The Law Says This, The Law Says That, The Law Says 'Tother Thing
Apropos of Jim Manzi and Megan McArdle on the Chrysler bailout: I take a much less idealistic view of the whole business.
The reason the government is involved in this process at all is that everyone assumes that, in the event of a bankruptcy of one of the major auto companies, nobody will be willing to offer debtor-in-possession financing to keep them running while they are reorganized under Chapter 11, and therefore we’d proceed to liquidation. Which, in this environment, means liquidation at a firesale price, with outsized losses to investors and stakeholders and a cascade of follow-on economic consequences from the failure of parts suppliers, dealers, etc.
Therefore, the general assumption is that the government would need to step in somehow to prevent that calamity – either by bailing out the companies directly (as was done in the waning days of the Bush Administration), or by agreeing to provide DIP financing in bankruptcy. In either case, the government would be significantly intervening in the capital markets to protect what was perceived to be a public interest.
So the government was at the table before the table was set. Before the hedge funds bought this distressed secured debt, they knew that the government was a major player in determining the outcome for the various stakeholders in the auto companies. Among the many factors in their investment decision, preeminent was the need to try to game what the government was going to do.
It’s very hard, once that context is established, for me to get terribly exercised about the Administration’s decision to play hardball negotiator on behalf of the UAW. Ever since the auto companies showed up on Capitol Hill begging for a bailout, they became political enterprises, and investors at every level must have understood that.
Bondholders in Washington Mutual at the holding company level got a windfall in bankruptcy because the FDIC pulled all the assets out of the operating company before the cash at holdco could be downstreamed; investors in debt of the holdco, meanwhile, got zippo. That was a political decision. When Fannie and Freddie were nationalized, preferred stockholders got zero and subordinated debtholders got par. That was a political decision. When AIG got bailed out, Goldman and Merrill got their payments (and were saved from bankruptcy) and AIG bondholders got bailed out while AIG shareholders weren’t even in the room for the negotiation. That was a political decision. Every owner of municipal debt in this country is the beneficiary of the political decision to partly nationalize the obligations of states and municipalities across the country. The government is way, way deep in its involvement in the allocation of capital in the economy at this point. To expect the government to simply ignore the various competing interests at play in these decisions is not only unrealistic – its probably a bad idea.
And, at the end of the say, this whole thing is winding up in bankruptcy court after all. The Obama Administration made an offer they thought the hedge funds couldn’t refuse. But they refused, and now a judge will decide what to do. The Administration will still be in the room, of course, because if the company wants to get capital to operate while it restructures and gets chopped up for Fiat to digest, it will need government assistance – and that assistance will come at a price.
Let me be clear about one thing. If allegations that the Obama Administration threatened to use the IRS to punish some of the hedge fund holdouts are true, then there’s been actual criminal activity and there should be a full investigation. But short of that kind of abuse of the government’s police power, I can’t get that excited about the government favoring this or that stakeholder. What did you expect would happen when you invite the government into your company?
We will get back to private allocation of capital not when the government decides to honor the priority of secured bondholders when proposing a solution for a particular company that avoids a bankruptcy process, but when the government is no longer expected by the private markets to be involved in allocating capital. That’ll be when the TARP is unwound, quantitative easing ends, etc. That won’t be soon.
that was very edifying.
— ron · May 4, 03:44 PM · #
“Let me be clear about one thing. If allegations that the Obama Administration threatened to use the IRS to punish some of the hedge fund holdouts are true, then there’s been actual criminal activity and there should be a full investigation.”
Didn’t someone say something along the lines of “when you’re the only one in the room who has a gun and everyone knows it, you don’t have to announce it.”?
— Tony Comstock · May 4, 04:06 PM · #
Noah:
I agree with the vast majority of this.
As I amplified in the comments to my post, Obama saying mean things about hedge funds is not an abuse of power; using or threatening to use his powers to investigate or distribute funds, in my view, clearly is.
The kind of thing we are seeing in the Chrysler case is a predictable result of the series of bailouts we have had since September. I supported the the first tranche of TARP in spite of predicting exactly this. I did not support the auto bailouts in December, in part because of this issue. I agree that the only real way out is unwinding the government’s investments.
But just because an outcome was predictable and accepted (by people other than me in the case of the auto bailout) doesn’t mean that its not a bad thing that is useful to identify as such in public.
— Jim Manzi · May 4, 04:29 PM · #
If it’s just peachy for the Obama administration to play hardball to get what it wants with Perella Weinberg Partners, why has the Obama administration seen fit to deny that’s what it was doing? Why can’t we have openness and transparency? Is it because even Obama has more of a sense of shame than some of his defenders here on The American Scene?
