[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.