A quick note about yesterday's editorial from Sherk and Zywicki. I'm loath to wade in yet again on this issue, as I doubt there would be any interest in these old bankruptcy cases if there were not an election looming.
But the Sherk and Zywicki argument is stated quite clearly, and merits comment:
Had the UAW received normal treatment in standard bankruptcy proceedings, the Treasury would have recouped its entire investment.
They then let us know that they don't like the UAW, and wish they'd suffered more. Not exactly a surprise for a WSJ op-ed based on a Hertitage Foundation paper, but Adam rightly questions the relevance of all this.
And then they conclude:
If the government treated the UAW in the manner required by bankruptcy law, it could have given the stock and promissory notes to the Treasury instead of to the UAW.
Aparently logic is not part of the editing process at WSJ. The sentence itself makes no sense, essentially saying that the government could have recovered more if it gave money to itself. Yes, I supose if you spend less you spend less …
But would the automakers have survived? The authors assume that the government could have imposed losses on the UAW and the union would have taken it and liked it.
Maybe as some kind of free market dream this sort of deus ex machina solution works, but back in reality chapter 11 is a process of give and take. Imposing losses on parties that have the ability to respond has consequences. And labor unrest at the automakers would have resulted in real losses for everybody, including investors.
In both of the automotive cases another class of creditors — "critical trade vendors" — got paid in full, which also would seem to violate "absolute priority." That the critics of the auto cases repeatedly harp on the unions, who did not get a full recovery, while ignoring the critical trade creditors I find quite telling.
Bankruptcy law has very little to do with these cases anymore.
Comments
5 responses to “GM and Chrysler, Yet Again”
I thought I was fluent in English, but I don’t understand what Sherk and Zywicki wrote. GM and Chrysler owed money to a pension proxy, not directly to the UAW. If the VEBA goes down UAW doesn’t take a haircut, Uncle Sam does, via Pension Benefit Guarantee Corporation. So Uncle Sam cuts a deal OUTSIDE the bankruptcy to keep that from happening. How is that liability transfer wrong, how is it bad, and how does the government holding onto the stock and notes generate revenue to cover real PBGC expenses?
Ah, but we’ve long understood that absolute priority doesn’t apply to critical vendors. One would think that GM and Chrysler’s labor forces are as critical as any of their parts vendors.
There are lots of people who receive critical trade vendors treatment. Many of them are not trade vendors.
The biggest class is probably consumers who hold reliance-type warranties, such as car buyers. I’ve heard that casino chips receive similar treatment. In one case, a bunch of kiddies who had subscribed to comic books vaulted to the head of the queue.
Somewhat ironically, the leading critical trade vendors opinion was written by the wingnut Judge Frank Easterbrook, who pretty much mirrored Steve Lubben’s reasoning.
“In the following days, the lenders began to realize their leverage was small and dwindling. Only the government had the ability or willingness to finance a bankruptcy reorganization of Chrysler, while also supporting its warranties and suppliers and recapitalizing Chrysler Financial. None of the lenders, some of which had consumer operations in the Midwest near Chrysler plants, had any desire to take over and liquidate the company.” (Quote cited from link)
http://epicureandealmaker.blogspot.com/2009/05/more-of-kickin-sitcheyation.html
The secured lenders are LUCKY to be getting their .29$ on the dollar, since without the government, GM & Chrysler would have been liquidated since these secured lenders were not going to finance the ongoing operations.
Some have suggested (e.g. Doug Baird) that Chrysler was worth more in a liquidation than in a reorganization, but liquidation was not an option that was seriously on the table.