As General Motors teeters towards bankruptcy, with a looming deadline of midnight tonight for bondholders to agree to a stock swap, Reuters reports that the talks don't look promising. The Wall Street Journal got the scoop regarding how the unions will shake out in all of this: very similarly to how they did with Chrysler. This seemingly good news for unions might actually turn out to harm them.
According to the WSJ, unions will end up owning 17.5% of the company's common stock, along with $6.5 billion in preferred stock (which includes a whopping 9% annual dividend).
The agreement largely mirrors concessions the union granted to Chrysler LLC last month, including a suspension of cost-of-living allowances, bonuses and some holidays, people familiar with the agreement said. It also includes a provision for job buyouts, as well as to forbid strikes until 2015, these people said. Wages are expected to remain unchanged.
And, of course, one should expect the GM bankruptcy proceedings to go exactly like the Chrysler proceedings: very well for the unions and very badly for bondholders. Hedge fund manager George Schultze was on CNBC earlier arguing that bond investors are going to be very wary about funding unionized firms, given GM will likely shake out just like Chrysler did. That led me to this gem from Bloomberg last week. In it, Schultze is quoted about lessons learned by bondholders though the automaker bankruptcies:
The obvious one is: Don't lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.
This strikes me as an extremely important conclusion, which is difficult to deny. Bond investors literally can't afford to lend to unionized companies because it's clear that current power in Washington will take the unions' side, despite past bankruptcy law precedents that favor senior creditors. That means Washington's actions in pushing for these bankruptcy verdicts to come out in favor of the unions will probably hurt unionized companies in the long run. As a result, it might be wise for Washington to reconsider the precedents it's setting for unionized companies undergoing bankruptcy.
I suspect that across middle america there are numerous manufacturers that directly or indirectly supply the auto industry, employ a large number of union members and are under varying degrees of financial distress.
I also suspect that as a result of the way the administration has handled Chrystler and GM -- the prospects for those manufacturers finding financing at the time they may need it most just got significantly more difficult.
First off, the UAW President, Ron Gettelfinger confirmed in a press conference that the union's Voluntary Employee Beneficiary Association will sell part or all of its holdings once the companies stock appreciates. VEBA is designed not to control a company but provide retiree healthcare, and with the organization lacking liquidity it will be forced to sell these shares (ie "The VEBA's going to be stressed in order to pay the benefits. So what we will need to do ... is as soon as we possibly can, to start selling these shares,")
Secondly, despite being one of the controlling holders, these are nonvoting shares. In addition, VEBA/UAW is only given one seat on the board at Chrystler.
The problem is that too often the financial sector loves to privatize the profits and socialize the losses. Honestly, the bigger question is what are the unions giving up in this deal and how will it effect their long-term survival? As we talk of SSI doom and gloom, microcosmically how will the UAW honor its pensions years down the road?
You're missing the point. The problem is that the interests of bondholders are being bypassed in favor of the interests of unions. First, you don't seem to distinguish or even understand the difference between equity holders and bondholders. The latter has less inherent risk, because if a company goes belly-up, bondholders will be at least partially compensated through the sale of the now-defunct company's assets.
So, if you are a potential investor, who is interested in buying corporate bonds, and you have the option of investing in Company A, which is unionized, and Company B, which is not, you'll likely choose Company B. This is because you know that in the worst case scenario, if Company B becomes insolvent, you will be guaranteed some sort of compensation. If Company A becomes insolvent, however, you may run the risk of the unions trying to demand a piece of the pie (of which you rightfully own a part), based on the precedent of what's happening now with GM and Chrysler. You may receive no compensation whatsoever.
This situation makes it much more difficult for Company A to raise capital, and they will most likely have to offer a higher coupon payment in order to attract investors, which makes them less competitive.
"VEBA is designed not to control a company but provide retiree healthcare, and with the organization lacking liquidity it will be forced to sell these shares"
This is immaterial. There are secured investors that won't be getting the payout they are owed or the opportunity to hold onto stock until it appreciates. Many of those investors are bonds belonging to other retirement funds. They are getting pennies on the dollar while the UAW actually get a chance to turn a profit.
This is scary because of the uncertainty it introduced into a once rock solid bit of law. Now investors have an unknown amount of risk when investing in a Unionized company, and that means you will have to pay them more to invest with you, if you can get them to at all.
None of that changes the fact that the leapfrogging of senior debtholders will result in it being more expensive for unionized companies (like, oh, Ford) to borrow money in the future. Effectively, Obama has imposed a substantial tax on all debt bought by unionized companies in the future in order to pay off the UAW today.
If you wanted to destroy unionized industry in America? Obama's policies in these bankruptcies are exactly what you'd cheer on.
I hereby nominate Obama for the Pullman-Cleveland Award for Union-Busting, for the most anti-union action in the United States by a U.S. President since Reagan fired the air traffic controllers.
"..how will the UAW honor its pensions years down the road?"
Your tax dollars. Did you not understand that already?
Discouraging the accumulation of legacy obligations? Seems to me Washington is wisely reducing future headaches. They are unlikely to regret that. For the Unions, it means they will have to bargain for cash down rather than promises; no sweat.
Well, sure. Fewer companies mean fewer companies needing government services. While we are at it, we could also kick some states out of the Union, and maybe revoke a bunch of people's citizenship. Those all cause "legacy obligations" in one form or another. Or we could, you know, structure our government to provide governance, as was originally intended, rather than succor. But that probably just makes too much sense. Until the government's own bonds start to fail in the market, of course, and we cannot afford to do either without repudiating our debt and our future obligations.
