Last week, GM reached a deal with its union and now is trying to get its bondholders to come to terms before the June 1 deadline. It seems likely that a bankruptcy will follow, since bondholders want more than the $2 billion they would get under current transactional structure. See Vlasic, GM in Deal with Union as Deadline Approaches, NY Times, May 22, 2009.
Are the bondholders doing right to hold out? They seem to think it is unfair for the union to end up with a significant equity stake in the new company. Or are the bondholders really just another example of Wall Street greed run amok?
I tend to think the latter. As others have noted, bondholders' squawks about the union deal is a red herring. That's a deal that applies to the new Chrysler company, not money that would ever have been available to pay off the bondholders. Stephen Lubben (Seton Hall prof) told Salon.com it's erroneous to "think that value is being diverted to the unions, because the value that is going to the unions was never in the debtor to begin with." See Who is screwing with bankruptcy law?, Salon.com, May 23, 2009. The $2 billion offered bondholders is likely a reasonable sale price for the company--and that's all the bondholders are entitled to. The hedge funds in particular seem to object to the government's paying attention to the union. But that's a role that government should play, using its resources strategically for the long-term good of the economy and the American people. the government may invest $45 billion in GM by the time it is done, see Lois Romano, Treasury Secretary: Economic CPR, Wash. Post, May 26, 2009. so it is reasonable to pay attention to the people being served with that money. The bondholders aren't entitled to a similar bailout, however much they may have thought they might get one. If the government weren't involved, would somebody else come up to the table to put that money out? Don't think so.
Thus, the Washington Post editorializing strikes me as just another bit of the corporatist agenda that the paper has adopted over the last decade or so. See Government Motors, Wash. Post.com, May 26, 2009. The Post editorial board complains about the government caring about the workers more than the greedy bondholders some of whom bought bonds hoping that government funding would help them make a killing on the cheap as dirt bonds. Nuts. Why doesn't the board see that as appropriate ? Why are the unions--who have made concession after concession--being treated by the Post like bad guys, when the company (and its managers, owners, and bondholders) have always put the obligations to fully fund pensions for its legions of retired workers on the back burner while borrowing for even bigger shareholder/manager/bondholder gains? The Post has it wrong: working a good deal for the workers in the post-restructuring new company is a worthy goal for government's return on its investment in the business. And the fact that government is the big investor is a reality that the bondholders will just have to deal with.
Hedge funds are big lenders, it's true, and they may hold off on lending if they end up not getting as much out of the deal as they wanted. But the answer to that isn't to feed them more government dollars or to coddle them so that they even more successfully privatize gains/ socialize losses. They've gotten a cushy ride out of this economy for quite a while now. The answer is to regulate hedge funds and the exotic derivatives they use to speculate on the economy--if they are going to act like banks, they should be regulated like banks. No more overleveraging. No more opacity. No more unregulated derivatives. Less speculation and more solid investment. If they find they can't operate under those terms, then fine--leave the banking to banking institutions that are and should be heavily regulated, and let investors invest through more traditional means.
I think hedge funds are sort of like the sophisticated customized tax planning advice that big corporations use to constantly cut their effective tax rates lower and lower--they serve no genuine public good, and actually do a lot of harm. We should require taxpayers to file their returns based on the position that they think is more likely than not correct, rather than letting them speculate on a risky bet with a claim of "substantial authority." Congress goofed when it backed down on the tax preparer standard--it just needed to extend that same MLTN standard to taxpayers and tax preparers and we'd see a major shift in the tax advising and tax filing as a result. Similarly, let banks return to being the lenders of choice by regulating hedge and private equity funds like the banks they are and by applying anti-trust rules much more vigorously. Downsize most financial institutions by reinstating the old Glass-Steagall walls, and then don't ever let them grow to behemoth size that is "too big to fail" again. Regulate derivatives, so that these hedge funds and investment banks are not just speculating with wild bets that make it even harder for solid companies to keep working.
So Congress needs to do a lot to get this economy working in a way that provides a sustainable economic base for healthy living for ordinary Americans: regulate derivatives (and not just the plain vanilla ones), regulate hedge and private equity funds like banks, re-instate Glass-Steagall, reinvigorate the union laws (including passing the card system for approving a union, rather than letting anti-union employers hold all the cards), pass a "more likely than not" confidence level applicable to both taxpayers and tax advisers, and otherwise get busy eliminating the corporatist framework put in place over the four decades since Reagan first tooko office, so that it becomes harder for corporate America to take advantage of the American system without paying their fair share to workers and to the federal fisc.
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