Patterico's Pontifications

4/11/2009

Government Motors Follies: Super Kabuki edition

Filed under: General — Karl @ 8:32 am

[Posted by Karl]

Megan McArdle notes the problem faced by Car Dealer-In-Chief Obama:

The government is trying to get GM and Chrysler bondholders to take a hefty haircut on their debt rather than push the companies into bankruptcy.  The problem is, it’s a terrible deal for the bondholders, and there’s no reason for them to do it…

***

The administration seems to be negotiating like a sovereign, which, of course, it is.  But GM is not.  Unlike Argentina, it can’t just default and flip off the bondholders.  When it defaults, its creditors can put it into bankruptcy.  The administration seems to be trying to prevent that in order to preserve stakeholder value–but the recovery in bankruptcy is essentially the floor of what the creditors will accept.

Or maybe this is all some elaborate Kabuki ritual, where the government pretends to be talking tough in order to placate Big Labor, while quietly waiting for the inevitable.  Either way, it seems like a giant waste of time.

Actually, it’s more than Kabuki.  Tom Maguire has noted that free riding GMAC bondholders have already made a lot of money betting that the “inevitable” is not — that when push comes to shove, the government will blink, as it already has twice with GM.  Maguire also predicted the behavior that is confusing McArdle:

Obama is trying to extract concessions from General Motors bondholders, all of whom know that the free riders will pick up a windfall after Obama shocks everyone by deciding not to take GM into bankruptcy.  The free riders could be controlled in bankruptcy, of course, but that won’t be happening.  However, a lot of huffing and puffing has to take place over the next few months to scare some bond holders into submission somehow.  Clearly, the ordinary Washington Kabuki won’t be enough – look for Super Kabuki!

McArdle may be underestimating the lengths to which the Obama Administration and a Democratic Congress will go to bail out the UAW and its electorally-important, white, blue-collar, workers in the swing states of the upper Midwest.

–Karl

29 Comments

  1. If the Bondholders could vacate the Union Contracts and push the pension onto the Gov.t they would make a mint on the Bonds.

    In fact, those bonds are probably worth much much more than face value to a Vulture Investor.

    Fact is they ain’t stupid. GM without the proletariat’s “tax” (i.e., bloated salaries, bloated benefits, bloated pensions) is a very, very profitable company.

    Unfortunately our Apparatchiks in treasury don’t have enough brains to get it so they are trying to do a cram down instead.

    Comment by Jimminy'cricket (637168) — 4/11/2009 @ 8:44 am

  2. I thought the base level argument was for Detroit to get it’s total costs in line commensurate with the foreign auto makers with plants currently operating in the US. What was I thinking?

    Comment by Dmac (1ddf7e) — 4/11/2009 @ 8:52 am

  3. Obama doesn’t understand business. He views this as a political situation just as he views the wat on terror as an exercise criminal justice, both of which are mistakes. He fundamentally underestimates and misunderstands those with whom he has to negotiate solutions, which is not a typically harbinger of a successful outcome from his perspective. Democrat politician do not understand business and Obama has never managed anything except the horribly unsuccesful Annenberg grant program in Cgicago.

    Comment by daleyrocks (5d22c0) — 4/11/2009 @ 9:14 am

  4. Daleyrocks,
    Did you hear that clip of H-Rod discussing the pirate attack? Limbaugh played it on Thursday. There’s a hostage situation and she’s cackling! And the ObamaMessiah declines to talk about it, because he’s pushing his housing plan.

    Comment by Brother Bradley J. Fikes, C.O.R. (0ea407) — 4/11/2009 @ 9:23 am

  5. This is just another depressing example of how the more government involves itself in matters it has no business being in, the worse the situations become.
    We are seeing, up close and personal, the validation of Amity Shlaes’ work in “The Forgotten Man”.
    We will relive the follies of the New Deal, with the hubris of the Carter Presidency.
    We are ….ing doomed!

    Comment by AD - RtR/OS (2b04d5) — 4/11/2009 @ 10:07 am

  6. Bradley – I heard about it but did not hear it. I think it’s great that Obama is keeping the surveillance and rendition positions of Bush especially now that he’s been briefed in and has had time to own them. His decision to close Guantanomo shows his fundamental naivete, however, and I hope his announcement was just optics for his base. When I studied international law in the 1970s there was nothing that would have prohibited Bush from doing what he did in Gitmo or Afghanistan with respect to prisoners. I’m unaware of anything that has changed in international law or treaties or the law of land warfare since that time which would change that position. None of the shrieking lefties who nomment here have ever presented a reasoned argument againsst it. The Supreme Court in Boummediene erred in relying on a colloquy between Schumer and Durbin, if I recall correctly, inserted into the debate of the Detainee Treatment Act after the fact as if it occurred on the floor, to interpret the intent of Congress. The left is basically outright lying on the history and current status of the treatment of detainees in wars, but I’m sure most people here expect nothing less.