Please kick Texas out! We will be ok.
Here's the uptake smart investors are gathering:
Democrats are inherently more risky to lend to, since they're thieves and welchers. So charge them higher interest.
If you can get enough credit from banks, you don't need bondholders, and Obama owns the banks. Things can get much, much worse.
Ken, I think you're on the right track, but there's one other place these companies can turn for financing--the government. This is the method through which the government will own a controlling interest in every major industry in the country. But don't call it socialism, cause it's not!
Nope; it's certainly not socialism. It's fascism.
How about Peronism? At least that way there's a musical...
If Democrats remain in power long enough to see this phenomenon, what is to prevent them from enacting something like the Community Reinvestment Act for bond lenders, requiring them to do a certain amount of lending to unionized companies? And the number of unionized companies will significantly increase once they pass some version of "card check" this year or next.
Sure bond lenders are not federally regulated as are the banks upon which the CRA was imposed. But if the Democrats are bold enough to seize a company and give ownership of it to themselves and their union contributors, why is it so unthinkable that "for the benefit of working families" they won't continue to impose their will on the private sector? Folks, when Obama says he wants "fundamental change," for once he isn't, um, fooling us.
There is no identifiable class of "bond lenders." Bond lenders could as well be you or me as it could large financial companies. But maybe you're on to something. Obama could require that IRAs and 401Ks over a certain amount invest in specified classes of bonds, i.e., bonds issued by unionized companies.
We don't need bondholders. The govt. (mind you this is a democracy, that means you and me) can always tax those who still have a job to finance whatever companies that the representatives of the people deem worth supporting. Just an expanded version of earmarks, no?
Don't forget that many of the Bond UNDERWRITERS are TARP Banks. Sure you can't get at existing bonds, but there is lots of potential for the government to monkey around with new issuances.
The trend lines are all down, and likely to get further tangled below the surface in the consequences, both intended and not, of the administration's heavy hand.
The rending asunder of heretofore consistent application of the bankruptcy code does set a dangerous precedent and injects increasd volatility into future proceedings -- proceedings which, by their very nature, deal with situations which are to begin with inherently unstable.
Furthermore, the message sent to potential future investors or corporate bond buyers is, as duly noted above, an obviously negative one -- certainly one that carries a heightened risk premium.
Finally, the awarding of disproportionate equity to labor (which, after all, also receives a working living from the corporation ) versus what is allocated to investors (who are completely at risk) is, on its own independent terms, not a fair deal, and ultimately untenable.
How about some data? The markets have known that bondholders were going to get treated in bankruptcy like pond scum for a couple of months now. Are we seeing that interest rate differential yet?
market karma May 26, 2009 5:39 PM
"I suspect that across middle america there are numerous manufacturers that directly or indirectly supply the auto industry...the prospects for those manufacturers finding financing at the time they may need it most just got significantly more difficult."
Do not fear, there are always suppliers from China. The Government Motors is going to increase their import from China anyway, may as well import everything. See, this way, the Chinese will do all the work, our union workers can sit back and enjoy their life. The govt. will raise taxes on the rest of the American people to share their ill-gotten gains to finance the people's GM, no pesky greedy bondholders to gripe about the union bosses' every move. Brilliant! Just brilliant!
By the way, the silly bonholders may think they can boycott union shops. But the laugh will be on them when the shops they financed unionize with card-checks. One can't imagine how effective a couple of burly union officials can do to persuade the workers to unionize for their own good.
First off, the UAW President, Ron Gettelfinger confirmed in a press conference that the union's Voluntary Employee Beneficiary Association will sell part or all of its holdings once the companies stock appreciates.
That leads inexorably to two [at least] questions. First, what are the odds that the stock will actually appreciate? Aside from the market being... problematical for both GM and Chrysler products even before the government/union takeover; in the aftermath there are certain market sequalae that are not going to make holding that stock desirable, just on a purely financial basis. Add in the shellacking that stockholders and bondholders are taking as part of the forced shifts in ownership, and there may be more than a bit of investor resistance to holding a stock that is subject to government interference at will. Who, exactly, will buy that stock?
Given that the management of the companies will be [and has been] subject to arbitrary government changes for political reasons; what assurance will any private stockholders have that any board with government members will be looking out for the fiduciary interests of the other stockholders?
I am not an investment guru. I am a retired cop. My pension comes from our Public Employees' Retirement Association, to which we pay in up to 10% of our gross salary [depending on branch, state troopers have a shorter career and pay in more, judges pay in less, I am near the top] and to which our state kicks in about 5% [except when they declare a financial emergency and therefore skip or reduce payments]. PERA invests the money and the return pays our pensions. We have one of the soundest pension funds in the country. But we have been taking a beating because of the recession. I don't know our exact investment mix right now, but I am pretty sure that having invested in good faith in corporate bonds in companies that attract a government "bailout" would not have been good for us.
I am writing to our elected PERA Board of Trustees asking if the mix includes GM, Chrysler, or any financial institution receiving TARP funds; and if so recommending that we reduce our exposure to them as soon as possible. Holding stocks or bonds in companies that have the government as a partner is the same as having the Mafia as a business partner. You know who is going to lose.
Subotai Bahadur
It's fairly obvious that President Obama and his people are not fans of Ayn Rand. She described this very situation 52 years ago.
In the place of General Motors and Chrysler, substitute Reardan Steel and Taggart Transcontinental.
Who is John Galt?
This was theory, but a report just came out that seems to support it. Bond yields on unionized companies did indeed sharply diverge starting with the collapse of the GM negotiations.