— The Reticulator · May 4, 04:34 PM · #
Both Jim and Megan, to some degree, supported the bank bailouts. To turn around and use “the rule of law” or free market principles to decry government intervening on behalf of the UAW is hypocrisy. Full stop.
The bailouts of the financial institutions represent an enormous public expenditure and use of government for the purpose of satisfying favored political constituencies— in the case of the right wing, their capitalist champions at the big financials. That’s a simple fact. Now Jim and Megan are ideologically opposed to unions and ideologically predisposed to favor big businesses to the detriment of others. That’s fine; that’s democracy. But we won the election. You lost. So now some on our side get the same massive government financial intervention that your side got. Don’t begin to pretend that the financial bailouts are any more in keeping with the rule of law, or that libertarians and other economic conservatives are anything less than full-throated defenders of the master class. This isn’t an argument about government favoritism. This is an argument about who is being favored. Keep your sanctimony for a time far removed from hundreds of billions of dollars given to the moneyed and powerful, please.
— Freddie · May 4, 04:36 PM · #
Jim: all I’m really saying is that the hedge fund guys knew they were betting first and foremost on politics when they made their investments; that’s what I meant about not being so idealistic.
— Noah Millman · May 4, 04:37 PM · #
Freddie, there is a perfectly principled argument, which Megan McArdle has made on numerous occasions (I don’t know about Jim Manzi) that: (i) the financial services industry is different from most other industries because its problems have systemic effects: (ii) as a result, the financial services industry has been subject to unique levels of both regulation and government support for decades; and (iii) what we see now is just an extreme case of what we have always been doing, and should have been doing. In contrast, the failure of individual auto companies will not have systemic effects, and therefore government bailouts of those companies are unprecedented and inadvisable.
You may disagree with this argument, but in that case the proper term for Megan McArdle (and I think Jim Manzi) is “unpersuasive,” not “hypocritical.”
— y81 · May 4, 05:02 PM · #
what we see now is just an extreme case of what we have always been doing
So when Jim Manzi points out that one of the bargainers has the guns on its side, others say he’s making an extreme case. They point out that the government isn’t really using its guns. But when we get to the point where the government DOES use its guns, we’re going to hear somebody justify it by saying, “This is just an extreme case of what the government has always been doing.”
— The Reticulator · May 4, 05:13 PM · #
Convenient, that. One more convenient coincidence. One more in a never-ending string of (totally principled, totally sincere) coincidences that has bent one half of the American political spectrum to the unquestioning support of the richest and most powerful amongst us. That’s what they tell me, every day, for every situation— can’t fund S-CHIP, that distorts the free market, have to bail out AIG, or the sky will fall.
I want very badly to be someone who can argue about this issues with respect and level-headedness, but increasingly, the incredibly stark nature of these issues makes it impossible for me. We have free markets for the poor and socialism for the rich in this country, every day makes that dichotomy more obvious and more plain, and every day it becomes a little harder for me to both tell the truth, and to be polite.
— Freddie · May 4, 05:18 PM · #
You guys are nuts about the guns. I’m hoping that you are using it as some kind of metephore for government power but kind of doubt it.
And you seem to me to be way off on the rule of law thing too. They were renegotiating contracts. The negotiations broke off so now is going to court. Seem like the rule of law is pretty strongly in effect.
And about the union being favored. THe union (or to put it in human terms,the present employees and retirees) were the biggest stakeholder. Chrysler owed them the most. The workers had contracts and held up their end buy going to work everyday. The pensions were part of their compensation and they earned it. In a renegotiation amoungst creditors why wouldn’t the Obama admin. want these people to get a piece of the pie proportional to what they were owed? In a renegotiation, everything is on the table. You can actually try to be fair.
— cw · May 4, 05:30 PM · #
Freddie:
Both Jim and Megan, to some degree, supported the bank bailouts. To turn around and use “the rule of law” or free market principles to decry government intervening on behalf of the UAW is hypocrisy. Full stop.
Maybe. I guess we rarely see hypocrisy in ourselves.
As per y81’s comment, I did not support the auto bailouts, and supported part of TARP reluctantly as the lesser of two evils, despite the prediction that it would create many of these problems.
The bailouts of the financial institutions represent an enormous public expenditure and use of government for the purpose of satisfying favored political constituencies— in the case of the right wing, their capitalist champions at the big financials. That’s a simple fact.
