An offer you can't refuse

I got into this debate with some finance friends this weekend. This essay I've seen linked gives a rebuttal:<p><a href="http://epicureandealmaker.blogspot.com/2009/05/you-realithe-of-courth-thith-meanth-war.html" rel="nofollow">http://epicureandealmaker.blogspot.com/2009/05/you-realithe-...</a><p>"Think about it. The political stakes for the Obama Administration in the Chrysler fiasco are monumental...<p>This leads to my second point. The negotiations over carving up claims to Chrysler Corporation prior to bankruptcy were just that: negotiations. Notwithstanding whatever principles of Truth, Justice, and the American Way the Chrysler non-Tarp lenders would have us believe undergird their positions, they were simply one party among many to a very complicated negotiation over the proper distribution of value of a very large and troubled company. Yes, there are general principles and precedents concerning the division of spoils in a corporate bankruptcy which normally guide such processes. Yes, many of these have been laid down over decades of contested and uncontested bankruptcies prosecuted through our court system.<p>That being said, none of these precedents are Holy Writ.<p>The parties to the Chrysler negotiation tried to agree to a prepackaged division of spoils which they could present to a bankruptcy judge and thereby speed the company's restructuring. They failed. Did someone—the government, the UAW, the non-Tarp secured lenders—overreach? Maybe. Does it matter who? Not in the least. A pre-agreed deal was not struck, so the distribution of claims to Chrysler will be determined in court, by a judge, who will listen to advocates for each group argue their case. The process will take longer, and perhaps introduce additional stresses and strains that Chrysler can ill afford, but everyone will have their day in court. Even those poor, put-upon non-Tarp lenders. In fact, even though they would likely be loathe to admit it publicly, everyone may be happier that the company has fallen into Chapter 11. That way, each can say to their own constituents that they tried as hard as they could, but were unable in the end to get everything they wanted. (Chief among these, by the way, I would place the Administration.)<p>The corollary point of negotiations is this: they are hard, and often unpleasant. Parties to a bankruptcy say hard, unpleasant things, they threaten and cajole, and they use all their powers of persuasion, soft and hard, to convince the other parties to the deal to give them what they want. In this context, why should anyone be surprised that agents of the government threatened recalcitrant lenders with IRS audits, excoriated their behavior in populist press conferences, or promised to destroy their institutional reputations in the public eye? The government was simply using the real and imagined powers at its command to browbeat its counterparties into agreement. This is standard operating procedure in high-pressure negotiations."

The article leads with: <i>NO ONE who lent money to General Motors (GM) or Chrysler can have been unaware of their dire finances. Nor can workers have failed to notice their employers’ precarious futures. These were firms that barely stayed afloat in the boom and both creditors and employees were taking a punt on their promise to pay debts and generous health-care benefits.</i><p>False equivalence.<p>If I hold GM or Chrysler debt and I perceive that the company is going downhill, then I can sell off that debt at a discount and cut my losses. If I spend twenty years working for the company under a contract providing generous retirement benefits in lieu of money up front, and <i>then</i> I start wondering if the company will actually be able to afford those benefits, I'm stuck riding the elevator all the way to the bottom (where "the bottom" is whatever minimal pension the government can guarantee).<p>Obviously in a case of insolvency these are both contractual obligations that the company can't satisfy, and everyone has to take some kind of haircut, but if the law doesn't give retirees priority over bondholders in this situation, then the law is an ass.

An aside: I really hate people willy-nilly throwing around the word "socialist", because it leaves me with no good descriptive adjectives for when the government expropriates several billion dollars from private investors and hands it to a labor union.<p>(I assume there must, somewhere, be a Democrat who feels the same about "racist".)

Lots of pleasant thoughts about fairness in this article, but no mention of the simple fact that the financial sector has rapidly burned through their collective reserves of political capital over the last year, and is hardly in a position to make demands.

The government's offer wasn't made in a void. In <i>exchange</i> for re-prioritizing creditor claims, the government was offering billions of dollars for debtor-in-possession financing that <i>is not available from private sources.</i><p>There was no use of force here. The government holds a carrot, DIP financing, but they don't really have a stick.

I'm torn on this - on the one hand it's those employees' healthcare which is at stake - real people and real lives. On the other hand there is due process, and the risk of making it very difficult for the government to encourage private investment in the future. If only this had been seen up front - surely employees' healthcare should have had better protection from the start, but these things are only obvious in retrospect. Perhaps the government needs to legislate to force companies to make their employees benefits higher priority in the case of a bankruptcy.