I'm surprised to see Felix Salmon joining the crowd of liberal bloggers defending administration bullying of the holdouts on the grounds that they bought the debt at distressed prices. (Though it's not clear that all the holdouts are vulture funds). Secondary markets for assets are real markets. Indeed, they are very important markets. Just ask homeowners in Detroit what happens to the value of an asset with no secondary market.
Chrysler was able to raise money in recent years because debtholders knew that they could sell that debt to someone else. If that "someone else" had thought that there were special moral--and apparently, therefore legal--rules for people who purchase debt on the secondary market, they would have paid less for it. And if the price of assets on the secondary market falls, so does the price of assets on the primary market. That's why you don't see a lot of new homes being built in Florida.
Thus, swatting the secondary buyers means higher interest rates for the primary fundraiser. There's a reason we order the seniority of claims by how secure the loan was, rather than how much we like the creditors.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
I'm not surprised. Don't be afraid, to let them show ...
But Megan, if people anticipate and respond to government intervention, then the government might not be able to micro-manage everything efficiently. Government actions might even have unintended consequences. That's just crazy talk.
I am repasting the spirit of my comment from the end of a prior thread... If you were a vulture investor or "secondary market participant" in Chrysler debt and you really thought everything was going to play out exactly according to the rulebook, maybe it's time to become a chartist or an index investor. As Megan points out in an earlier post, in this climate there are some activities that are investing and some that are gambling. This is gambling. The federal gov't is unloading bags of money at Chrysler's front door; these guys thought they could quietly carry it out the back door? Come on. I agree, in most cases the bankruptcy law works very well (railroads are a big exception), and if this was happening in normal times it would be an outrage, but at times like these I'm out of outrage and I know longer know or care who to root for.
This is gambling. The federal gov't is unloading bags of money at Chrysler's front door; these guys thought they could quietly carry it out the back door?
So, if you and are playing poker in a casino, and, in the middle of the hand, the house decides to make Aces wild, then you're totally OK with that? After all, we're "gambling" anyhow; why complain when the rules of the game arbitrarily change with the dealer's whims?
Would you be likely to visit such a casino in the future?
You're absolutely right, if I ever visited that casino again I would be playing blackjack at a $5 table. To continue the analogy... the vulture funds did something cute (think back to that scene in the movie Casino) and now find themselves getting roughed up in the back room. Know when to walk away, know when to run.
If buying debt is considered "something cute" by this administration, then Megan is absolutely correct to be worried about the ripple effects in the credit market.
When did buying secured debt become cute?
And what do you have against vultures? Would you prefer corpses lining the landscape, rotting away, polluting water supplies?
BudFox2, are you saying it's not possible for someone to have bought Chrysler debt before the government advanced (or even discussed publicly advancing) the company any money?
That's certainly possible, but I think they should have seen this coming. I do like contracts, rules, etc., but these vultures are big boys who make bad poster children for the cause of playing fair.
Sounds like you are saying that anyone who lent money to the auto manufacturers is a fool. I agree with you there, but that's hardly a recipe for rescuing these firms. If you go around changing the rules of the game, you have no market. If you have no market, you get no lending. There are lots of countries like this out there, but to call them "developing" markets severely overstates the strength of their economies.
Maybe so, but the poster children for rights and responsibilities usually aren't. How often is the poster child for free speech rights somebody you'd take home to mother? But there are right ways and wrong ways for investors and gamblers to lose.
You seem to be missing Megan's central point. Secondary markets are a good thing. A society of laws where contracts are respected is a good thing. Ignore these facts at your peril (at everyone's peril).
The problem with your post is the senior debt was priced as senior debt with high risk. In other words, it was priced as first in line in the case of a bankruptcy. It was not priced as behind the UAW.
Rick
It's all very American Well, Latin American.
Hiyo! Comment of the day.
Agreed. And certainly explains why Obama has been making out with Chavez.
That's only if you think economic growth is more important than social justice. Now social justice centers itself on economics development, but hey, I'm not the doublethink scholar...
And meanwhile, the government's cost of capital continues its steady climb up, and the time grows short to change course and avoid a lost decade.
"I'm surprised to see Felix Salmon joining the crowd of liberal bloggers"
You are??? How naive of you, Megan; you should know better. Salmon is a complete and utter hack, willing to parrot whatever is the approved leftwing position of the day. His opinion is represents nothing more than the lowest common denominator of leftwing bloggers.
If a third party company bought into Chrysler with the kind of management stake the government is here, and starting doing this kind of aggressive restructuring, would you be arguing against it like this?
Just like bailing out Bear Sterns, which you supported, represents a sop to a favored conservative constituency-- bankers on Wall Street-- so the government forcing Chrysler (in the midst of, you know, allowing Chrysler as a company to continue to exist) to maintain its union presence is a sop to a favored liberal constituency. I just wish you could say "the problem is that I ideologically prefer bankers to unions." That's fine, that's democracy, that's how it works. But there's nothing malign or nefarious about it, unless you think that conservatives have a right to use the government to support bankers but liberals don't have the same right to use government to support unions. And, by the way, the governments support for these enormous multinational corporations that failed on absolutely every level of fiduciary responsibility is massively, massively bigger and more expensive than the government's support of the UAW. By orders of magnitude.
Freddie, bankers aren't conservative. Wall street bankers supported Obama by a large margin. The bailout was supported by liberals, and opposed by conservatives.
Get your facts straight.
Support for bankers by conservatives != support for conservatives by bankers.
Freddie, I'm just pointing out that your claim:
"...bailing out Bear Sterns, which you supported, represents a sop to a favored conservative constituency-- bankers on Wall Street-..."
is blatantly false. Bailing out the banks is a sop to a liberal constituency, and was supported primarily by liberals.