    Comment by daleyrocks (5d22c0) — 4/11/2009 @ 10:15 am

  7. Car Dealer-In-Chief Obama

    More like used-car-salesman Obama. Or aluminum-siding-salesman Obama. Next up: his attempt to sell the Brooklyn Bridge.

    There’s a hostage situation and she’s cackling!

    Merely nervous laughter. I have no doubt the situation is reminding her of the frightening predicament she faced several years ago when she was forced to escape from sniper fire on an airport tarmac in Bosnia.

    Comment by Mark (411533) — 4/11/2009 @ 10:24 am

  8. “Car Dealer-In-Chief Obama”

    He certainly doesn’t have the Midas touch (I don’t know how to do that trademark thingy).

    Comment by daleyrocks (5d22c0) — 4/11/2009 @ 11:01 am

  9. The most terrifying words in the English language are: I’m from the government and I’m here to help. ~ Ronald Reagan

    That just about sums it up.

    Comment by ML (14488c) — 4/11/2009 @ 11:28 am

  10. Just wanted to see what the idiots were blabbering about. Oh Dmac that is positively pavlovian! HAHAHA nice to see you guys still got your heads up your asses

    Comment by Jrock (c313be) — 4/11/2009 @ 11:32 am

  11. Obama is a law (adjunct, which means unpaid) professor and sees everything through that lens. Worse, he is filling his administration with lawyers and law professors. At least some lawyers have some real world experience. I’m reading John O’Sullivan’s book about Reagan, Thatcher and the Pope and this situation looks more every day like Carter’s second term.

    The pirate standoff might just be a mini-version of the Iranian hostage crisis in which the public gets to see Obama’s policies in action.

    The whole GM crisis is an attempt to avoid BK so the unions don’t have to give in. They will wreck the company rather than do the logical thing and make the UAW back down.

    It’s hard to believe he is only in the third month. It seems like he’s been there for years.

    Comment by Mike K (90939b) — 4/11/2009 @ 11:40 am

  12. Whenever a discussion digresses to the obstructionism of various members of the legal profession to the accomplishment of a desired societal good, I am reminded of the colloquy between Arnold Schwarzenegger and James Belushi in the movie “Red Heat” when Belushi responds to Arnold’s plan of ridding society of drugs, that the lawyers’ would never allow it, and Arnold responds:
    “Kill them first!”

    Comment by AD - RtR/OS (2b04d5) — 4/11/2009 @ 11:53 am

  13. it is only his third month, its a shame he can’t resurrect GW’s terrible, terrible, terrible, terrible, terrible handling of our economy in just three months. That is positively pavlovian, right Dmac?

    Comment by Jrock (c313be) — 4/11/2009 @ 12:02 pm

  14. So force the bondholders to take a hair cut…

    Worsening the assets quality of the bond investors…

    Making it more likely they default on their debt to banks…

    Which further deteriorates the bank…

    Which requires more TARP money for the bank…

    Which then requires the Bank to re-lend it…

    Which the Autos can then re-borrow to keep covering their losses…

    An the UAW keeps the checks coming.

    Comment by Jimminy'cricket (637168) — 4/11/2009 @ 12:51 pm

  15. JC – WTF are you talking about?

    Comment by daleyrocks (5d22c0) — 4/11/2009 @ 1:32 pm

  16. Upon reading a post today on Roger Kimball’s blog it occurred to me that the biggest loser in the Obama presidency may be the reputation of Harvard as a center of excellence in education. We don’t know how he was admitted and how his tuition was paid. We have no information about his college grades except that he was not an honors graduate of Columbia. He was editor of the Law Review without ever writing a scholarly paper.

    This seems to have been an affirmative action career thus far. It doesn’t seem to be working out well, so far.

    Comment by Mike K (90939b) — 4/11/2009 @ 1:57 pm

  17. [...] The government is putting the squeeze on the creditors of General Motors and Chrysler, the two members of the Big 2½ — it’s hard to consider Chrysler as making it the Big 3 — to alleviate the pressure on those companies. (Hat tip to Karl.) [...]

    Pingback by Common Sense Political Thought » Blog Archive » Government Motors, indeed! (73d96f) — 4/11/2009 @ 1:59 pm

  18. “Car Dealer in Chief Obama”

    So does that make him like this guy?

    http://www.youtube.com/watch?v=pTaTitRENDM

    “The Obama administration–You think you hate it now, but wait till you drive it!”

