Let’s see if I can get this story from the Washington Post straight. The banks that have received federal TARP funds—some unwillingly—were told by government car czat Steven Rattner that they must accept 15 cents on the dollar on some $7 billion (face value) of Chrysler bonds. They professed shock and refused. The story quotes freshman Michigan Congressman Gary Peters as saying that the banks ought to take the loss “to get the American economy moving again and maintain American jobs.”
The last two words are the clue to the three big letters that the Post leaves out of the story but which explain what’s actually going on: UAW. Chrysler has been given until April 30 by the Obama administration, in a decision announced by Barack Obama himself, to get financing to avoid going into bankruptcy. The Italian-based automaker Fiat has indicated an interest in taking over Chrysler but only if its conditions are met. A story in yesterday’s Wall Street Journal made clear what at least some of those conditions are. “There’s no sense in being optimistic,” Fiat CEO Sergio Marchione is quoted as saying. “There’s a lot to resolve. The situation with the Canadian and American unions has not reached the point where there are the conditions necessary to form a solid industrial base.”
In other words, for Fiat to take over the UAW has to take more of a haircut than it’s been willing to take. It will have to give up some of the supergenerous health care benefits and supergenerous pension arrangements that the UAW has extracted from the U.S.-based automakers over the years. Fiat’s bargaining position is strong. It can walk away from the deal and still have a successful business. The UAW’s bargaining position is weaker.
If Chrysler goes into bankruptcy, the bankruptcy judge can and presumably will tear up the UAW contracts, as bankruptcy judges have torn up UAW contracts with bankrupt auto suppliers. In those circumstances, the bondholders will get a better return on their bonds. The Washington Post story recognizes this. “According to an analysis by Standard & Poor’s, the loans would be worth 30 to 50 cents on the dollar if the company goes into bankruptcy and assets are sold to repay creditors.” But the Post doesn’t tell us who has an interest in holding the banks down to 15 cents rather than “30 to 50 cents.” The answer, of course, is the UAW.
So the Post story gives us an incomplete view of the negotiations between the administration, the bondholder banks and the UAW. It shows Steve Rattner muscling the banks to take less money than they could get in bankruptcy—something which would presumably make it at least marginally more difficult for them to do profitable business and pay back the TARP funds—in order to strengthen the bargaining position of the UAW.
The Obama administration and the Democratic party generally owes a whole lot to the UAW. It has been for many years a bulwark of the Democratic party, supplying funds, manpower and political sophistication to Democratic candidates in one election after another. Here the Democratic party and Steve Rattner, a major Democratic contributor for many years (and one whose firm is being investigated in an alleged kickback scheme in New York state pension funds) are returning the favor. In Bailout Nation, political preference trumps economic interest.
Keeping as much of those UAW contracts in effect as possible is the obvious motive here. And you can make a public policy argument for that, I suppose. Hundreds of thousands of people have relied on those contracts in making major decisions in their lives. They are going to be hurt—though they won’t be starving—if Chrysler goes into bankruptcy. Workers will lose their jobs and their supergenerous health care benefits. Pensions will be scaled down to the Pension Benefit Guarantee Corporation’s maximum, which is below UAW levels. The supergenerous UAW retiree health care benefits will be scaled back. As a native of Michigan, I can’t take any pleasure in seeing thousands of ordinary people, some of whom I know, being hurt.
But the banks and Sergio Marchione are balking. The Post doesn’t tell you the full story. But the fact that it quotes a Michigan Democratic congressman, obviously a political ally of the UAW, tells you something about the reporter’s sources and their motivation. The negotiations will presumably go on until April 30, or maybe later, and the outcome is uncertain. But this won’t be the last time the administration exerts pressure to help its political allies in Bailout Nation.