I do get a little schadenfreude tingle when I think about this. Wall Street is getting what it wanted. Good and hard.
As someone mentioned after your previous comment on a similar post, whether you believe it or not, it's not unreasonable to believe that letting financial institutions fail is different than letting car companies fail, that the financial institutions are vitally important to our economy. And that's the argument that people supporting the bank bailouts tended to make. On the otherhand, nobody seems to be making the argument that the UAW is vital to the economy.
Even if the people supporting the bank bailouts are full of ****, don't think letting banks fail poses a systemic risk, and are only trying to give money to favored constituents, at least they pretend they want to do what's best for the country as a whole. The people supporting bailing out the UAW, on the otherhand, aren't even pretending that doing so is what's good for the country as a whole.
We've been using the political process to determine winners and losers for a while now, and increasingly so, so I'm not sure how upset to get about this. But to the extent that we want to keeep our current political system stable, I think it would be better if gov't officials at least pretended in public that we were looking out for everybody.
I just want people to be upfront about the fact that they are choosing winners and losers. I do think it's fine if someone is just opposed to unions and that's why they're opposed to this business. But I think we should just be open about it.
From Freddie:
Such a third party would still need the agreement of every single lender in order to reduce/restructure the contractual rights of those lenders. What Obama and his minions were attempting was an end-around on black-letter law. And to think one of Obama supporters' biggest claims on behalf of their candidate was that he represented a return to lawful behavior.
Obama may still get away with this, but he will now have to bully/intimidate the judiciary.
Again-- there remains considerable controversy about whether many elements of the financial bailouts were legal or not. Why is the rule of law important when evaluating a deal that favors the UAW but not when evaluating a deal that favors AIG?
Freddie,
I have criticized the bank bailouts from the very beginning, on both practical and legal grounds, so my position is the consistent one. You and Megan are the ones that need to get your arguments straight.
The rule of law would be important either way, but the interests it is balanced against are allegedly different in each situation. The financial bailouts were at least nominally about saving the economy.
What is saving the UAW about again?
Wow. Just wow Megan. At what point will realize that liberals will forgive Obama everything, and that Obama is a socialist moron?
"and apparently, therefore legal"
Can you explain this? My understanding is that thus far they have only attempted to use moral suasion to persuade the bondholders to cave - ultimately, they failed, and thus the bondholders successfully pushed Chrysler into bankruptcy court where they can argue their claim. Is there something I'm missing? Would love to know - many thanks in advance.
Does "moral suasion" include threats to use the bully pulpit to "destroy" a company's reputation and it's ability to do business? In that case, that's "all" that's been attempted. It's also a new definition to the term and looks more like what we used to call coercion.
If a company's reputation and ability to do business can be destroyed based on Obama pointing out that they're standing in the way of a deal by not accepting a sufficiently large haircut, then perhaps they should consider the potential negative p.r. value of the choices they're making in light of the public mood. But I would call it a huge stretch to label "Obama threatening to talk negatively about a company" as coercion. Pressure, certainly. And coercion certainly seems like the wrong term given that, um, it didn't work.
Also, let's not forget that all we're talking about here is the difference between the $2.25 billion he offered and the $2.5 billion they offered. It was a negotiation that broke down that very easily could have reached a deal, and probably will in court somewhere in that range. This really isn't the end of the world for credit markets.
"If a company's reputation and ability to do business can be destroyed based on Obama pointing out that they're standing in the way of a deal by not accepting a sufficiently large haircut, then perhaps they should consider the potential negative p.r. value of the choices they're making in light of the public mood."
You have to be kidding me. Why on earth would any rational investor give money to a fund on the Executive Branch's shit list? Hint: it's not due to "PR concerns".
According to the lead attorney leading the recalcitrant bondholders, the Administration's threats caused one of the bondholders to cave. The threat was to use not just the Administration's ability to make statements and issue press releases, but to use the White House press corps to attack the company. (That says volumes about the independence of our press watchdogs.)
Stan,
That's quite a simplistic way of looking at it. I don't think it's very accurate. My assessment of the Chrysler situation is that in light of unions losing much of their "guaranteed" pension and health care benefits, as well as a number of their jobs, perhaps the hedge funds that only bought these loans in the first place assuming the government would pay them off for a profit when they inevitably bailed out Chrysler should be content to settle for a bit less than they liked.
And if the result of this situation is that hedge funds stop betting on government bailouts for profit because they might not make that profit anymore, then to be honest with you I consider that a good thing. You guys are the ones who keep talking about how we should let the car companies go under, right? So why complain now that the secondary credit market for the worthless-without-bailouts debt held by companies destined for bankruptcy might suffer?
Adam, I don't understand the point of speculating as to why the hedge funds bought the loans. Really, why does it matter? Will everyone's motivation for buying debt not be publicly questioned henceforth? Whose job is it to infer the motivations for debt purchases?
Can only those with putative "noble" reasons for buying debt expect to be able to exercise their legal options without the fear of the full weight of the Executive Branch (including the DoJ and IRS) bearing down on them?
You're also avoiding addressing Megan's main point: at a time of economic crisis, isn't it a bit reckless to cause bondholders or potential bond purchasers to ask the above question?
Stan,
Good points. I would say it does matter what their motivations are given that it looks to me like they were pretty much expecting to make money through government bailouts. Sending a signal that that behavior might not be profitable anymore doesn't look like a terrible idea to me.
"You're also avoiding addressing Megan's main point: at a time of economic crisis, isn't it a bit reckless to cause bondholders or potential bond purchasers to ask the above question?"
