "Chrysler 2", under section 363. This is a conflict of interest because it is collusive bidding - the government is a stakeholder, as an equity holder and also as the recipient of political contributions, but is engineering the bid to the company that is ostensibly going to assume control of Chrysler, Fiat. Fiat will receive 15% of the equity, but it is strange that receives this control without putting up ANY MONEY AT ALL. Very typically, increasing the size of its stake will require politically-minded ideas like location of a Chrysler plant within the US. The UAW is owed unsecured claims of their health care fund, the VEBA, which under the government plan they will be "forced" to convert to 55% of the equity of the "New" Chrysler. For all this, they are offering $2 billion to the secured creditors.
Why is the Administration so eager for this bankruptcy to occur? Well, the general rule in Chapter 11 bankruptcy is that all creditors must agree to a re-organization plan or be proscribed one by the bankruptcy judge. However, the Administration wants a rapid-fire sale to Chrysler 2, because in order to effectively "block" the sale, the small number of dissenting creditors in question would have to put up more money in total ($2 billion) to bid on the assets than the Administration is offering. I will get to why there is no legal remedy in this situation later. Here is another conflict of interest, since the Administration is financing several of the larger creditors, the illegally-financed TARP banks, who will tend to accept less money than they would without yoke. This is a collective action problem: under normal bankruptcy, you can block by dissent; under the Administration plan, there needs to be a kind of coordination between the secured creditors.
First of all, understand that Fiat, the company, isn't important here. That begs another question - why are they participating, and what is their relationship to the Administration? They are not actually putting up any money, because the Treasury is going to finance the sale of the assets that will be received by "New" Chrysler. You could call it a "shill" bid, there is essentially no third-party bidder. Indeed, why would anyone want to get involved in this messy political situation, especially if the UAW will strike if you don't give them the same kind of exorbitant deal they would receive under the government? Note also that that same question also hampers the dissenting creditors' bid. Not only will the UAW get a 55% stake in "New" Chrysler, after Daimler pays $600 million into the pension plan, the Pension Benefit Guaranty Corporation will assume the liabilities of "Old" Chrysler, on the taxpayer's dime. They get to appoint a director to the board, and the supposedly "neutral" government will get to appoint 4 directors.
The sale under section 363 is designed to pre-empt another rule under section section 1129(a)(7) of the bankruptcy code. It reads,
"With respect to each impaired class of claims or interests – (A)
each holder of a claim or interest of such class . . . (ii) will receive
or retain under the plan on account of such claim or interest
property of a value, as of the effective date of the plan, that is not
less than the amount that such holder would so receive or retain if
the debtor were liquidated under chapter 7 of this title on such
date. "
So basically, it is a rule that says any reorganization plan should get maximum value for priority level of claims. If it prevailed, the dissenting secured bondholders would be made as whole as possible. But, if the company is sold under the more majoritarian section 363 sale, they never get to exercise those claim; if the trumping bid is the government's $2 billion, all secured creditors are paid pro-rata, and their claims cease. That's why the Obama Administration is speaking its Double Speak: "surgical" and "quick" really means "illegal" and "fraudulent". But the Federal Government is playing both sides, so that's A-OK.
The success of this plan critically hinges on whether it is judged "sub-rosa" by the presiding judge, which offers remedy for the "fear that a debtor-in-possession will enter into transactions that will, in effect, “short circuit the requirements of [C]hapter 11 for confirmation of a reorganization plan.†So, instead of the alternative where we could have had an open, private process between many stake-holders, we are having a secretive and political process between compromised and possibly corrupt stake-holders.
May 2, 2009, 6:00 amSteve S:
"it will run the company (further) into the ground and leave the union to pick up the pieces."
As long as the unions have a friend in the White House, it will be the taxpayers that pick up the pieces. Because the UAW.....I mean Chryler, of course....is too big to be allowed to fail. 30 to 40 billion per year should keep the whole mess semi-solvent.
May 3, 2009, 8:12 amTim:
Interesting blurb in the Autobeat Daily:
UAW AIMS TO SELL CHRYSLER STOCK QUICKLY. The United Auto Workers union’s retiree healthcare trust isn’t interested in being a long-term owner of Chrysler and hopes to sell its 55% stake in the company as soon as possible.
May 5, 2009, 6:35 amPresident Ron Gettelfinger tells reporters that the trust, which is to begin operating next year, will need cash to pay for retiree benefits. He says funding will be tight at first and the trust may need to trim benefits.
Gettelfinger also confirms that the trust will have one seat on the company’s board but no voting rights.
John:
How can the UAW own GM and Chrysler yet still be able to collectively bargain with Ford?
May 5, 2009, 1:39 pm