By on May 27, 2011

When private, for-profit firms ask for public money, taxpayers tend to take a more personal interest in their goings-on. After all, they are, in a very real sense, still the partial owners of these companies, and they put up the cash to provide a second chance to companies that offer no similar reciprocation when consumers default on their own car loans. And though US taxpayers have earned the right to feel a sense of ownership towards GM and Chrysler, there are several groups of Americans who have shouldered a disproportionate amount of the burden of the bailout. First, the GM and Chrysler employees who were laid off despite the bailout must doubtless wonder why they had to both fund the bailout and lose their jobs (remember, cutting jobs was the most “positive” aspect of the bailout, according to the industry). Similarly, GM and Chrysler’s bondholders paid twice to “save” their failed investments, once with their tax money and again by taking a hefty cramdown. And finally, a third group paid far more than anyone else, not only funding the bailout with with their taxes, but also sacrificing compensation for injuries caused by GM and Chrysler vehicles. The WSJ [sub] reports

Among the creditors who suffered most, car-accident victims represent a distinct mold. Unlike banks and bondholders, this group didn’t choose to extend credit to the auto makers. As consumers, they became creditors only after suffering injuries in vehicles they purchased.

“This was not a normal case. The government was deciding who was going to be taken care of and who was not,” said David Skeel, a University of Pennsylvania law school professor and bankruptcy expert who has testified before Congress on the auto bailouts. Even if the auto makers had legal rights to leave behind product-liability claims, “there is a deep unfairness,” he said. “It would have been easy enough to set something aside for them.”

Given the celebratory, even triumphalist, rhetoric that’s being applied to the auto bailout after the fact, it’s important to remember that many suffered in order to give GM and Chrysler a second chance. Even those who are proud of the bailout’s accomplishment should acknowledge that the jobs saved carried a price that goes beyond any final accounting of anonymous billions lost from the federal budget. The pro-bailout crowd should take more care to recognize and heal the deep wounds that fester beneath their “Mission Accomplished” rhetoric… if only to prevent a repeat of these tragic decisions in the event of future industry rescues.

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44 Comments on “WSJ: Some Paid More For The Auto Bailout Than Others...”


  • avatar
    psarhjinian

    Do we have to do the bondholder thing again? They didn’t take a haircut by any means, what with having their worthless bonds backed by negative equity backstopped by the government.

    • 0 avatar

      Because, after all, a Canadian socialist knows more about US bankruptcy law than a University of Pennsylvania law professor who specializes in bankruptcy law.

      • 0 avatar
        psarhjinian

        Fine, we’ll do this. Again.

        The issue isn’t one of law but economics: bonds aren’t often secured, bondholders are well back of secured creditors (like, eg, banks and lenders, of which the government was the primary), and—this is important—the companies were worth nothing.

        Under a “typical bankruptcy” you so cherish, the poor bondholders would have gotten nothing** because even 100% of nothing is nothing.

        Again, this isn’t an issue of law: there was no money for them. Had this gone to private-equity-based DIP C11 or a C7, there was no cash and, after the assets were fire-saled, still no cash, for the bondholders. How. Many. Times. Do. We. Need. To. Say. This?

        Are you so emotionally attached to the “poor bondholders” meme, or the political capital it buys “your team”, that you can’t recognize it for the complete snowjob it is?

        Forgive the bitterness, but unlike, say, the relative worth of the bailout in net terms, or it’s strategic value, both of which are good topics for debate, the bondholder issue is a political canard. No, worse, it’s a zombie dead horse: no matter how often we beat it, it rises again and again and again.

        ** as would the groups above; probably less than they got with the bailout, considering what little benefits they might have gotten would have been completely negated.

      • 0 avatar
        MikeAR

        Psar, it doesn’t quite work that way. A DIP would not have caused an immediate shutdown, in most cases a DIP keeps operating with labor contracts invalidated and creditors, secured and unsecured, receiving equity in the company in lieu of paymonts on the debt. Before you say “but the credit markets were frozen” remember a Treasury backed DIP would have unfrozen the credit markets especially with fresh injections of a trillion or so into the too big to fails. The exceptional thing about the bailout was the never before done penalizing of one class (bondholders) and the naked political rewarding of another class (the UAW). If you can find another example of something like this in the history of this country feel free to educate me.

      • 0 avatar
        psarhjinian

        A DIP would not have caused an immediate shutdown, in most cases a DIP keeps operating with labor contracts invalidated and creditors

        Sure. And who would be the provider of DIP financing? During a credit crisis?

