By seeking to dictate terms to secured creditors of Chrysler LLC and General Motors Corp as the automakers struggle to win further aid by cutting debt and costs, the U.S. government has entered uncharted waters that some find unsettling.
Inserting itself into a private process -- an attempt to avoid bankruptcy that, if it fails, could toss Chrysler into an almost-immediate Chapter 11 filing -- some see the government as tipping the scales against Wall Street investors in favor of political considerations.
This is worrying because U.S. bankruptcy law is set up without exception for private entities on both sides with relatively equal leverage, said Gary Kaplan, a director at San Francisco-based law firm Howard Rice. If you have the federal government on one side with tremendous resources and a bully pulpit, it's truly not fair.
This means the playing field is not level, he added.
Others see the government's intervention in negotiations with creditors as a direct threat to America's long-standing adherence to Darwinian capitalism, where the fittest survive.
This sets a lousy precedent for all other industries, said David Littmann, senior economist at nonpartisan think tank The Mackinac Center for Public Policy. This is the politics of re-election rather than the economics of excellence where those with invested capital see it expropriated in favor of vested interests.
Those vested interests are the unions that campaigned to elect U.S. President Barack Obama, Littmann added.
'NEITHER REASONABLE NOR ADEQUATE'
Chrysler -- 80 percent controlled by private-equity firm Cerberus Capital Management LP -- and GM have received emergency federal loans to help them weather the worst downturn in decades for the U.S. auto industry, as the recession and the credit crunch batter sales.
To receive fresh funding, Chrysler must restructure its debt and labor costs, plus consummate an alliance with Italian car maker Fiat SpA by April 30.
GM has until June 1 to slash its debt and labor costs.
The U.S. Treasury Department has worked to broker deals with the two automakers' creditors, offering Chrysler's lenders $1.5 billion in first-lien debt -- they are owed $6.9 billion -- and a 5 percent equity stake, while the lenders asked for $3.75 billion and a 40 percent stake. Reports have put a revised government offer at $2 billion, with no stake.
The UAW has said that under a proposed contract it would get 55 percent of Chrysler in return for concessions, and the government and lenders would get 10 percent between them.
GM's secured creditors have been offered a 10 percent stake in return for their $27 billion of GM debt, while the UAW would get nearly 40 percent. In both cases, the automakers would pay cash into retiree health care funds.
We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company, a bondholder committee said in a statement.
This is not the way things are normally done.
To say it's unusual is an understatement -- it's unprecedented, said Norman Kinel, a New York-based partner at law firm Duval & Stachenfeld. The government doesn't ever get involved in this way.
Dan Seiver, a finance professor at San Diego State University, said that as some of the automakers' creditors have received bailout money from the government they may be forced to ride herd over other lenders to get a deal done.
We're in a new era where the government is calling a bunch of shots, Seiver added.
Intervening in the auto industry is also seen creating a conflict of interest for the government, where its role as a shareholder collides with its desire to protect jobs and benefits.
There is also concern about what Syd Finkelstein, a professor at Dartmouth's Tuck School of Business, called the implied consequences of disobeying the government.
Finkelstein referred to the case of Bank of America Corp Chief Executive Ken Lewis who, according to testimony released by New York Attorney General Andrew Cuomo, said he had been pressured by the government to complete a merger with Merrill Lynch & Co.
This is a very active, hands-on Treasury Department that is not afraid to flex its muscles, Finkelstein said.
For some, however, the government is merely protecting its interests and those it represents: U.S. taxpayers.
Like any other investor the government wants to have conditions placed on providing further loans, said Karen Ostad, a New York-based partner at law firm Morrison & Foerster. Yes, the labor force doesn't have a lien, against either firm.
However, if these companies are going to continue in business, then the people who provide the sweat and labor need to have a buy-in, she added.