    Comment by Another Chris (a3bb8f) — 4/11/2009 @ 2:11 pm

  19. It’s pretty hard to drive something that only can make Left turns.

    Comment by AD - RtR/OS (2b04d5) — 4/11/2009 @ 2:34 pm

  20. So now the press finally begins to realize that Volcker was just window dressing all along (duh):

    http://online.wsj.com/article/SB123940537361509771.html

    What a crock – there is no way in hell that any of this FUBAR economic crud had input from Volcker. If anything, he’d probably have fainted dead away after he saw the initial plans. Perhaps their super – secret plan is to finally turn to him for advice when inflation/stagflation begins in earnest.

    Comment by Dmac (1ddf7e) — 4/11/2009 @ 2:59 pm

  21. Since it is usually easier to stop a problem before it develops, than to fix it after it has arrived full-blown, it doesn’t appear that Volcker’s experience and expertise are valued at all by Duh-1.
    After his dismal performance at the UN on Food-for-Oil, you just have to wonder what in the Hell has happened to him, and just how does he think this is going to enhance his reputation?

    Comment by AD - RtR/OS (2b04d5) — 4/11/2009 @ 3:33 pm

  22. http://omg.yahoo.com/news/celebrity-salaries-revealed-for-2008/21129?nc

    I think it socially unjust and we need pay caps here too. It is only fair.

    #13, hi/bestwishes/bye.

    Comment by Jimminy'cricket (637168) — 4/11/2009 @ 3:36 pm

  23. If the Government of the United States starts to establish the amount of money one can work for
    (I grant them the MinWageLaw, no more),
    what is it that would differentiate the U.S. from the U.S.S.R.?
    First wages, and then employment, and then living quarters, what kind of car you’ll drive (or not – got to have bodies on public transit to pay those costs that are always out-of-control); where will it end?
    Every time this country has attempted to impose Wage & Price Controls (that was Nixon’s job during WW-2, and led him to try it again in 1971), it has turned out badly.
    The entire Health Insurance mess is a result of the W&PC’s imposed during WW-2,
    among other problems we still have not shaken off.

    Comment by AD - RtR/OS (2b04d5) — 4/11/2009 @ 3:57 pm

  24. So, after General Motors CEO Barack Obama puts all of this pressure on GM’s creditors to reduce GM’s debt, what does this mean for Ford, the one American car maker which took action before the crisis to make sure it could survive without a government bailout? Won’t this give a competitive advantage to Government General Motors?

    Seems like a plot to get Ford to cry “Uncle,” so that Uncle Sugar can control the entire auto industry.

    Comment by The Dana who drives an F-150 (82a421) — 4/11/2009 @ 5:44 pm

  25. The fiasco of the Obama administration attacking a company it was supposedly working to save, ie., AIG, has nearly destroyed Obama’s credibility in both the TARP and the GM rescues. That’s the message being sent by the many banks now paying off the TARP money despite the Treasury Dept’s wish.

    Everyone knows it but the media.

    Comment by SPQR (26be8b) — 4/12/2009 @ 2:48 pm

  26. “Seems like a plot to get Ford to cry “Uncle,” so that Uncle Sugar can control the entire auto industry.”

    Ford just completed a pretty large voluntary debt swap with a substantial portion of its creditors without any steenkin’ gubmint interference. What Obama has created here is a game of chicken because he hasn’t put any wood to the unions yet and assume he does not want to.

    Comment by daleyrocks (5d22c0) — 4/12/2009 @ 3:15 pm

  27. To recap a few salient points:

    If GM defaults on the bondholders, they can force GM into bankruptcy, government ownership or no. And they know it. Thus, they aren’t going to take a deal that is worse for them than bankruptcy.

    Bankruptcy would force the UAW contracts to be reopened, which is badly needed if GM is ever to be viable (i.e., profitable) again. The work rules in particular need to be shredded, even more than wages and benefits. The UAW doesn’t want this.

    Obama owes the UAW, so his administration doesn’t want this. He’ll try and clip every other stakeholder but the UAW. But until the UAW contracts are renegotiated, GM is going to be an ongoing money pit. The big question is how long will the public stomach that.

    Comment by LarryD (243b3d) — 4/13/2009 @ 6:29 am

  28. [...] our last episode, I commented that The Atlantic’s Megan McArdle may have been mistaken in thinking a General [...]

    Pingback by The Greenroom » Forum Archive » Government Motors Follies: Surgical Taxpayer-Soaking Edition (e2f069) — 4/14/2009 @ 2:39 pm

  29. [...] In fact, this case is doubly dire, as one of the few things worse for a business than the United Auto Workers is the Canadian Auto Workers.  This is a job for Super-Kabuki! [...]

    Pingback by Patterico’s Pontifications » Government Motors Follies: Chrysler Fiat Edition (e4ab32) — 7/22/2009 @ 12:20 am

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