        Much as you say there wouldn’t have been a freeze, I can tell you than banks in Canada who barely suffered for the US market iced up credit for even moderately successful businesses. What were the chance that, in the US, where things were much worse, that someone would have ridden in to finance two companies in as sorry as state as GM and Chrysler in 2008?

        I should have thrown an “even if” in that paragraph, I’ll admit.

      • 0 avatar
        cackalacka

        “Under a “typical bankruptcy” you so cherish, the poor bondholders would have gotten nothing** because even 100% of nothing is nothing.”

        Some of the folks arguing from authority above should take a couple moments out of their day and listen to a certain Billy Preston song.

        As for the main topic: if folks are sacrificing their injury claims, then clearly the only just and viable solution would be complete tort reform.

      • 0 avatar
        wsn

        psarhjinian: Under a “typical bankruptcy” you so cherish, the poor bondholders would have gotten nothing** because even 100% of nothing is nothing.

        That’s clearly false. As an outsider, I could say GM is worth nothing, because whatever remaining can be sold for $20, and the debt level is $100. So yeah, it’s nothing.

        But it’s different from bond holders’ point views. Say, the $100 debt is structured such that holder A owns $50, holder B owns $50. A has absolute priority over B. Then, for B it’s worthless. For A it’s 40 cents back for every buck, i.e. not nothing.

      • 0 avatar
        psarhjinian

        But it’s different from bond holders’ point views. Say, the $100 debt is structured such that holder A owns $50, holder B owns $50. A has absolute priority over B. Then, for B it’s worthless. For A it’s 40 cents back for every buck, i.e. not nothing.

        That’s true, but in this case A were banks, lenders (including the government) and suppliers who were guaranteed assets. The bondholders, all of them, were B people.

      • 0 avatar
        John Horner

        ” …. University of Pennsylvania law professor who specializes in bankruptcy law ”

        Hmmm, all of the courts this set of issues was appealed to disagreed. Does Mr. Professor understand the meaning of case law?

      • 0 avatar
        wsn

        psarhjinian: That’s true, but in this case A were banks, lenders (including the government) and suppliers who were guaranteed assets. The bondholders, all of them, were B people.

        Clearly BS. Priority is typically determined by time of issue (i.e. the later the higher priority), not who owns it.

        Just before bailout/possible C7, government doesn’t own all the top tier bond, period. Or there won’t be any debate whatsoever.

        If the government wanted to be the new investor “A” and have fresh cash as the top tier bond, the process would be:
        1) approved by majority of stock holders – didn’t happen
        2) GM not defaulting on any debt – didn’t happen either

    • 0 avatar
      tced2

      look up “senior debt”. “Senior” has a meaning. Over 100 years of settled bankruptcy law was ignored.

      The debt markets have taken notice that the meaning of senior has been broken. This type of debt for some companies costs them more to obtain – i.e. they have to pay more interest.

      • 0 avatar
        psarhjinian

        The debt markets have taken notice that the meaning of senior has been broken

        No, it hasn’t.

        Bondholders are back of the line, after people who have loans backed by assets. They’re not all the way back, but they’re certainly not front-and-centre.

        And then there’s that whole “worthless assets and negative equity” thing that people keep ignoring.

    • 0 avatar

      psar: I agree that the bondholder issue is a bit overdone… my main interest is in the WSJ story about legal liability evasion. As the guy points out, bondholders were taking a risk… folks injured by auto defects enjoyed no such agency. Also, I’m not trying to re-litigate the bailout… just providing some counter-weight to the triumphalism that is defining all media coverage of the issue just now.

      • 0 avatar
        psarhjinian

        @EdN: Fair point, and I actually agree with it. In any action there are always winners and losers, and there’s real danger in being purely utilitarian and judging the enterprise on it’s net benefits.

        My only—only—complaint is that of the three groups you raised, one (the bondholders) actually did better as a result of the bailout. Including them as hard-done-by’s is inaccurate.

        It didn’t stop them crying about how they didn’t do as well as they would have liked, or how their whinging is getting recycled for political capital.

    • 0 avatar
      MikeAR

      At the time of the bailout for most companies the credit market was frozen but in the case of the too big to fail banks it would have unfrozen immediately had the government guarenteed a DIP bankruptcy. Remember at the time the Treasury pretty uch owned every large financial institution in country. They would have had to do whatever the government said including lending money to GM backed by hte government.

      And it really doesn’t matter anyway, it happened and it can’t be undone. I think that after all that has happened we can all agree the purpose of the bailout was to reward and save the UAW. GM still operating is gravy.