I have avoided it, because while I don't mind this specific instance a trend of this might not be a very good idea. I would hope it's a one-time case and that the rule of law generally be allowed to work. I will say though that having potential bond purchasers ask whether or not they should bet on a bailout is better than their buying bonds assuming there will be one, because if the market implicitly prices that in it just makes the bailouts all the more inevitable. And I think we can both agree the fewer bailouts the better.
Hmmm, I'm not sure about all of this. At least, I'm pretty sure President Obama is not guilty of what Ms. McArdle claim he is, that he has changed the bondholders' legal position.
I would feel extremely offended if the administration would circumvent the rule of law and have the bondholders wiped out regardless of their legal claim. One can imagine a President making an argument about national necessity and this case being too important for bankruptcy court and setting up an independent tribunal of executive branch appointees to decide the outcome - sort of an economic military commission, if you will. To use such a system to keep the bondholders from pressing their legal claim, that would be unquestionably wrong. But that doesn't seem to be what has occurred here.
Here, the administration is using the bully pulpit to (choose your verb: persuade, coerce, encourage) the bondholders to accept a different deal than the one to which they were entitled. The bondholders refused, and now the administration is being roundly criticized for it. I agree that it is unseemly and I'm quite uncomfortable with my government doing all of this, but it is a far cry from using their control of the governing apparatus to alter the bondholders' legal position. I mean, they threatened with the White House Press Corps - they also control the CIA, the IRS, and the treasury. To threaten with the first is worrisome, but it's not the same as threatening with the latter.
I also disagree with Ms. McArdle that all of this was so unforeseeable for these bondholders - the entire bet was based on the government's attachment to the firm yielding some sort of rescue. If it was just up to the market, then Chrysler wouldn't get the financing it needs to restructure and would go under. So, they were making a bet on the government's attitude to the firm, and if you're doing that it doesn't seem so unreasonable to also realize that you're making a bet on how the government will view your involvement.
Weren't you people *listening?* President Chauncey WON.
Therefore anything he says is true, is true.
He did't mean to SELL Chrysler to Fiat, he said "I fix them BY FIAT!"
You guys are missing the whole thing.
I'm afraid I don't get the reference. Chauncey Billups? Chauncey from Wonder Showzen? Those are the only two that immediately come to mind. I'm not up with the libertarian lingo these days.
That being said, yes, he did win. Feel free to convince the public to vote him out for your preferred candidate *cough*. You might find there are quite a few union workers in swing states.
You appear to be unfamiliar with the work of Peter Sellers. That's something for you to investigate.
Chauncy the Gardener.
A person can learn a lot of important things growing a garden.
Perhaps the point is what things we opt to help thrive? Free markets, including secondary credit markets, are based on the survival of the fittest, given an unchanging climate. But we're facing climate change, on earth, and in our markets.
But often, things find ways to survive and thrive working together. Orchids need a soil fungus to survive; peas, too. Gardeners build good relationships, good communities.
And Zic proves once again what a brainless Gaia-worshipping hippie she is, using metaphors about "good communities" (re: high taxes on the rich! be a liberal or be shunned from the community) being like gardens.
Gardens require a free market so you can see your produce, babe. So you can afford that prius that wills top "global warming."
You mean Jerzy Kosiński, as adapted for cinema by Peter Sellers?
You might also find there's a few tea party goers in swing states as well, Adam.
Oh there certainly are. There were some pretty big Sarah Palin rallies in swing states too (and Joe the Plumber was from Ohio!). But I'll take the union coalition over the tea party coalition any day. If I were you I'd work on developing economic policies that are better for the middle class and winning the union guys over, leaving us with just the poor and rich. But that's just me.
I do know the "people who agree with Basic Fact on 90% of his principles" is no threat to win an election anytime soon, which is always comforting.
"But I'll take the union coalition over the tea party coalition any day."
--it doesn't surprise me that a liberal worships forced coalition at the threat of violence over spontaneous coalitions through shared frustration.
"If I were you I'd work on developing economic policies that are better for the middle class and winning the union guys over, leaving us with just the poor and rich."
---Isn't that just the liberal way, ignoring all history which shows that right wing economics benefit the middle class over left wing? Or did you forget 12 years of unparalleled economic growth whent he Repubs held the purse strings, and the recession led by the Democratic congress?
"But that's just me."
---yes, its always wise to heed political advice from your political enemies.
"I do know the "people who agree with Basic Fact on 90% of his principles" is no threat to win an election anytime soon, which is always comforting."
---and finally, the arrogance and myopia of liberalism: we won 2 elections, you will always lose.
"it doesn't surprise me that a liberal worships forced coalition at the threat of violence over spontaneous coalitions through shared frustration."
I wasn't worshipping anything, I was just pointing out that the union coalition is, um, larger. And that you're more likely to win elections with them on your side.
"Isn't that just the liberal way, ignoring all history which shows that right wing economics benefit the middle class over left wing?"
Ok, let me rephrase. *Convince* the working and middle classes that right-wing economics are better for them. If that's really true then you have the worst marketing team in the history of politics because they definitely don't believe that as is.
"and finally, the arrogance and myopia of liberalism: we won 2 elections, you will always lose."
I didn't say anything like that. At some point in time a broad center-right coalition will defeats a overextended liberal party. Especially a coalition that has the working and middle classes, as I advised you to do.
What I did say was that the subset of non-liberals who believe what you believe (jail anyone who has an abortion, Iraq war was awesome, supply-side forever) is a small fringe minority, and I don't have much fear of losing as long as we're competing against those ideas. I presume that we won't be competing against that forever as after enough losses one would think even your party will abandon those stances for ones that appeal to moderates, knowing they'll still have your vote anyway.
