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OT: Fair?

Fom an investment newsletter:

"I'm not going to get into what's fair. That's for individual bondholders to decide," explained new GM CEO (and former CFO) Fritz Henderson. Fair? There's nothing fair about doing business with the government or the unions...

Few people, especially in government and big business, seem to remember one of the founding principles of Western civilization and capitalism: private property. If you borrow someone's private property, you have to pay it back. It's not optional. GM has borrowed $27 billion from its bondholders ? and Fritz Henderson was the person who arranged nearly all of these loans while he was CFO. Fritz promised lenders they would be repaid. If GM cannot repay these debts on time with interest, then according to all the laws of this country and 1,000 years of common-law tradition, GM's assets are legally transferred from the company's equity investors to the bondholders through bankruptcy. Them's the rules. But apparently, OBAMA! has other ideas about how things should work...

OBAMA! is demanding a 50% equity stake in the restructured GM. That's not a misprint. The government wants half of the new company. For what? Yes, the government has put $15 billion into the company ? but it did so only after GM should have filed for bankruptcy. In other words, without the government's "help," the bondholders would have gotten 100% of the new company. Now, even though they're still owed $27 billion (almost twice what the government is owed), they're being asked to accept only

10% of the equity in the new GM. Where's the rest of the equity going to be "spread around"? The union expects a 39% stake. And Fritz even plans to give existing shareholders a 1% stake. Everyone, it seems, is going to get a large stake in the new GM ? except for the company's legitimate creditors.

Memo to OBAMA!: Capitalism doesn't work when debts aren't repaid. Capitalism doesn't work when legitimate creditors are put last in line ? behind the union. If you think the way to restart the financial system is to allow the government to steal 50% of GM's assets and give the rest to the union, you're nuts. Nobody can afford to make a loan if they're forced to figure out the odds that OBAMA! will steal their collateral.

Reply to
Robert Baer
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=96

This nitwit doesn't seem to have noticed that the "legitimate creditors" have gone from owning 100% of nothing much to owning a much smaller percentage of something that might - someday - be worth something.

Under even the purest possible form of capitalism, nobody can afford to make a loan to a company that can eventually go bankrupt - a bankrupt is, by definition, someone who can't repay their debts. Whoever wrote this =EFnvestment newsletter is fulminating over the loss of purely theoretical rights, and neglecting the fact that any rescue of GM is better for the bondholders, the employees and the sub- contractors than its outright closure.

It is questionable whether keeping GM going is good for the US economy in the long term, but shutting it down overnight would certainly be bad for the economy in the short term, and the projected take-over does seem to offer the administration the opportunity to dilute the power of the people who used to run the company and let it slide into its current hopeless condition.

-- Bill Sloman, Nijmegen

-- Bill Sloman, Nijmegen

Reply to
bill.sloman

[...]

Yep.

Cheers, James Arthur

Reply to
James Arthur

Where were the unions when the bondholders invested?

If you don't like doing business with unionized companies, don't buy their bonds. Or read the fine print first.

Yep. That's how this nation was built. With convicts from British debtors prisons. Would you like to go back to those days? Do you think anyone will ever buy another GM if the down side to missing a payment is swinging a pickaxe on a chain gang?

How would you like those assets? Worthless common stock, or the deed to a bunch of shuttered factories?

For the $15 billion we (the largest equity owners) just put in.

GM should have declared bankruptcy instead of taking that $15 billion. The creditors should have demanded it, rather than inviting in such a powerfull partner. Often, anyone who loans money to a company in financial trouble can expect a pretty sweet deal.

Capitalism doesn't work when people are unwilling to take financial risks either. Particularly when they expect big returns. That's how this whole CDO, AIG mess got started.

--
Paul Hovnanian  paul@hovnanian.com
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Have gnu, will travel.
Reply to
Paul Hovnanian P.E.

Now the risks have been raised enormously--the government can step in on behalf of its patrons, the unions, circumvent due process in the courts, and capriciously seize, reallocate, and award them assets.

So, as an investor, you now have to consider that your investment might be expropriated, without recourse or warning, for arbitrary pretexts: your own good, for the good of the People, or because it's judged too important or too big to fail.

The net result will be ... less investment.

James Arthur

Reply to
James Arthur

Or investors will consider carefully whether they want to loan money to a unionized outfit. Given the political clout that unions have and the probability that they will always be paid first in a settlement, I'd just take my money elsewhere. 'Elsewhere' will have greater access to funds. Most likely, investors will demand a premium for getting involved with unionized companies in the future.

The free market works after all.

--
Paul Hovnanian  paul@hovnanian.com
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Have gnu, will travel.
Reply to
Paul Hovnanian P.E.

I've already done exactly this.

It would, except the government has preempted my judgement, snatching up that which I would let fall.

What you describe as the free market working here I'd call "unintended consequences": future companies trying to get started--including would-be innovative green car companies--will be hurt by what Obama's doing today.

Cheers, James Arthur

Reply to
James Arthur

Yes, imagine if, instead of pouring billions into GM, the goverment instead said "We will buy XX thousand electric cars, with these standards, at $25,000 each for the federal fleet." THAT would be an engine of innovation!

Charlie

Reply to
Charlie E.

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