Marionettes, And Magicians
Do you find yourself scratching your head, trying to understand how Congress decides who gets what in the midst of all this bailout mania? Banks were bailed out, and all they created was the debt that caused the meltdown.
Personally, I wouldn’t own a car made by Ford, Chrysler or GM – even if you gave it to me. I’d find some sucker to sell it to and buy myself a Toyota.
Nevertheless, at least those guys make a real product. From what I see every day, at least some people are buying them.
So what was it that made the Senate decide not to bail THEM out? Who was pulling the strings behind the scenes?
In a nutshell, it was the banks.
From the WSJ via TheAutomaticEarth(emphasis mine):
‘The key to any magic trick is to focus the audience’s attention away from where the action is actually taking place. That is what Congress did in the failed auto bailout bill. Language in the proposed legislation seemed to uphold the rights of existing car-company creditors while also protecting any taxpayer funds used to prop up Detroit. In reality, the bill raised a chilling prospect for debt investors: that in extreme situations the government could upend the traditional pecking order of the bankruptcy process.
The result could be further instability in credit markets, which the government has been trying to thaw for more than a year. “If someone is thinking of providing a secured loan to another company, they can’t ignore this development,” said Mark Brodsky, head of Aurelius Capital, which focuses on distressed investments. “It introduces a tremendous amount of uncertainty.” Creditors’ rights became an issue in the proposed automotive bailout because the government planned to put its money first in line for repayment in the event of bankruptcy. That seems like a no-brainer for taxpayers. They clearly wouldn’t want to shoulder losses before banks.
But such a move could contravene the way corporate debt structures work and possibly the U.S. Constitution since senior lenders have their debt secured against company assets. In response to opposition from the banks, legislators compromised in the bailout bill originally passed by the House of Representatives, but which appears to have died in the Senate. The new language ostensibly made any government loan subordinate to senior, secured lenders. Problem solved? Not quite. What the government gave with one hand, it took with the other. It also added in some extraordinary protections for any government loans.
These included a provision that, in the case of bankruptcy, the government would be exempt from a legal stay, which freezes creditor claims until the court divides up the assets. It also included language saying the government’s loans couldn’t be haircut, as often happens to debts in bankruptcy. These protections mean that in any bankruptcy, the government “would have a strong blocking position that is going to make them the dominant player,” said Randy Picker, a professor at the University of Chicago Law School. The exemption from a stay in bankruptcy is especially significant, he adds, because it would let the government seize assets when everyone else has to stand put.
In effect, the language creates a new kind of debt and subordinates the senior, secured holders. That is a possible outcome debt investors now have to keep in mind when investing in industries the government may ultimately have to prop up. The financial crisis already has shaken the confidence of debt investors in everything from ratings to asset values on bank balance sheets. If the government wants to get markets working again, the last thing it needs to do is give these already skittish investors yet another reason to worry.’
Talking Heads And Pointing Fingers
The talking heads on the TV and radio are telling you about an email that circulated through the Republican ranks of the Senate. They are telling you that the UAW refused to make concessions, and that this is the reason the auto bailout was finally defeated.
Do not believe it. The UAW is NOT THE REASON for the past 30 years of stagnation in the US auto industry. The UAW is NOT THE REASON Detroit failed to deliver on its promise to design and produce more fuel efficient vehicles that we Americans would want to own. The UAW is NOT THE REASON any of these ‘Big 3’ auto-makers have become insolvent.
I’m not here to tell you ANYTHING good about the UAW, or any other union, for that matter. Whether I like it or not, unions of workers are most likely still a necessary part of corporate America. Nothing I know shows me that our leaders, whether in government or business, have matured enough to be able to unharness themselves from basic greed.
Until that changes, I will grudgingly accept the need for the collective power that comes from unions. Corporate and individual greed makes them indispensable. Still, I wish for something better, something more – considerate.
I’m not holding my breath. But I’m also NOT buying the current spin which points a finger at the unions as the ultimate bad-guy in this farce.
Instead, I have a finger of my own, and I’m pointing it straight up in the air, knuckle-side out, and you can imagine what I’m saying to the government and the management of these haphazardly-run companies.
I am Jon, and I call BULLICUS.