Adam, caught again:
"I wasn't worshipping anything, I was just pointing out that the union coalition is, um, larger."
Let me remind you, liberal, of what you *actually* said: "But I'll take the union coalition over the tea party coalition any day."
You expressed a *preference* for the violence-led union mobs over spontaneous protest by people inflamed by overspending and lies about that spending. Not *pointing out the union coalition is larger.* You, sir, are a liar.
"And that you're more likely to win elections with them on your side."
----lol. Right. Because 250,000 protestors= no political influence.
"If that's really true then you have the worst marketing team in the history of politics because they definitely don't believe that as is."
---No, they just bought 1) the Dem. lies that Iraq was a quagmire in 2006 and then 2) the Dem lies that the 2008 economy was somehow caused by Bush. But hey, I guess 4 years=forever, right liberal?
"Especially a coalition that has the working and middle classes, as I advised you to do."
----Bob Shrum, everybody! lol. Keep gabbing lib, no one is listening.
"What I did say was that the subset of non-liberals who believe what you believe (jail anyone who has an abortion, Iraq war was awesome, supply-side forever) is a small fringe minority,"
---And once we thought that people who believed that pulling live babies out of mother's wombs, allowing them to breath and live on the pan, and then stabbing them to death would never be allowed anywhere near national office.
And once I believed a group of violent extremists who destroy property and stomp on and burn religious images would never be considered an oppressed group worthy of legislation protecting them from any retaliation.
And once I thought an America-hating, terrorist-befriending, cowardly loser would have no chance of becoming president.\
Pendulums shift, boy. Watch your back, so it don't come swinging on your head.
"and I don't have much fear of losing as long as we're competing against those ideas."
---Yep. And the terrorists just want a hug.
"Chauncey Billups"
----RACIST.
wait, sorry, I was channelling a liberal there. sorry all.
I don't have any idea what you're even talking about any more, Lurker. The NY Times? The Washington Times? What's the Pravda these days?
Most newspaper writers are just, well, awful. That's why I read blogs like Megan's where I largely disagree with the stances she and most of the commentators take; I tend to learn a lot more when I'm challenged. Somehow I doubt you take the same path.
Sorry, this meant to go in the one below it. The 4-max is a little confusing when having a detailed thread like this.
It's a reference to Being There... not really a case of "(us) guys" and our "libertarian lingo".
Link's broken. I did mean that a bit tongue-in-cheek, thinking it was 50/50 to be either some kind of in-group reference like teleprompters and ACORN, or a reference I didn't get, being uncultured and all.
Oops. let's try the link again. Curiously, this movie was often referenced by both the Left and the Right during the 2008 Presidential campaign. The Left used it as an analogy for Sarah Palin (until she bombed her interviews), and the Right for our current President.
Yes, the current IQ of the White House and the V.P.'s office barely adds up to Palin's.
Palin's IQ had better be high, since she reads all the newspapers
She knows how many states there are...
And how you can ride the NY subways during the swinge flu "scare"....
But hey, I just pay attention to facts myself. No need to challenge the "brain trust" (lol) currently in charge.
how cute; Adam still reads his Jason Blair Times and Daily Pravda, and trusts only what they say.
Anyway, as to the Being There reference...I've actually seen that movie, though I didn't remember its name or Chauncey's. But I definitely heard, well, a *lot* of anti-Palin rhetoric and I don't recall that ever coming up once. Maybe I missed it.
"Maybe I missed it."
---wouldn't be the first thing you missed, leftie. lol.
"I don't have any idea what you're even talking about any more, Lurker. The NY Times?"
---Amazing how liberals quickly forget when their racial quota systems yield failure. Jason Blair=NY Times reporter. You do keep up on current events, right?
"Most newspaper writers are just, well, awful."
---because they are liberal mouthpieces.
"I tend to learn a lot more when I'm challenged."
---from the tone of your predictable stupidity, you learn nothing at all.
"Somehow I doubt you take the same path."
--lol. when there is a rational liberal argument, I do. Unfortunately, kiddo, for you rational and liberal are contradictions in terms.
Like those union workers at the Boston Globe? Or the union workers at Chrysler? Or is it the ones at GM? Maybe the ones taking furloughs at various state agencies as Governors tell them "we have no more money - sorry..."
Sure is good to see Union Workers being treated like the solid proletariat comrades they are, eh?
The doctor said: In order to save the patient, we had to kill him.
Obama says: In order to save the unions, we had to kill the company's ability to finance, and the secondary capital markets along with it.
You think the UAW's chances of survival are enhanced by this? I don't. Chrysler is dead, and Fiat will feast on the bones.
Look -- it's one thing for secured debt to trade at a discount because:
1. Bankruptcy looks likely, and
2. 100 cents on the dollar appears unlikely in chapter 11 even for secured creditors.
That's reasonable. What's definitely not reasonable is for the claims of secured creditors to be demoted because they are judged less sympathetic than the unsecured creditors (and because the secured creditors bought the debt at a discount because of the two factors above).
With respect to the motivation of buyer in Chrysler senior secured paper, I think the idea they were expected to be made whole via a government bailout is ridiculous. I think most buyers felt that the value in liquidation of Jeep + Dodge Ram line + Caravan + cash + other random assets would exceed the ~3.5B needed to break even on the .50-.60 cost basis that most funds are holding this at. I think they are probably right despite the absurdly lowball valuation put forth by Chrysler in their court filing.
Yes, the lack of a secondary market, that's why housing in Detroit sucks. It has absolutely nothing - nothing! - to do with Detroit being, ya know, Detroit.
