Tuesday, May 12, 2009

Gangster State

Holding GM Debt? Gubbermint Is Robbing You! - The Market Ticker
I ask you this essential question:
If President Obama and Tim Geithner will steal from you in this fashion, literally at gunpoint, do you believe that your 401k or IRA will not similarly be confiscated whenever our government decides it wants to steal from you on similar "terms" - or when it suddenly "needs" some money (like when the bond market has had enough of this crap and stops being willing to finance a nearly $2 trillion annual deficit!)


Dag said...

That leaves me totally confused.

The government takes money from people who have a legitimate right to it, i.e. to be paid in case of bankruptcy; and instead of paying legitimate claims first, the company has to pay the union stock-holders? The government is telling who? the company? to pay the union first? And if the company says no, the government is going to do what? to whom? Or is this a government telling granny that if she takes the government to court to sue for her money owed the government will audit her taxes for the past ten years?

I don't know this story. I don't know what it means in terms of being a citizen. How can the federal government take money from stock-holders? Who is taking the money? From whom? How do government agents get the money from investors? What court will up-hold this? I'm lost here.

truepeers said...

The article linked may be a bit hyperbolic because he assumes that what happened to the Chrysler bondholders is just what is going to happen to the GM bondholders but this is not too clear yet.

When a company goes bankrupt, people who have bought secured bonds (not shares) in the company have the first claim on the assets. IN other words, those who loan money while accepting the collateral of the company's assets as security have a higher claim than do the shareholders or owners of the company, as you would expect.

What has happened to GM and Chysler is that they have had to borrow billions in emergency loans from the government, to stay afloat these last few months. This money has come with the proviso that the government now basically dictates to the company's management the terms for their financial restructuring (Obama even demanded that the former head of GM quit). What they are trying to do is restructure the companies and get all of the stakeholders to sign off on the restructuring agreement. It is a pressure sell and people involved have to decide whether they want to cross Obama's will and what that could possibly mean for them down the road (and who knows where this government could go: that's the fear they are using)

If the government can get all (or most of) the stakeholders to sign off they can restructure the company without going through bankruptcy court.

In the Chrysler restructuring, the bondholders were paid back a small fraction of the total of the debt they held, while the shareholders, most notably the union and its employee medical and retirement funds, got a much better deal and a significant equity stake in the new company. Chrysler is different from GM in that it is privately owned, and its bonds were held largely by big investment firms and banks, the same Wall St. interests that the government has also been bailing out in a massive way. Most of the Chrysler bondholders were consequently not in much of a position to complain about what the government, i.e. their sugar daddy, was proposing. Only a small minority of Chrysler's secured bondholders challenged the deal but basically backed down (there are stories they were threatened by the government, but none of this is clear) when they considered the legal costs and hurdles they were facing (I don't know how many bondholders have to sign off on the deal to make it near impossible for the minority to win a court case but the minority cried foul and gave up.)

Now the GM situation is different in that the debt is much more widely held by ordinary people. But the government is pressuring for a similar deal. Will they get away with it? I guess it depends on how many want to fight, how many will accept crumbs from the Obama deal instead of going through an expensive court battle that might only end with them getting a few crumbs from a failed company. Granny will never be able to afford the lawyers on her own: there will have to be a certain critical mass among the bondholders.

See this story for detailsWhat the market blogger I linked to is really worried about is that if the idea gets around that secured bondholders (i.e. people generally assumed to have first claim on a company's assets) are not really that secure if the government takes an interest in a failing company/industry and favors the unions or employees as the new owners of the companies it is restructuring, then there is going to be a political risk premium that companies wanting to raise capital through bonds are going to have to pay. And if the costs of borrowing and doing business thus go up, then there were will be less business and the economy could be seriously hampered. It strikes me as a legitimate fear but who knows for sure how the bond market will react in future. Will it share the view that the Obama regime has gangster ethics? That's the question of the hour. The economy can only turn around if people have faith and trust in what is happening and are willing to invest in it again. I wouldn't take the recent run up in the stock market to be much of an indicator of anything other than a government-media hype (done to make it easier to help failing banks raise new capital?) since there are really no signs in the real economy of a turnaround yet. WIll those who loan money to government and American corporations continue to do so? It depends on whether they share the outrage of the blogger at the deals forced on the CHrysler bond holders and now, it appears, on the GM ones. The blogger doesn't want the economy to tank, so he is using hyperbole to put the fear of God and loss of financial trust into the government people to encourage them to stop and think about what they are doing. Have they destroyed sacred ground? That's the question of the hour. The answer is not ultimately theoretical or even dependent on a court ruling: the answer will be found in the future cost of borrowing in the bond market: will they write this off as an exceptional event that they need not fear being repeated? Or will they fear it will be and thus push interest rates up?

Dag said...

You're going to bankrupt the Wall Street Journal if yo keep writing like that, Peers. That was excellent.

Given that the nature of economy, based on "household" is faith, security, trust, and so on, and that the government has stepped into a collective act of faith and befouled it, in my opinion, I don't think a good out-come would be a correction of the market, or a turn-around, a they say. That would strike me as fruit from a poisoned tree. It would lead to more intervention at best, and a further erosion of independence in the market, a further erosion of why we have a free market in the first place. So, success is failure.

What does the ordinary person do in such a case of overwhelming government power and a lack of clarity on the part of so many voters who have no real stake in the economy as producers? I'd move my assets off-shore to a secure economy.

truepeers said...

The problem is, there are really few safe places to move assets to. America can play Banana Republic, for a while, and maybe get away with it (in a way that say Canada or a real Banana Republic never could), because the debt crisis, while bad in the US, is maybe even worse in Europe, and Japan is still stuck in a trend of lowering asset values caused by its own government's failed attempts to spend/borrow its way out of a similar financial crisis.

People may still want to hold American debt because they may still have more faith in the AMerica taxpayer still paying it off in ten or thirty years than they do with anyone else. But there can no doubt come a point where even that relative good faith can be destroyed, which might then entail a radical collapse, or maybe transformation, of economic activity.

One point I didn't accentuate above is that secured bondholders are supposed, under law, to be paid back *in full* before anyone else gets a piece of what's left of a failed company. But the bondholders have only gotten a small fraction of their loans back, while the unions and government have now been given a significant ownership in the restructured companies. This really looks like a political protection racket. But will Obama play this game again and again? Who knows? But there are countries, like CHina, where it's well known to be always a kind of protection racket, if you want to do business. Moving money offshore to a tax haven is one thing; but then, finding productive investments with that money is another, because you (or your bank) still have to invest the funds moved to the tax haven in some kind of productive enterprise and that usually means moving it back to the USA, at least if you want to minimize risk.

The problem with the Obama team's embrace of neo-Keynesian ideas is that while government taking on debt and spending may work in some times and places to stimulate activity, the more you rely on it the less it can work. The more debt you pile up, the more of your income has to go to servicing debt and that cost of servicing can grow to the point where you can't grow the economy to keep up, no matter how much you borrow to "stimulate" it. At that point, what happens? Will the government be again tempted to rip off debt holders, in the name of screwing the rich to save the poor (not that the UAW members and retirees are exactly poor compared to other retirement bond funds)

I'm not so worried about fruit from a poisoned tree; I'm worried about the tree's fertility being destroyed. If socialism really worked at producing wealth, why would it be a scandal? Why would we still value independence and freedom? But history shows it can't work once it runs out of other people's wealth to expropriate. In the short term, the stock market can run on emotions; in the long term, it will come to terms with the real value of companies. At some point, hope and change has to deliver or the bluff will be called.