      • 0 avatar
        mazder3

        “the purpose of the bailout was to reward and save the UAW”

        The bailout saved many towns. Take Hillsboro, NH for example. Pre-bailout, the town’s only major employer**, Sylvania, laid off 60 employees and was considering shutting down the plant completely. Post bailout, Sylvania stayed and offered those 60 their jobs back. Had Sylvania closed, Hillsboro would be New Hampshire’s Flint.

        **Shaws Supermarkup and First Student are small potatoes comparatively.

      • 0 avatar
        Telegraph Road

        “Remember at the time the Treasury pretty uch owned every large financial institution in country. They would have had to do whatever the government said including lending money to GM backed by hte government.”

        Financial institutions are not owned by the Treasury Department. You may want to revisit your Economics course notes (unless you studied in Arkansas.)

      • 0 avatar
        MikeAR

        Telegraph Road, are you ignorant of the reality of the baiout? Yes you are, the Treasury was running every major bank in the country at the time. The Treasury was firing CEOs and BODs at the time. Of course that doesn’t fit your story, so you omit it so that your phony version of history looks valid.

        Liberals have a problem with truth, sometimes it doesn’t fit their stories so they ignore it. Now who’s uneducated? Go sit in the corner.

  • avatar
    tced2

    Not the only industry that “escaped” liabilities of their product – just the one that gets a large amount of publicity.
    See all the companies involved in asbestos products. They all went bankrupt for a reason.

  • avatar
    carguy

    Another fine post to increase TTAC page views.

    The logic implied in this article is somewhat flawed as the same applies for a whole range of government expenditures. Your taxes may pay for infrastructure you never use, your taxes may even pay for things that you personally don’t agree with – that is the nature of a democracy – it is the voices of many through their elected representatives that determine the priorities. There is no veto for individual citizens.

  • avatar

    Red Ink Rick was specifically annointed to lead General Motors into Bankruptcy after stripping the corporation of assets. mission accomplished.

    • 0 avatar
      psarhjinian

      If he was, he sucked at it because he put it off as long as was humanly possible. I suppose that he was awful at everything else** was redeeming in that sense.

      ** or so clever that his apparent ineptitude was actually a masterful disguise

  • avatar
    M 1

    In a country where 48% of the population pays no income tax whatsoever, your pouting intro about everybody having a stake rings hollow. But it plays well to people like my brother, an elite forklift driver who rants and raves each year about his unfair tax burden, and nevermind that his refund is padded by about $8,000 over what he actually paid in.

    • 0 avatar
      wsn

      They do pay property tax, gas tax, capital gain tax, sales tax, and whatever indirect taxes vendors pay that transfer to consumers.

      In addition, some of them paid 50 years of income tax and just got retired; some just paid $100k to the education system and were about to pay income tax.

      • 0 avatar
        Jellodyne

        I love how that stat makes you envision this army of freeloaders and welfare cheats. If you’re adding them up, in addition to the freeloading retirees, students, children, and infants don’t forget about the unemployed — I know several people who have never been out of work for any significant amount of time in their lives who are unemployed now, and not paying income taxes.

      • 0 avatar
        cackalacka

        Don’t forget payroll tax!

        Perhaps your brother would like to meet some banker’s housewives that I’m acquainted with. They certainly love to whinge about marginal tax rates and parasites- in between tennis lessons, that is.

        Love it. Some dude makes an honest living, and his own brother uses him as a foil on the internet.

    • 0 avatar
      John Horner

      ” … 48% of the population pays no income tax whatsoever ”

      Only true if you neglect to consider Social Security and Medicare taxes, which take 15.3% of the first $106,800 wage and salary income from everyone, and only 2.9% of the income above $106,800. Of course in theory half of that tax is paid by the employer, which simply means that that you don’t see those amounts on your pay stub. Believe you me, the employer considers their “half” part of a person’s compensation.

      • 0 avatar
        wsn

        I always thought the 48% figure was referring to people not paying income+payroll tax. Because payroll is really an income tax.

        Talking about propaganda …

      • 0 avatar
        RangerM

        About half of those who pay no income tax, also have a “negative” income tax liability, through the Earned Income Tax Credit. They get a check at the end of the year offsetting the payroll tax in part or fully (depending upon the amount of the EITC).

  • avatar
    carguy

    From the WSJ this should be taken in context. After all, they also suggest that heavy metal poisoning isn’t nearly as bad as the EPA makes it out to be.

    http://online.wsj.com/article/SB10001424052748703421204576329420414284558.html?mod=googlenews_wsj

  • avatar
    John Horner

    So, which is it:

    1) “Out of control trial lawyers and a legal system unsympathetic to the plight of businesses are killing off the companies we need to survive and thrive.”

    2) “The US government stuck it to those unfortunate folks who had won lawsuits against “Old GM” and “Old Chrysler” by not paying 100 cents on the dollar towards their claims”.