As to the larger point, isn't the whole point of the administration's involvement in the auto industry predicated on the notion that the auto companies going under could mean something like 3 million more unemployed people? It doesn't have anything to do with liking the UAW or hating hedge funds; it's about people having jobs. Megan thinks the union should be asked to give up more. Why is that a more valid position than asking the Hedge Funds to give up more? Of course the administration's role is problematic, but I can think of many worse alternatives - like hedge funds calling the shots in our economy.
Ah Detroit: Democrat for 50 years, crap for 50 years. Coincidence?
Yeah, it's a real shithole compared with all those cities whose population is overwhelmingly Republican. Like...um...Tulsa? Cheyenne? Help me out here. Even Salt Lake City and Omaha are blue now, and I'm pretty sure all the Texas major cities are too.
Something hit a nerve with Adam. Could it bne the truth?
You're right, Adam; a city so overwhelmingly blue for so long couldn't have to blame its knee-jerk left-wing reactions for the destruction of its city center, oh noes.
The point flew way over your head there. The point was that pretty much all of the large cities in the US, both the great ones and the awful ones, are blue and have been blue for a long time. I would think it's common knowledge that the blue/red divide all over America has been urban vs rural with suburban voters making the difference for some time now. So, your argument is basically "Detroit is a hellhole because it's a big city".
No, Adam, once again, your wee wittle wiberal mind misses the point. My point was Detroit has been so far left for so long and that has led to its downfaill economically, socially---you name it, its in the crapper.
Sure, some other cities are blue. But of course, calling Salt Lake City far left is nuts, as is most of the others. NYC is very law and order right wing on that, haven't you noticed? The further left the city, the worse it is. DC, Chicago, Detroit.....you lose, liberal.
I have to tell you how endlessly amused I am that you think liberal is a pejorative insult. It's like calling me a male, or a blogger. Not that I expect someone outside of the reality-based community to care much about what's generally viewed positively these days (last I checked, 54/40 positive opinion for D, 22/68 for R).
It's true that societal net-takers tend to congregate in cities, and this aligns with the liberal vote.
OTOH, there *are* some notably conservative cities and areas that hold up pretty well when compared to shining cities on the hill like Detroit, DC, Newark, Baltimore, Chicago, and other such paradises.
Salt Lake City and the surrounding area come to mind.
Ditto Colorado Springs.
Big chunks of Texas.
Anchorage
Where would you prefer to live, Miame or the adjacent Hialeah? Buffalo, or the adjacent Amherst? Newark, or the nearby burbs like Summit and Short Hills?
Once liberals take over any metro area it's just a matter of time before the budget is irreversibly upside down, corruption soars, and quality of life tanks.
Other than Cambridge, and maybe Seattle, I can't think of a liberal city that I'd consider truly "a nice place to live." Many cities have nice SECTIONS to live, but more often than not they are where the conservatives live...
Liberalism reads a lot better than it plays out...
"I have to tell you how endlessly amused I am that you think liberal is a pejorative insult."
---yes, kind of like when you call a teenager a punk. They're so stupid, they take it as a badge of honor.
"Not that I expect someone outside of the reality-based community"
---lol. To steal from your hero, reality has a known right wing bias.
"to care much about what's generally viewed positively these days (last I checked, 54/40 positive opinion for D, 22/68 for R)."
----lol. Again, the liberal arrogance and myopia: we're winning nwo, therefore we will also win.
and note how the liberal avoids the facts: the further left a city goes, the worse it is. Basic. Fact.
Ooh, Adam, now you're getting tag teamed with facts. Quick, run to the DailyKos!
And yes, Detroit is a real shithole.
Secondary markets are important for a reason- not everyone wants to own an asset forever, and if those people can't sell the asset to someone else at a later date for something other than zero, then they won't make the purchase in the first place.
In other words, you completely misunderstood Megan's point about real estate in Detroit.
Secondary markets are definitely important. I'm just not convinced the secondary markets for debts held by companies that are pretty much guaranteed to go under if not for repeated government intervention are important. It's valuable to be able to resell an asset, but is it valuable to keep nosediving companies alive a little longer by getting 50 cents on the dollar for your debt instead of 25 in bankruptcy court because a market exists for people assuming the government will make them a profit?
It seems to me if this particular secondary market didn't exist then we wouldn't have a zombie car company barely on the edge of bankruptcy for so long, and they could have already cleanly restructured by now.
"I'm just not convinced the secondary markets for debts held by companies that are pretty much guaranteed to go under if not for repeated government intervention are important."
I would think that a willingness to jump in and use political clout to strongarm senior creditors into giving up their rights would be bad for raising capital in any industry in the U.S.
"It seems to me if this particular secondary market didn't exist then we wouldn't have a zombie car company barely on the edge of bankruptcy for so long, and they could have already cleanly restructured by now."
I may be misunderstanding this point, but I don't think killing the secondary market for GM and Chrysler debt will do anything to affect the likelihood of having a zombie car company, as whether we prop up zombie companies is mainly a political question.
Killing the secondary market does affect whether the gov't will bear all of the burden of propping them up. By killing the secondary market, we're making it harder for GM and Chrysler to go raise money, as who wants to by assets they can't sell b/c potential buyer's are afraid the gov't may come in and try to extinguish their rights in the asset. So if we make it harder for investors to buy debt from Chrysler, we're just ensuring that the gov't will be the one coming up with the money to prop up a zombie car company until we have the political will to let a major "american" car company fail.
