This week, the Obama Administration failed to push through a reorganization plan for Chrysler that would have, among other things, used government bailout money to give the United Auto Workers a majority stake in the company.
Reacting to the setback, President Obama took aim at the few Chrysler bondholders (including hedge funds and private investors) who had scuttled the plan. He described these holdouts as unwilling to make the sacrifices that the company, the workers, the pensioners, and the taxpayers had been prepared to make for the good of the country. Ironically, the greedy group that Obama holds responsible for killing the auto industry is the only force capable of saving it.
Singling out hedge funds as the bad guys will not be politically controversial. The accusation falls comfortably into the Administration's view that unfettered capitalists on Wall Street and poor planning by short-sighted CEO's are responsible for our problems. These ideas, echoed in Congress, the media, and on Main Street, completely ignore how government intervention incentivized the bad behavior and brought down our economy.
The investors' reluctance to cave in sends Chrysler to bankruptcy court. Normally, this process would be the best means to reallocate Chrysler's assets in a way that benefits our economy. But Obama made clear that this will be no ordinary bankruptcy. The guiding hand of Washington had already formulated its far-sighted plan to save Chrysler, and this proceeding is meant to strong arm those won't cooperate. As a result, expect a cram-down rather than a negotiation. The sanctity of the bondholder's investment contracts will crumble under the political weight of Obama's vision.
Chrysler has not been profitable for years; and with the Washington calling all the shots, the potential for long-term viability has been dashed. Even after the concessions offered by the unions, the labor and overhead costs are still too high to compete in a global marketplace.
A real bankruptcy is the only solution. In it, current shareholders get wiped out, current contracts and obligations are voided, and the remaining assets, both physical and intellectual, are sold to the highest bidders. But the process would create the opportunity for new management, with private capital, to buy auto-producing assets for pennies on the dollar, hire skilled auto workers at much lower costs, scrap out of date business practices, and produce cars cheaply and profitably. Under the guise of saving jobs, the Administration has disrupted this process.
In contrast to the holdouts, the Administration claims consensus of all major stakeholders. But this ignores how government has tilted the playing field. Billions of dollars of TARP and bailout subsidies have compromised the ability of the big banks and the Chrysler Board to make decisions independent of politics. They will enter into a bad deal if it helps preserve their Federal lifelines. The independence retained by the holdouts is a thorn that will, unfortunately, be quickly removed.
Giving control of Chrysler, and soon GM, to the UAW and the government will enshrine a culture of failure and seal Detroit's fate. Both companies will become government sponsored entities, not too dissimilar from Amtrak or the Post Office, forever relying on taxpayer funds to create products of dubious quality. Does anyone remember the Yugo?
Peter Schiff is president of Euro Pacific Capital and the author of the Little Book of Bull Moves in Bear Markets