The Big UAW Payoff

Well, in addition to rewriting bankruptcy law, they’re also giving ownership to the UAW/Liberal Democratic Axis. Not just Chrysler, GM too. I e-mailed my cousin who’s a middle level white collar guy at GM and congratulated him on finally getting that Civil Service job. The only difference is that Civil Servants can’t get laid off. My cousin has no similar assurances.
So Obama was screaming about Chrysler’s bondholders not being willing to sacrifice for the good of the UAW and the taxpayer. Sure they were. Know this, they have liens on Chrysler’s assets. In a liquidation of Chrysler they would probably get something in that 60 cents on the dollar range. They were offered 10. They said no. They counter offered to take 60 cents now and shortcut the process. My guess is they would have settled for 40-45 cents. It’s called negotiating. But apparently there is no negotiating with this administration. The taxpayers and UAW, depending on whose analysis you read, are getting something between 60 and 85 cents on the dollar (including new common stock). There hasn’t been much talk about the unsecured trade creditors, who in a normal bankruptcy might end up with 5-10 cents. But it looks like they’re not being asked to take ANY discount. It’s upside down except for one thing – the existing common stockholders are basically being diluted out of existence and the UAW and Federal government are stepping in.
In a business’s capital structure the risk return trade off goes like this. The riskier the position in the capital structure the greater returns demanded by the investor. Starting at the bottom and moving up the right side of the balance sheet, common equity (the stock market) is the riskiest and demands the highest returns. Preferred stock is next followed by subordinated debt (subordinated to the claims of senior debt holders, also known as mezzanine debt), then senior unsecured debt (in this case the bondholders AND the UAW Trust). Then comes unsecured trade debt, which is shorter in duration but still has no claims against assets. Last and least risky, is secured debt which has liens against assets and is usually held by banks (that’s what I do). In the Detroit cases, the Treasury’s loans were put in as senior unsecured debt to effectively allow GM and Chrysler to continue to pay their existing creditors. This is akin to debtor-in-position lending, which is usually part of a prepackaged bankruptcy. DIP financing pays off existing pre-bankruptcy creditors and almost always at a discount (see paragraph 2). DIP lenders then get paid off first and in full when the company emerges from bankruptcy. This is what is happening at Chrysler. The only thing missing from the Treasury loans to GM was the actually bankruptcy filing (so far).
What happened here, and what Levin was talking about, was the government elevated the UAW from a junior unsecured creditor to a level close to par-pasu with its own loans. Why is obvious. UAW good. Private investors bad. But let’s not forget who holds all that public unsecured debt. It’s not ‘greedy Wall Street bankers’ (EEEEKKK!, not them!!. Hide the women and children!) It’s pension plans, 401(k) plans, insurance companies, mutual funds, state and local retirement plans, etc. aka regular people who are not members of the UAW.
Chrysler is a little different, but just as chilling. It is owned by Cerberus, a big private equity firm. Its major bondholders are the banks, insurance companies and hedge funds that financed its leveraged acquisition of the company. (There’s those greedy Wall Street bankers again.) Now that those lenders know that the Federal government is more than willing to come in and unilaterally subjugate their mostly secured claims in favor of unsecured creditors with claims junior to theirs who also happen to be politically favored constituents (i.e. the UAW) how willing are they going to be to do the next transaction? Or the one after that?
The auto companies should have been allowed to go through the normal bankruptcy process. The Obama administration and the UAW know that, but then they would have lost control of the process and could not have taken over these companies themselves. By doing this the UAW and Federal government now have overwhelming majority ownership of the common voting stock of GM and Chrysler. So we now have this scenario. When the UAW contract comes up for renewal, the UAW will be on both sides of the table and they will be negotiating both with and against the Federal Government. It’s the ‘with’ part that should frighten everyone. In places like, oh, China, Russia and Venezuela these are called state run enterprises. By the way, the environmentalists will be there as well. They’ll be telling management what kind of cars to make. If management doesn’t do it the shareholders (see: Federal Government) will change management.
The auto companies have essentially been run for the benefit of the UAW for the past three or four decades, and forced to produce products mandated by Federal environmental regulations. Corporations are supposed to be run for the benefit of the shareholders. Unfortunately, now they’ll have it both ways.
One last point. Don’t listen to the greenheads who point to those evil SUVs as evidence of ‘not enough’ environmental compliance. SUVs and light trucks have been the only profitable products for Detroit for years. There had to be some source of cash flow to fund those uncompetitive union contracts. That’s why there are such high tariffs against FOREIGN SUVs and light trucks and why Detroit was allowed to continue to make them. Now even that’s going to change. The upshot? More protectionism against imports and even higher wages and benefits for the UAW leading to higher prices to the consumer, greater production of environmentally correct cars that most people don’t want and that are unsafe, and an increasingly unprofitable industry that will require massive amounts of government (i.e. taxpayer subsidies).
Wonderful.
The Libinator