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THE AUTO BAILOUT ISN'T GOING OFF THE ROAD.
Our esteemed colleague Robert Reich makes a great and indisputable general point on the auto bailouts – that the government shouldn't be funneling money to auto companies that are slashing jobs here and taking production elsewhere. The government should be concerned with the jobs, not the companies.
But the Chrysler bailout follows Reich's prescription to the tee. It explicitly doesn't cut any jobs, which have already been cut like crazy over the past several years. More remarkably, it actually stipulates that 40 percent of Chrysler's product (measured by value) that is sold in the United States has to be made here as well. Back in the '80s, as the U.S. began to de-industrialize and move toward offshore production, advocates of "domestic content" legislation called on the government – unsuccessfully, as it turned out – to require companies over a certain size to adhere to the kind of production requirements to which Chrysler has now agreed. To the best of my knowledge, the Chrysler deal that the administration worked out is the first ever to require a percentage of production to be kept within the U.S. Far from flouting Reich's recommendations, they faithfully adhere to them.
Nor is it clear that General Motors' decision to cut an additional 21,000 jobs is a case of the government forcing the company to shrink – the company would probably be compelled to shrink simply due to the catastrophic reduction in sales. In any event, the Chrysler deal and what we know thus far of the GM-deal-in-progress makes clear that the administration's approach to auto is based on creating viable companies that employ American workers and that preserve (as much as possible) the commitments made to retirees when they worked at what were then the world's largest (and largely successful) companies.
The deals follow the principles that Ron Bloom laid out in a talk he gave several years ago: Shareholders and bondholders knew they were taking risks when they invested in the company, but workers were flatly promised pensions and health benefits in retirement, payments for which were deducted from their paychecks. In sum, even as the administration's policy toward the banks has a bias toward capital, its policy toward auto has a bias toward labor. Which, in the latter case, is entirely as it should be.
-- Harold Meyerson
COMMENTS (4)
Harold makes some great points here.
He's too polite to point out that Reich's grand bargain to penalize GM and Chrysler and reward BMW, Honda and Toyota would kill the UAW.
Reich made himself notorious in union ranks when as the anti-Labor Secretary, he pronounced that the jury was still out on whether organized labor has a continued role to play in the American economy. For Bob Reich, the verdict seems to be in.
Posted by: Jack Clark | May 1, 2009 11:54 AM
"Shareholders and bondholders knew they were taking risks when they invested in the company, but workers were flatly promised pensions and health benefits in retirement, payments for which were deducted from their paycheck."
What's fundamentaly wrong with this statement is bondholders actually lent GM $27 billion dollars, in part to fully fund the pensions. Yes, one could argue bondholders knew they were taking risks investing in GM but so also did the UAW know GM as a going concern was a risky proposition back in 2005 when it negotiated VEBA - it was given as the reason to the rank and file in a UAW letter to members. They negotiated VEBA specifically to protect their retiree benefits from bankruptcy law, which isn't as partial as the administration to labor. Bad for them, their VEBA is still largely unfunded - by $20 billion plus, and current obligations are paid out of GM's general funds. But in the same vein as bondholders, UAW members knew Gm was in serious trouble and they were taking a clear risk by remaining in GM's employ. But the benefits were good and besides, the government wouldn't let GM fail, right? So they held pat. Sound familiar?
GM bondholders were flatly promised in a legal prospectus, indenture, and supplementals, redemption of their bonds for the full principal amount and that their debt is senior unsubordinated unsecured, raking pari passu to all other unsecured debt of GM.
Despite an existing $27 billion in senior debt, GM later promised to pay the UAW a lump sum payment of $20 billion it didn't and doesn't have to fund the VEBA - benefits that actually cost less than $3 billion a year to maintain at current levels.
Your idea of fairness is those that actually put up $27 billion to fund GM's operations be given 2 shares per $1,000 of debt owned while the UAW get 100 cents on the dollar in cash and stock to cover all future retiree healthcare expenses with a lump sum payment of $10 billion in borrowed government money, and taking the rest in stock - both to the detriment of an equally ranked class of creditors.
Quite frankly, It's not just a bad deal, it's evil.
What would St. Joesph the Worker say? Objectify and take from the bondholders? I dont think so...
Pax et bonum
Posted by: Brian Byrne | May 1, 2009 11:55 AM
Brian Byrne,
Do you think St. Joseph had a lot of bondholders in that carpentry shop in Nazareth?
Bloom's point, as reported by Harold, remains valid. Investors, including bondholders, understand that they are taking a risk. By definition, they are wagering on an increase in funds they don't need today for survival.
Workers, even well-paid workers, face a different calculus. For retirees, the wages deferred during their working years were supposed to provide their pensions.
With the collapse of huge firms like Chrysler and GM, there's a lot of pain.
the bondholders are taking a haircut.
Calling that evil is a little over the top.
Posted by: Jack Clark | May 1, 2009 3:24 PM
Permanently shutting down 8 Chrysler plants, which could cut almost 5,000 jobs is hardly not cutting "any jobs". Chrysler and Administration officials lied when they said that the bankruptcy would not close plants or cut jobs. Its unfortunately as simple as that.
Posted by: Sarah | May 3, 2009 11:45 AM