    Take your pick. You can only pick one.

    If you pick #2, remember that the vast majority of Chapter 11 restructurings wipe out the claims both of stockholders and of unsecured creditors of a company. There were no other scenarios on the table whereby the civil litigants against old GM or old Chrysler would have collected a dime even if they had judgements. They are simply too far back in line. Sorry.

    P.S. The Wall Street Journal has always been business biased, which is to be expected. However, one should be mindful that they are now owned by Rupert Murdoch of Fox News fame, and their editorial slanted has become even more pronounced.

    • 0 avatar
      wsn

      John Horner: “If you pick #2, remember that the vast majority of Chapter 11 restructurings wipe out the claims both of stockholders and of unsecured creditors of a company.”

      The vast majority of Chapter 11 restructuring doesn’t cost me money.

      • 0 avatar
        John Horner

        “The vast majority of Chapter 11 restructuring doesn’t cost me money.”

        So, you wish that the litigants with civil cases against old GM and old Chrysler could have gotten more of your money ????

  • avatar
    PenguinBoy

    I’m actually pleased at how the bailouts worked out.

    The taxpayers have got at least some of their money back, and my guess is that the total cost to taxpayers of the whole debacle was less than the cost of an uncontrolled liquidation. There’s no sense comparing to some ideal situation, only to the next most reasonable alternative – which would have been to liquidate, and send capability to China for pennies on the dollar.

    While I agree that changing the bankruptcy rules during the game sets a dangerous precedent, I believe it was the lesser of two evils. To put it succinctly, I’m glad mikey gets his pension.

    I don’t see any lasting damage to the capital markets caused by tossing the bondholders under the bus – the bond market seems to be roaring again, and deals are getting done.

    It doesn’t bother me if the bond holders got a haircut. They took a speculative risk, and should live with the consequences of taking that risk. Got to avoid moral hazard don’t cha know…

    I would like to see bankruptcy rules permanently changed so that employees come before other creditors in a liquidation.

    I used to work for a very large, previously successful (non automotive) company that had been around for over 100 years that went through a bankruptcy and liquidation a couple of years back. I was fortunate in that I was working for a different company by the time the bankruptcy hit, but I know many long service employees who didn’t get any pension or severance benefits as a result of the bankruptcy. While younger people can absorb the hit and move on, the current bankruptcy rules can cause genuine hardship for retirees or those on disability who can’t reasonably return to work.

    • 0 avatar
      wsn

      PenguinBoy: “While I agree that changing the bankruptcy rules during the game sets a dangerous precedent, I believe it was the lesser of two evils.”

      The written law is to guide the public to make smart decision. A life for life is not intended to cause a second kill, but to deter against the first one. When the rule is changed midway, here are some questions to be answered:

      In the future, if another company is to face a similar situation, will it:

      1) Receive the same treatment as GM bankruptcy/bailout?
      2) Use the old rules?
      3) Be decided case by case, by the government? But still what’s the legal definition of “too big to fail” and other criteria?

      You see, changing the rule for one company is only the beginning. I fully expect other companies won’t enjoy the same treatment given to GM. Then, people would be at a total loss at what to do. The entire legal system of using precedence will fail.

      • 0 avatar

        Which is why I believe that the way the bankruptcies were structured is so damaging – more to the system of credit and bankruptcy than to any individual stakeholders.

        There seems to be a pattern. These guys make a change. Bankruptcy, 1967 borders, whatever. Then there’s pushback so they deny that there’s been any substantive change. The bankruptcies were not irregular, the president was expressing long standing US foreign policy. The amen chorus chimes in with “Obama’s really governing right of center”.

        What a shuck & jive!

    • 0 avatar
      Steven02

      In the case of GM, no bankruptcy laws were changed. This goes back up to asset backed debt that people don’t seem to understand from Psar’s posts earlier. Don’t give me some BS line about senior debt holders when secured debt holders are first in line. Bondholders were owed NOTHING.

      In the case of Chrysler, it was a bit different. There was a restructuring plan that was put forth that 97% of the secured debt holders agreed with. 3% didn’t and went to court about it and lost. Are we supposed to ignore the rights of the 97%?

      No bankruptcy laws were rewritten. Have a nice day.

      • 0 avatar
        MikeAR

        Yeah, go ahead and believe that. Then wake up and look at 200+ years of bankruptcy law in the US. Tell me if you can find another bankruptcy like GM and the UAW went through. Admit it, your ideology can’t let you see that the whole process was corrupt. Feel free to cite any case that mirrors GM.