Adam,
What does "pretty much guaranteed to go under" really mean? No one has a 100% foolproof way of determining what lendings will be paid back and which will not. When evaluating whether or not to lend to marginal companies like Chrysler in the past (An important distinction! The buyers of the debt in the secondary market are not funding Chrysler in the present), the initial, secured lenders would have been far less willing to lend to Chrysler if the only two options they had were to get paid back in full or take Chrysler into bankruptcy at some point in the future. The secondary market, the exact one you are questioning, mitigates the initial lenders' overall risk and reduced the cost of funds to the Chrysler of the past. One can wonder whether or not it was wise to have Chrysler survive for the last 5 years, but absent that crystal ball, I don't see how anyone could guarantee that it would be a waste of resources. Hindsight is always 20/20.
So, who are you blaming here for the zombie company now being formed that would go under absent "repeated government bailouts"? I blame the government, not the buyers of Chrysler's debt in the secondary market since they serve the purpose of bearing the default risk that couldn't be borne by the previous holders of those bonds. The government had and has an option here to simply refuse to put any more money into Chrysler, and this would be a option that would have my full support- that would be the just and proper way to avoid "rewarding" the so-called speculators in Chrysler's debt. You can't have it both ways- if you are going to put money into Chrysler, you have to accept the rules governing the contracts the company has entered into, and if you can't accept those, then let the bankruptcy proceed according to the established law.
I intentionally misunderstood Megan's point, because I don't think she really has one here. When considering the value of assets in Detroit, we need not look at secondary markets when the primary market... is Detroit. It's not like it would have all been smooth sailing for homeowners in Detroit; the homes are still in Detroit. The breakdown of the secondary market may exacerbate an existing problem, but there is an existing problem.
I think your comment on saving jobs is also a little off point. This is about liking the UAW.
(1) Obama isn't just saving Chrysler and its jobs, he's giving a chunk of it to the UAW, apparently more than they would get in a bankruptcy proceeding. Therefore it is about liking the UAW.
(2) Using his office to try and strong arm the bond holders to take a bigger haircut in order to benefit the UAW will likely tend to decrease confidence that the US will follow the rule of law. We have bankruptcy laws that are designed to handle situations like this. It's generally considered good when countries follow the laws on the books, as it increases confidence that the rule of law will be followed in the future, thereby allowing people to make decisions based on the assumption that laws fill be followed.
If Obama wanted to save Chrysler or the UAW by sticking a bill to the taxpayers, that would arguably be ok. You can question the wisdom or even the morality of it, but ultimately, the taxpayers have a way to deal with it if they think it's unwise. But when you want to save Chrysler and improve the position of the UAW at the expense of a particular group of people, and you want to do so by using political clout to eviscerate the bankruptcy laws that we generally want people to be able to rely on, you're getting into a different territory. Besides the issue of whether it is fair for one group to bear the burden of improving the UAW's position simply b/c it's members are politically unpopular, there's also the issue of what using his office to change the deal will do to people that need to be confident that the US will follow the rules it has set out.
For both of these reasons, Obama using his office to try to pressure bondholders to take a bigger haircut, for the benefit of the UAW, is less valid than having the respective shares of the UAW and bond holders determined pursuant to bankruptcy law.
The threats to the funds (not all hedge, either; the biggest one is Oppenheimer, which is a mutual fund company) is only a part of it.
The amount of power the administration has over the other banks is also enormous. Do you really think Citi and JPM crossing Obama is a real possibility? The punishment for crossing him is so obvious that it doesn't even need to be expressed. There's a reason the dissidents are calling themselvers the Committee of Non-TARP lenders.
Obama has used the partial-nationalization of the banks to get a sweetheart deal for a massive Democratic party donor.
And don't forget RobM, that Cambridge is a university town, with 2 major insitutions running it---so its living off its parents, literally.
No argument, but fair is fair. It's liberal, and it's livable.
What's entertaining is that the town is both liberal and livable for a very ironic reason: it's too expensive for the "riff raff" to live there. Cambridge is one of the few liberal towns that even pretends to care about the fact that the ultra-high cost of living that they drive has basically made the whole city completely inaccessible for the "working people" that they claim to champion.
But that doesn't change the fact that it's true, and that none of the professors are happily handing over their house keys to the people they claim to care so much about...
Hypocrisy is one of the primary tenets of Statism, right? ;)
touche, RobM. Although I would contend it is just a university town that happens to be smack dab in a metro area.
Just to chime in, San Diego is a poorly run mostly bankrupt city that's red. Republican congressman, Republican mayor and council members. It's very livable, but that's mainly because the weather is just fantastic year round. I've certainly lived in small, red towns that were poorly run as well.
Worse city: Detroit or San Diego?
End scene.
Worse city: Detroit or San Diego?
Right, because a declining city like Detroit should be a comparison point at all. I'd say San Diego is one of the best places to live, but that's mainly because of weather. Put a city run like Detroit and give it San Diego weather and it wouldn't be so badly off either.
Byrk, please. crime in San Diego is way lower than in Dem cities.
You know, when people talk about "the cocoon"... this blog comments section? This is the cocoon. A never ending stream of conservatives going on and on about how much liberals suck.
Well, I don't know about "cocoon." I see a lot of Basic Fact and Adam yelling slogans at each other.
As for the point of the post, I don't see how what Megan's saying is controversial. The whole cascade that started back in September with Lehman failing is because no one wants to be a counterparty to the next Lehman. And no one wants to have the feds as a counterparty either, for the same reason that David Scatino found out having Tony Soprano for a party was bad for the long term health of his business. P.J. O'Rourke once said that if the government pays you to do something you wouldn't normally do, it's most likely paying you to do something stupid.
I guess to a certain extent I can see how a certain mindset might think that having credit spreads wide enough to fly a 747 through is an acceptable consequence to social justice. I think it boils down to the difference between wanting to improve everyone's lot in life through economic growth and wanting to equalize results.
