Democrats versus Republicans

[PBzeer]

I started to write this long piece in response, but realized, it really comes down to one simple fact. You don't solve economic problems with politcal solutions. To this point, everything done has had the political ramifications primary, and the economic result second.

The Chrysler deal shows where the priorities lay. Rather then let Chrysler go through the normal bankruptcy process, Obama has tried to engineer a solution that benefits a political constinuency, at the expense of the secured creditors, who by law, have superior claims against the company. In complete disregard for contractual law. And the proposals for GM mirror the same approach. While it may keep his poll numbers up, the long term effect on the economy is not positive if investors can no longer rely on the contracts necessary for investment.

When you add in the "Spend now, Save later" approach they are using to implement their political agenda, with nothing more than wishful thinking about the savings, you have the very real prospect of unsustainable debt to confront. Which leads to a second simple fact. The more capital that goes to government, the less there is to invest in growth of the economy. That's a harsh reality that no one seems willing to face, or even admit to.

[craigimass]

Originally Posted by cardiacpaul

GM
Will go bankrupt, pizz on union contracts legacy costs, & dump or spin off brands, slash the supply chain and distribution and be better for it in the long run.

It will get worse before it gets better, it will get better quicker only if policy makers, without ANY industry experience get the hell outta the kitchen.

Well, there goes PB's contract law. When a company fails, the law of the jungle or whatever the bankruptcy court says...is what goes. Honestly, anyone who invested in GM is either stupid or clueless.

One thing that NOBODY knows is what would have happened otherwise. Bush was convinced that if he didn't sign the 750 Billion bank bailout that the entire world would have collapsed. One need only see the look on his face and how quick he retreated into oblivion during the last 120 days of his Presidency. He and Cheney were those great BUSINESS LEADERS you are talking about, Bush with his MBA and Cheney being the CEO of a multi-national. What did that get us? Oh, $4.00 plus a gallon oil which broke the back of the country and continued deregulation to make sure it stayed broken longer.

We can all be monday morning QBs.

I can honestly say that I don't know if any course of action would have been better or worse with the car companies. But I do know math - and can state the obvious. The amount of money involved is TINY.....not even a blip on the radar screen as opposed to the cost of wars and bank bailouts.

When you want to solve BIG problems you have to put things in perspective that way. In other words, no matter what happens with GM or the others, it really does not matter. If 50 billion ends up being wasted, that is a joke.....nothing! 1/15th of the amount wasted on the banks just with the first Bush signed bailout.

I understand that bond holders, stock holders, vendors and employees are fighting over the scraps. But, largely, that does not matter. The Carcass is already decaying. It is nothing.

Let's look at the big picture.

We were failed by Wall Street. We were failed by the government, who supported the continued deregulation of the financial markets which allowed the banks to leverage 35 to 1 as opposed to the normal 10 to 1 (just one of many dereg problems).

Then, our individual and collective greed created an orgy of debt. Eat, drink and be merry, because we are American and nothing bad can happen...right?

Wrong.

Why work hard for money when you can just take a couple points off each loan that is refinanced once every year? Why work hard when your house increases in value 100K per year and you can just borrow against it? Why work hard when BILLIONS in cash are being flown to Iraq and given out without any oversight at all? Why work hard when the government, through the war efforts, becomes a vast driver of the economy (see: military-industrial complex)?

Now, back to a little politics. As I said, it often beats the alternative, which is the complete law of the jungle. That said, it must be measured as to what it is, and what it could be.

The last administration, IMHO, was about a 1 out of a 10....10 being the perfect government (which does not exist). They were, in general, either stupid, evil or incompetent. They demanded secrecy and loyalty and valued it WAY above truth and competence. They were, in many ways, the complete opposite of what our government is supposed to be.

Now things have changed. The new government is probably a 4 out of a 10. That means a 400% increase, IMHO, of the intelligence and practicality being brought to bear on the problems.

Ideally, I would want a government where we don't have to pay as much attention. But the last guys made that tough, as they spent every second trying to undermine our rights and our economy.....for the benefit of their oil and corporate friends. We can't have that.

I long for a time where I can just ignore them.....like I largely did under Clinton, Bush I, etc.

[sawingknots]

I think unless one is a multimillionare or a charity case but rather a ordinary american tax payer you can put both in a bag,shake it and just vote for the first to crawl out

[PBzeer]

Well, there goes PB's contract law. When a company fails, the law of the jungle or whatever the bankruptcy court says...is what goes. Honestly, anyone who invested in GM is either stupid or clueless.

That IS the law. In bankruptcy proceedings, secured creditors (those who accepted less return for the security of primacy to assets) have first call. That's the whole point behind secured vs unsecured creditors. GM is a private business, not a social agency.

