Ignore Detroit’s bondholders’ whines

By Felix Salmon
May 1, 2009

I’m frankly surprised at the amount of pushback against the entirely sensible notion that Chrysler’s creditors (and, by implication, GM’s as well) should accept an enormous haircut on their failed investment.

You can tell an argument in favor of the holdout bondholders is on thin ice when the people making it wheel out the old groaner about future capital access. Here’s Liam Denning:

If the current plan is pushed through, then good luck to any unionized firm trying to raise secured debt on decent terms in the future.

Here’s Breakingviews:

Years of bankruptcy law have put secured creditors at the top of the pecking order, inducing them to put capital at risk. Vilifying investors who held firm to this conviction may have the reverse effect.

And here’s Joe Wiesenthal:

It should certainly make anyone think twice before lending money to a company with a strong union.

Oh come on. When Detroit raised debt capital in the past, its lenders weren’t operating on the assumption that they would be paid off in full before the UAW got a penny — and if they were, they were being foolish in the extreme. The UAW, after all, is necessary for the continued existence of the company: they’re doing the equivalent of putting new money in to the operation, in the form of their labor going forwards. I don’t see the creditors offering to put up any new capital.

Sure, the creditors might have a point about seniority if the firms were to be liquidated with the loss of all jobs. But let’s not forget that a huge part of the reason why they lent their money in the first case was that the US auto industry is systemically important, and that the government would never allow it to be liquidated. They were making a moral hazard play, and believed the car companies when they said that bankruptcy would be disastrous, and so they assumed that the government would keep the car companies out of bankruptcy.

So now I can barely believe it when the creditors start talking about how much they might receive in liquidation. For one thing, I don’t believe them. If GM and Chrysler liquidate, their assets are worth very little if anything at all: how are you going to monetize a mothballed production line? And insofar as the liquidation value is positive, it only gets to that point by dint of taxpayers picking up most of the costs of liquidation: soaring unemployment in the rust belt, an even worse economic depression in the hardest-hit areas of the country, and so forth. It’s a bit like the Wal-Mart model of paying your employees so little that they’re eligible for Medicaid, thereby getting them “free” healthcare, and Barack Obama is absolutely right to reject it.

I also heard an interesting new twist in this argument last night: the idea that the government is repaying itself in full while imposing massive haircuts on other creditors. No it’s not. It’s getting an 8% stake in the new Chrysler, which is worth roughly zero, in return for the billions it’s pumping in to the company — and it’s worth remembering that the $2.25 billion that the creditors were going to receive was going to come directly from the government, not from Chrysler itself. And no, the creditors would not need to pay that money back.

Of course aggressive creditors are going to want to maximize the value of their claims, both in bankruptcy court and in the press. But if this is the best they can come up with, I think it’s safe to dismiss their whining as the bleating of the sore loser.

Update: I forgot to mention the other old chestnut which indicates that there’s really no substance to the complaints. Here’s John Gapper:

Some of these “speculators” inconveniently manage money on behalf of pension plans and endowments, rather than rapacious rich people.

And here’s Wiesenthal, again:

If you’re a teacher or any state employee or anyone who has money in a pension or gets money from an endowment, there’s a decent chance that you’re invested in a hedge fund.

The “hedge funds represent normal people too” argument is so vacuous it’s not really worth responding to — except to note that it’s being made, and to cite some kind of rule that the minute anybody makes it, they can automatically be assumed to have lost the debate. If you’re going to set up a cage match between hedge funds, on the one hand, and the UAW, on the other, I think it’s pretty clear which side represents rich capitalists and which side represents people without much in the way of savings.

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