There's pretty good argument at Slate, arguing the counter-argument that the bond holders over-estimated the value of the debt in today's market.
http://www.slate.com/id/2217653/
It's in fact a terrible essay, factually and intellectually. For starters, Chrysler never issued bonds and never had bondholders. It's (secured) loans and lenders. This is relevant because he wraps up his thesis by comparing Chrysler debt recoveries to (typically unsecured) HIGH YIELD BOND recoveries, which are much lower than (secured) bank debt recoveries. Moron.
Second, he has some bizarre argument about employee mobility. If we're going to place moral judgments on union claims vs evil hedge fund claims, at least acknowledge that excessively rich union packages and work rules drove the Big 3 right into the abyss.
Third argument is some bizarre hand-waving. Take it from a practitioner: recovery estimates are always net of liquidation costs. Sure, liquidation costs money, but it gets repaid by the asset sales.
The crux of his last argument is essentially that 'these hedge funds have over-valued the Chrysler estate', and asserts this as a fact. Hello, on what basis? The evil hedge funds value these things for a living -- Gross, have you run the liquidation analysis yourself?
In the words of the great Eliot Spitzer, the article is factually wrong, legally wrong, morally wrong, ethically wrong. I would add intellectually very weak.
Finally, he neatly ignores the key issue at hand -- whether the government can deprive lenders of their contractual rights. Due process, fifth amendment, anyone? I thought George Bush was the only one who violated the constitution (and yet by failure of imagination, he never threatened to sic his media lackeys on private citizens).
Thanx for the analysis. Not having run the numbers myself and lacking the expertise to do so I cannot help but wonder if further government funding went into analysis. I am not going give the funds the benefit of the doubt that their liquidation analysis is correct. This entire financial crisis was created by the failure of financial institutions to correctly assess risk.
Somehow using the bully pulpit of the presidency ala Roosevelt isn't that big deal to me. I think the rhetoric that Obama is gonna sic his media lackeys is a bit of whining. If you can't take the heat of reporters asking you questions, maybe business isn't for you. In today's political environment, buying this debt was a higher risk than it would be in normal times. The public is angry at Wall Street and it's clear that risk wasn't added in the calculation.
I think the thing people are objecting to is less Roosevelt's bully pulpit and more Capone's offer you can't refuse.
So let's sum up: Obama's actions make it likely that as soon as the government starts to think about bailing out a company, investors will flee. How very Randian!
I'm surprised to see Felix Salmon joining the crowd of liberal bloggers defending administration bullying of the holdouts on the grounds that they bought the debt at distressed prices. ...
I don't see Salmon in the article you link saying anything about buying the debt at distressed prices.
Big shock; you elected an unrepentant socialist and he pulls this banana republic thuggery on you.
Whoda thunkit?!
Megan's right. But she pulls her punches too much.
Felix's argument, and the liberal argument here, is boneheaded. It's stupid. Breathtakingly stupid. It's Flat Earth Society stupid.
If this usurpation of the laws surrounding bankruptcy and secured debt holders catches on, it threatens to short-circuit the capital markets and the ability of ANY heavily unionized industry to access funding.
Now bond buyers have an entirely new risk to factor into the equation: Idiot risk. The risk of the Idiot in the Oval Office and his drooling morons usurping the long established rule of law to pay off favored constituencies, Chicago style.
Risk has a price. That price is higher interest rates and lower liquidity, which translates to a higher cost of capital for everyone else.
One of the reasons capital markets in the US are reasonably efficient compared to other countries is that historically, the US had very little political risk to factor into bond prices. Our regulation regime was not perfect, but it was at least relatively consistent and orderly and predictable. As a result, capital flowed to the US from other countries... such as, say, China.
I've spoken with institutional fund managers specializing in global investing. Political risk is a big part of their risk equation. They avoid entire countries, despite what would otherwise be lucrative opportunties, precisely because they cannot assess or reasonably price political risk.
US markets are the best in the world because they are the best regulated. Everyone knows the rules up front. Until now, thanks to Felix, Obama and their liberal fellow-travelers.
Felix doesn't seem to grasp that even with NO secondary market bondholders, Chrysler would have the exact same problem. The only difference is that absent a secondary market, Chrysler would not have been able to borrow money to pay workers and health insurance premiums in the first place, and would have been bankrupt years ago. In either case, we would still be faced with the problem of determining how much, as a percentage of par value, the secured debtholders will receive in liquidation. Whether there was a capital gains element to the purchase decision or not is absolutely irrelevant.
The Felixes of the world are acting like a rambunctious six year old, grabbing at the transmission and trying to shift gears and yanking at the steering wheel while the adults are trying to drive the car.
Interesting that Megan et al., are clinging to the theoretical rather than the practical.
The reality is very few of Chrysler's assets have any value other than to produce cars. The notion that a competing manufacturer would purchase a mothballed plant in St. Louis or Kenosha or Detroit is too silly for words.
The reality is also that many of these purchasers of debt were betting on another government infusion of capital. If that would have happened, Megan et al., would have been hooting and hollering about that.
Lastly, the reality is that Obama played this brilliantly - protected workers, cast hedge funds as the bad guys, developed a viable go-forward plan and scared the hell out of GM bondholders.
Chrysler has almost 6 billion worth of inventory at wholesale. Now, I've no doubt that that inventory will sell for a considerable discount. But I think people will be willing to buy a $20K car for, say $10K in liquidation.
I'm sure some people would be willing to pay reduced prices for Chrysler cars. On the other hand, you'd have to pay me to take a Chrysler product. There's a reason they've gone bankrupt, and it's not just the union expenses.