  • avatar
    fincar1

    Ronnie Schreiber, you’re right. Nobody knows what this administration is going to do; not bankers, not businessmen; the only actual trend anyone can see is that the cost of employing people, the cost of making things or doing any kind of business is going up. Is it any freaking wonder that no one wants to lend money to businesses or to hire people?

    • 0 avatar
      John Horner

      ” … no one wants to lend money to businesses or to hire people … ”

      US private employers have been adding 150,000 to 200,000 net additional jobs per month for the past few months. Huge initial public offerings are happening once again. GM just issued a successful $500 million bond offering last week, …. and so on.

      Anyone is free to argue that hiring isn’t happening fast enough, but to assert that “no one” is lending or hiring simply doesn’t square with the facts.

      • 0 avatar
        MikeAR

        Are you serious? Do you really believe that bs? The jobs added you brag about isn’t even sufficient to keep pace with the people entering the workforce. Let’s try creating jobs at a monthly rate of 400,000+ to get the unemployment rate back to what it was before the crash. I won’t spend time on U6, the real unemployment rate, it’s north of 17% now with no improvement in sight. You do know that the BLS cooks the non-farm payroll numbers by adding a made up number of jobs they just think may have been created. You do know that the labor force participation rate is below what it has been for years, don’t you? You might know that each month a hundred thousand or so people go off unemployment roles and are no longer counted, I hope you realize thatr.

        And we get to those wonderful IPOs that you brag about, have you made any money off them? Has anyone you know gotten an allocation in any IPO this year? Has the LinkedIn IPO made you richer? And the GM bond offering you cite, how successful was it when it comes at some spread over treasuries. Why not buy GM bonds when they yield more than Treasuries and are implicitly guaranteed by the government.

        You can do better than that or at least you need to do a lot better if you expect to have any creditability whatdsoever.

  • avatar
    Mr Carpenter

    MikeAR said “The exceptional thing about the bailout was the never before done penalizing of one class (bondholders) and the naked political rewarding of another class (the UAW).”

    tced2 said ” look up “senior debt”. “Senior” has a meaning. Over 100 years of settled bankruptcy law was ignored.”

    Someone also said (more or less) “why argue, it can’t be undone.”

    Well, let’s look at the big picture.

    Yes, it is true that settled bankruptcy law was ignored. (I’ll use the words “unprecidented” and “illegal” because they are both relevant here).

    Please illuminate to me that if there is law and precidence (backing law), and someone “in power” simply chooses to over-ride it, why that would NOT be considered illegal? It clearly is not legal.

    What about penalizing one class of people and rewarding another (who are the friends of the powers that be)? If that were done in some banana republic, it would be considered unjust, immoral and typical of half-baked dictatorships, would it not? So exactly why is it just glossed over when it is done in this country? Immoral, illegal and unjust are immoral illegal and unjust in any country, and there are natural laws which take precidence over “man made law” – just ask the East German politicians and border guards and Germans and Poles and others after WWII who were successfully prosecuted for breaking laws against humanity – all the while quite “legally” following laws as written by men in their countries.

    No, it is crystal clear that the bail outs and the GM/Chrysler bankruptcies (whiche were bail outs) were as illegal and immoral as hell.

    And that’s not even bringing into the discussion the fact that ONCE it is finally determined that B.O. was never legally Prez of the US because of his father’s birthplace (i.e. a British protectorate land) and his mother’s too young age to confer citizenship onto him under the law of 1963, that EVERY single “law” and action done by B.O. and “his” administration – are not only null and voided, but would be seen to open the biggest legal can of worms the world has ever seen.

    So you see, it IS possible that this whole thing could explode in the faces of the powers that be.

    And you can just about count on it, because “follow the money.”

    Put another way, when the real powers that be decide that their useful idiot B.O. has outlived his usefullness, it will be “allowed to be put out” that his tenure has been illegal all along – and the powers that be will reap the rewards of litigation for years to come. See how that could happen?

    In the meanwhile, it is absolutely crystal clear to the REST of the world, that what was a nation where corruption was fairly kept in check – is now a land of Diktat, not a land where the rule of law take precidence.

    Which partially explains the reluctance of other nations’ wealthy in buying our enormous and growing national debts, which has resulted in the “fed” simply “buying” the debt… on top of the debt that the government simply allots onto their records by the fact that a non-governmental agency – the “fed” – conjures up “dollars” out of noplace, lends them to the government and takes interest on the “loan”! Obviously, our whole system is nothing more than a ponzi scheme – the rest of the world can see it and they are trying to save their own bacon by getting out of dollars.

    So the GM and Chrysler thing is only but a symptom of a far larger problem, folks.


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