You are about to become the proud owner of a controlling interest in General Motors–well, you and tens of millions of fellow taxpayers, anyway. A deal has been struck that tries to keep GM out of bankruptcy. As I understand it, the deal is contingent on GM providing a turnaround plan that is satisfactory to its new owners–us–by June 1.
The company’s bondholders are up in arms about the deal:
Calling the proposal “neither reasonable nor adequate,” an ad hoc committee of GM bondholders said it believed “the offer to be a blatant disregard of fairness for the bondholders who have funded this company, and amounts to using taxpayer money to show political favouritism of one creditor over another”.
The linked news story fails to explain why the deal “shows political favouritism,” but Larry Kudlow fills in the gaps:
What is going on in this country? The government is about to take over GM in a plan that completely screws private bondholders and favors the unions. Get this: The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock. Huh? Did I miss something here? And Uncle Sam will have a controlling share of the stock with something close to 50 percent ownership. And no bankruptcy judge. So this is a political restructuring run by the White House, not a rule-of-law bankruptcy-court reorganization.
As we’ve said for a long time, the only way to bring transparency and the rule of law to the issues raised by the troubled automakers is through a bankruptcy proceeding. Instead of that, we have a national-socialist type top-down restructuring carried out by politicians to achieve political purposes. It is deeply ironic, with hindsight, that the Left used to accuse the Bush administration of “shredding the Constitution.”
Elsewhere, the bad news continues. The Treasury Department reportedly has just reached an agreement with Chrysler’s management that will “help the troubled automaker avoid bankruptcy.” In other words, another back-room deal that will favor Barack Obama’s political constituencies.
In other news, the federal government has “stress tested” Citigroup and Bank of America and decided that both banks “need more capital.” Is that true? I have no idea, but executives at both companies reportedly “are objecting to the preliminary findings.” I have a great deal more confidence in those executives than I do in Tim Geithner and the rest of Obama’s economic wrecking crew.
Given that finding, where are Citi and BoA supposed to raise more capital? Shares in both companies have been hammered, in part on fears that they they will be nationalized by the Obama administration, and both are down again on today’s news. It may be that the only realistic supplier of the capital the government thinks is needed (but the banks do not) is the government itself.
One hallmark of organized crime loan-sharking is that, once you are in debt to the mob, you are never allowed to pay off the principal. No matter how much you pay, you always owe more. The mob squeezes you for everything you have. Until a few months ago, I never expected to see an analogy between the U.S. Department of the Treasury and the Mafia. But is it unreasonable to see a parallel in the government’s refusal to allow banks that have borrowed money under TARP to repay it? Does it not appear that financial institutions that became enmeshed with the government, and are now being dictated to by the government, find it increasingly difficult to extricate themselves?
Maybe that analogy is overblown. I certainly hope so. But when we look back in a few years, I wonder how many of the financial institutions that accepted “help” from the federal government–some of which tried to refuse, but had “help” forced upon them–will still exist, and how many will be hollowed-out shells operating as arms of the government.