I bought four Chrysler products in my life. The last one did not last past 70K miles. Three different mechanics told me it was worth less than $1,000 at that point. I was surprised. Silly me.
My import, however, keeps going and going has still has plenty of resale value. What is more, it drives really well. At $10K, I would buy a used import over a new Chrysler. Seriously. I may make an exception for a Jeep--I really liked the one I owned back in the day.
The issue under bankruptcy law, though, is how that reduced value - which the creditors can get under a chapter 7 bankruptcy - compares to what they would get under the proposed chapter 11 plan.
In this case, as I understand it, the secured creditors will get ~$2.6 billion to split up amongst themselves. The Chrysler CFO claims, under oath, that they could get no more than between $654 million and $2.6 billion in a liquidation.
In other words, this arrangement has resulted in no change in the legal position of the secured creditors.
Is this correct? If so, then you really should retract your claim about the President having changed the legal rules for these bondholders. That is a very serious accusation, and if it is not true then it is extremely irresponsible to claim that it is.
The nominal value of the inventory was $5.6 billion. A report prepared for management estimated a liquidation value of $1-$1.4 billion. Some reasons for the discount, bulk sales, no warranty, some cars encumbered.
That would seem to settle the issue, no? If true - and it may not be - then the bondholders were just using their position like litigants in a strike suit, trying to use their powers to harass, delay, and force everyone else to incur costs to compel a superior settlement.
I very much doubt they'll be able to unload those cars at only a 50% discount. For one thing the environment isn't right - consumers aren't buying cars from anybody. For another, any guarantees about parts and service are likely to be discounted by consumers.
"The reality is very few of Chrysler's assets have any value other than to produce cars. The notion that a competing manufacturer would purchase a mothballed plant in St. Louis or Kenosha or Detroit is too silly for words."
?????
So you think it's the president's job to come in and try to circumvent the bondholder's rights b/c some people think they are overvaluing their assets?
"The reality is also that many of these purchasers of debt were betting on another government infusion of capital. If that would have happened, Megan et al., would have been hooting and hollering about that."
???? Of course they would be complaining b/c it's not the gov'ts job to interfere with markets to benefit favored constituents any more than it is to try to circumvent the rules of law to benefit favored constituents. Even if the bondholders bought the debt relying on a gov't bailout, (I'm still unclear as to what proof people have that this is the case, and that they didn't simply make a bad business decision), I'm not sure why this justifies the administration trying to interfere with what rights they have under the rule of law. If you don't want people investing on the idea that they will get bailed out, that's just a good reason to not bail people out, not a reason to ignore our current laws. What point was this comment supposed to make?
"Lastly, the reality is that Obama played this brilliantly"
???Brilliant????? It's brilliant to:
"protected the [UAW]" (not workers per se) --> at the expense of the rule of law?
"cast hedge funds as the bad guys" --> for what purpose? Do you really consider it brilliant to villify people that want to be able to rely on the rule of law just b/c they public perception of them is not good?
"developed a viable go-foward plan" --> ??? Handing over a portion of the company to a group that is largely responsible for its demise? Virtually guaranteeing that Chrysler will remain an unproductive company that the gov't has to pump money into for the foreseeable future??? I guess continuing to shovel taxpayer money into the company is technically a viable plan, but I'm not sure its consistent with the spirit of the way most people would understand "viable"
"scared the hell out of GM bondholders." --> ????? Again, for what purpose and why is this a good thing???? We want investors to be scared right now? You think the problem is that people feel too safe investing in U.S. companies now? You want the gov't to be the only source of capital for american car companies for the foreseeable future??? If these are the goals, I guess it was a pretty good move, but I'm not sure why these are the goals.
We apparently have very different definitions of "brilliant."
If that "someone else" had thought that there were special moral--and apparently, therefore legal--rules for people who purchase debt on the secondary market, they would have paid less for it.
This is not just tripe, it is either naive or disingenuos tripe. Of course the buyers of this debt on secondary markets knew that there were risks beyond the normal. They knew that the likelihood of bankruptcy was high, and that the likelihood of government involvement in that bankruptcy was virtually certain.
For the former point, the priority of claims in bankruptcy is violated regularly, not just between debt-holders and crditors, but among creditors as well (cf. Weiss, Journal of Financial Economics).
re the latter point, the secondary market buyers knew that negotiating with governmentin a bankruptcy is a game of chicken. Deal-making in bankruptcy court on large cases is generally a game of chicken, and jurisdiction shopping is quite common since the deals can vary substantially from one jurisdictionto another. The secondary marker buyers are merely playing one of their cards, which is to whine about the sanctity of markets and priority of claims. I'm surprised that you appear to be taken inby this.
I have to echo Megan's question from a few days ago. After this is done with, who in his right mind will every buy secured debt from heavily unionized companies, especially companies that are struggling?
Sorry to be late here - I may be out of date, but I thought that there was a difference between a secured creditor and a senior creditor. Everyone here seems to use them interchangeably.
To me, secured creditors have a lien on some specific asset(s). Is this true for the hedge fund debt holders? Does XYX Fund have a loan secured by 22 FG131X assembly robots in Ontario, for example? Or do they think that they have Nth dibs on overall value, (after the taxmen, wages, .....), wherever it may be?
IANAL but I believe this is the situation. The senior creditors collectively have a lien on a whole bunch of stuff like Chysler's car inventory. If Chrysler were to be liquidated they would get what these assets sold for after expenses. But the government doesn't want Chrysler liquidated so the government has to pay off the senior creditors. Legally the senior creditors aren't entitled to more than what they would get in liquidation. The argument is about how much this is.