I’m not so sure that it was done for this purpose is a simple fact. I agree that it had, among others, this objective effect. I believe that at the time I supported it, I described it as “obviously unfair”. Another objective effect it had, I believe, was to prevent radically increased odds of a depression-level economic event that would hurt almost everybody.
Now Jim and Megan are ideologically opposed to unions and ideologically predisposed to favor big businesses to the detriment of others.
I can’t speak for Megan, but neither statement accurately describes my predispositions (to my knowledge).
That’s fine; that’s democracy. But we won the election. You lost. So now some on our side get the same massive government financial intervention that your side got. Don’t begin to pretend that the financial bailouts are any more in keeping with the rule of law, or that libertarians and other economic conservatives are anything less than full-throated defenders of the master class. This isn’t an argument about government favoritism. This is an argument about who is being favored. Keep your sanctimony for a time far removed from hundreds of billions of dollars given to the moneyed and powerful, please.
I agree that it is human nature to act this way, and therefore there is a whole lot of it in politics. The idea of rule of law is that we limit this, for the long-run good of all. Nobody does this entirely, but to simply say “that’s the way it is” leaves no real stopping point to it.
— Jim Manzi · May 4, 05:52 PM · #
Jim:
That’s what you seem to insist on missing. Politics being “the way it is” is why we will, in fact, reach a stopping point to all this.
This is a good thing. It reminds the foundationally self-interested that with government, the stress is on the second part of “necessary evil.”
— Sargent · May 4, 06:20 PM · #
At some level, the US government is calling the tune. The government is increasing its own deficit in order to provide either bailout funding (if everyone had agreed to the deal) or debtor-in-place financing (since they didn’t), and it can theoretically say that it won’t fund Chrysler if the debtholders don’t agree to make a larger sacrifice than they would ordinarily have to. Either way, the bondholders probably get more than they would if there was no government funding and they just broke Chrysler up.
With that said, I’d be more comfortable if I had some confidence that we were turning Chrysler into a profitable company going forward. If Chrysler is owned by the UAW retirees (1) I doubt that it will make the tough decisions necessary to go forward; and (2) how is the Obama administration ever going to tell them “sorry, no more funding for you?”
On top of that, Obama’s willingness to cave to one interest group — the unions — doesn’t speak well about what he will do when the time comes for another powerful interest group — the dealers — to make sacrifices.
— J Mann · May 4, 06:53 PM · #
Freddie seems to imagine that the financial bailouts were an act of right-wing political payola, which rather conveniently ignores that a large number of right-wingers, including a majority of House Republicans, opposed the bailouts, while a large contingent on the left, including the majority of House and Senate Democrats, supported them.
— Blar · May 4, 07:20 PM · #
Freddie,
I guess I missed it when “your side” came out against bailing out the banks. Was it very inspirational when Obama denounced Bush for using public money to benefit the GOP’s “capitalist champions at the big financials” and assured America that, if elected, he’d give as much money as possible to “some on our side,” to balance things out? What nefarious trick did the Bush administration use to prevent the Democratic majorities in the House and Senate from showing up to vote on TARP?
I’d say your “side” is at least as responsible for the bank bailouts as anyone else. The right wing of the GOP House caucus provided the only meaningful political opposition to the bailouts in the first place – they must not have gotten the memo that it was all a payoff to their corporate masters.
— Alex · May 4, 07:35 PM · #
Well, the House GOP and the movement libertarians. All a bunch of shills for corporate interests, they.
— John Schwenkler · May 4, 08:00 PM · #
You know you can laugh at me, John, but the fact that you have not even begun to ask yourself why every policy position of the ideology you claim to want to save is designed to further the interests of the most powerful and richest just goes to demonstrate why that ideology is beyong saving.
— Freddie · May 5, 02:50 PM · #
I don’t know if this will be persuasive, but I’ll try one last time.
Freddie, most right-wingers detest the bailouts. Many in Congress, including a majority of Republicans in the House voted against the financial bailouts of 2008. Many out of Congress argued against them. Many others argued in favor of them only with grave reservations. Meanwhile, many left-wingers, including a majority of Congressional Democrats—among them the current Congressional leadership and President—supported them. My sense was that the left-wing commentariat was also generally supportive.
I’m tempted to go so far as to say that the left principally owns the bailouts, but at any rate the proposition that the right owns the issue is preposterous. So to claim that “every policy position of the ideology you claim to want to save is designed to further the interests of the most powerful and richest,” a claim which hinges on that proposition, is also preposterous, especially in the context of a discussion on the financial bailouts. You picked one of the worst possible cases on which to propound your thesis.
— Blar · May 5, 03:51 PM · #