While TARP was certainly signed by Bush, it had Obama's whole hearted support, as did the bailouts of GM and Chrysler, actions taken in concert with Obama (all matters of public record should you choose to research it rather than spout knee jerk anti-Bush rhetoric).

Your blithe dismissal of Bush policies fails to take into account that to a large extent, all Obama has done is EXPAND them, not change them. Again, a matter of public record. For while the rhetoric has changed, little of a substanstive nature has. The only real change has been the increase to the size and scope of government intervention.

[wind_magic]

GM bond holders don't have some secret desire to go to bankruptcy court, they know they are going to lose more in bankruptcy court than they would if they ended up owning their fair share of a new GM outside of bankruptcy court. The problem is they are not being offered their fair share - the government and UAW are offering 90% of the company to themselves, and GM bond holders are expected to take 10%, when bond holders own MORE of GM's debt than the UAW and the government COMBINED. So ... GM bond holders are going to let the company slip into bankruptcy court, because that's their last chance to get a fair deal on what's left of the companies assets. Plain and simple.

GM bond holders are willing to take that risk for one simple reason, separation of powers - if the executive branch and the legislature is out to screw you, move on to the judiciary and see if you can get a fair deal.

The government is the one forcing GM into bankruptcy court by leaving bond holders no other choice.

[wind_magic]

This GM thing is ALL politics.

From a "who is going to suffer" point-of-view, which seems to be the only way anybody ever cares to look at things anymore, there are three groups of private citizens who are going to suffer should GM go under - UAW workers, GM bond holders, and GM stock holders.

GM stock holders, nobody cares, you owned the company, you should have forced your board to plan for the future and build up cash reserves and yadda yadda, you are screwed, too bad. That's how it goes when you mortgage your company, by definition it belongs to someone else, and nobody is going to shed a tear for you. You own the company, you control it, and it was your job to make sure none of this ever happened. Sucks to be you.

GM bond holders, here everyone cares. GM bond holders are private individuals (and tax payers via government investment), either directly holding bonds or holding them through pension funds, 401k's, bond funds, or any number of other ways. Obviously this is going to be a problem - if GM goes under then bond holders, who have already taken a huge hit in price against the face value of their bonds, are going to suffer. These people loaned GM money, just like if you had gone up to your father and asked to borrow some money, GM went to bond holders and created a contract with them, borrowed money, and those bond holders want their money back. GM also went to the American tax payer and borrowed money and made a contract, and tax payers deserve their fair share. It ISN'T GM'S MONEY anymore, GM mortgaged everything it owned, its future revenues, its workers futures, everything, to get money from people who had money to loan. And who had it to give ? People nearing retirement, that's who, and the American tax payer. Discounting the tax payer for a moment - the people who own GM bonds are mostly older people who have worked their entire lives to save up nest eggs for retirement, they chose to buy GM bonds because GM seemed like a safe investment paying xx% a year. Is it anybodies fault GM bond holders are now left holding the bag ? No, bond holders know what they are getting into when they loan companies money, they know that companies can default on their obligations and go bankrupt and that they will be left scrambling to sell the companies assets to get back as much of their retirement money as they can. That's just how it goes when you loan people money, sometimes they don't repay it, for whatever reason. HOWEVER, GM bond holders also "know" that they have a majority position in the chain should GM default, and that is what is at issue here, GM bond holders LEGAL RIGHT to the assets left in bankruptcy based on their majority position.

UAW workers, we feel for them too - there are two major points with UAW workers that need to be separated out.

FIRST - UAW workers work for GM. They had hopes of working for GM well into the future, and now that GM is going out of business (probably) they lose their livelihood. Sometimes companies just fail. UAW workers did get something in return for their work, it's called a PAYCHECK, they usually arrive weekly, they stop when the company goes under, that's just how it goes.

SECOND - UAW workers loaned GM money, just like bond holders did, they ARE bond holders. This is perfectly valid, GM's employees should not be ripped off, their retirement is wrapped up in GM just like bond holder's retirements are wrapped up in GM's, they both loaned GM money and now they stand to lose everything. UAW workers DO have a legal claim against GM here, GM entered into contracts with UAW workers when they borrowed the money, those contracts were the bonds that they issued promising to repay.

Everything should work like it is supposed to work, the way the law says it works, and that means that if GM goes bankrupt then all of its creditors get together and divide up whatever is left and part ways, either that or everyone gets together BEFORE GM goes to bankruptcy court and they haggle and take losses until they come to some kind of agreement that everyone can stomach (which nobody likes, of course, they always want more), then they reorganize the company and move forward.

The problem here is POLITICS. For whatever reason (?????????????) the administration cares more about UAW workers than it cares about people who are retiring. Why ????? I absolutely no idea. For whatever reasons known only to the administration and the congress, a poor UAW worker who is about to lose his/her job is simply more important than a couple of old folks who are about to lose their retirement (which will force them to work much longer than they would have to replace the money). Why is a UAW worker more important than an older person ? I have no idea, only the administration can explain that, or the Congress. Maybe someone who supports the Democrats can explain it to us.

[wind_magic]

Here are the only theories I can come up with for why the administration and the Congress are currently trying to ride roughshod over bond holders in favor of GM's UAW workers. I only have a few theories, I really can't think of any other reasons for it ...

1. Maybe by threatening GM bond holders the administration hopes that they will soften bond holders up for a last minute deal. The theory here is that by scaring the hell out of GM bond holders they will be more willing to negotiate right before GM goes into bankruptcy, that they will give a little more, and that a deal will get done. There is some merit to this, GM bond holders have a very strong claim against the company, you basically would have to threaten them with total loss to get them to deal - but this plan would have a huge flaw and that is that GM bond holders are a very diverse group and they work slowly, you can't wait until the last minute to offer them a deal unless you are planning to extend things by giving GM more money to carry it through a for a few more months.
   
2. Another theory is that the administration and Congress just didn't know what the hell it was doing, which I think is also possible. Listening to Nancy Pelosi and Frank on the steps of the capital talking about how everyone was going to have to take a haircut last autumn I really do think they may have just misunderstood the process or something, they really didn't inspire much confidence, they didn't seem to even know what they were talking about. Maybe they were all just confused and they are only now figuring out how bankruptcy court works ??
   
3. Or maybe the administration really does just want to screw bond holders, maybe he thinks it is just a bunch of big companies on Wall Street and that they deserve to lose money ? Again, this would be naive at best, the administration must know who owns all those bond funds, etc, that it is retiring people who own them. I don't want to believe that the administration actually cares about one person more than it cares about another, and I really don't believe this is the motivation - but I could be wrong ?????
   
4. One theory I have that I think really could be it - the President actually doesn't want to save GM, the President WANTS the company to go to bankruptcy court. Rather than have to tell UAW workers the bad news, the administration instead comes out and makes a totally impossible offer to GM bond holders knowing full well that bond holders are going to reject it, which will force GM into bankruptcy and then it's the court's fault, NOT the administration's fault, that UAW workers are forced to accept less than they believe they deserve. This provides LOTS of cover for the administration, GM UAW workers are forced by a judge to accept something they don't want, GM bond holders still get a fair shake, and the administration doesn't look responsible for any of it. This is what I feel is most likely going on here, the President is obviously a savvy politician and I'm sure he'd much rather have a judge break the bad news to the UAW than have to do it himself, maybe that is why the administration offered such lousy terms to bond holders, because if the terms had been even marginal then the administration would take the risk that bond holders would actually accept it ?

Roughshod -adjective 1. shod with horseshoes having projecting nails or points. -idiom 2. ride roughshod over, to treat harshly or domineeringly; override, crush: He rode roughshod over his friends to advance himself in the business world.

That was the first time I've ever used the word roughshod.

[Sunbeam]

Originally Posted by craigimass

I can honestly say that I don't know...

You're beginning to make some sense!

[Selkirk]

Originally Posted by Sunbeam

You're beginning to make some sense!

Ooo. Cold. Just cold.

[craigimass]

I think most of the above is right.
The administration knows it does not have the power or desire to put the company back together again.

I think it is an attempt to let it go down slowly, which may be a good thing. No one know the future. Maybe in the time that was bought the economy would have really started coming back together and people would have started buying cars. Yeah, a long shot....but possible. In fact, much more possible than the depression we are currently in (ALL the parties that participated in the CDS calculated the chances at virtually zero...of this type of default).

Nothing wrong with politics. It affects everything we do. I really doubt the situation, in this case, will end up any worse than if we let them file for bankruptcy 4 months ago.

Reality is reality. It can't be saved. But maybe it can be let down gently and kept slightly comfortable on the way to it's demise.....which, of course, will be called a reorganization and downsizing.

As to corporate bonds, I own a bunch and consider them an extremely risky venture....anytime and anywhere. BUT, if you own enough of them - say though Vanguard Mutual Funds, etc. - the risk (IMHO) is rather small.

The high yield bond market is another story. USA defaults are already passing 10% and forecast to hit 20%. Big hurting. I assume GM debt was junk status for a long time. Yep, just looked and they have been junk for 4 years. Anyone who didn't rid of them in that time.....took a big chance.

Hmmm...just looked at the Vanguard junk fund I own.....paying almost 10% - not bad. They have 2.5% of their bonds in default. Also, only 1.8% of the bonds are listed as transportation...but who knows? Maybe cars are classified under consumer cyclical.

I see Ford bonds among the top 10, but no GM.

VWEAX if anyone is interested in 9.4% (with risks, of course!)