Last month I suggested the exact break-up of GM. But when you really think about what happened here, i.e. a government mandated takeover of a private enterprise, one can only conclude that capitalism is dead in America. This situation has never occurred before in our country’s history and it’s a sad day for all free market capitalists. Its chances of succeeding are zero. How can a combination of UAW and government produce anything people want? They can only produce things people are forced to buy, Soviet style.
Just like Chrysler before them, GM will be stolen from its owners by a Tolstoy-Russia type dictatorship. Forget about right or wrong, forget about politics. If any other president had done what Mr. Obama did, you’d have been reading the same thoughts from me. The rule of law, the bedrock of our system, was trashed last week. Instead of company ownership being redistributed based on the provider’s place in the capital structure — as the law requires — the asset redistribution takes place based on a very subjective criterion: empathy.
President Obama’s actions will have a significant impact on the future of auto companies in the US. They impaired auto companies’ ability to borrow from the fixed-income market for at least a generation, and that’s regardless of whether they have secured collateral.
Fixed-income investors, when pricing a security, make certain assumptions of recovery based on the collateral and its place in the capital structure in the event of bankruptcy. The better the collateral and the closer it is to the front of the capital structure, the less money they stand to lose, and thus, the lower the interest rate they expect to receive. In the case of Chrysler, loan holders expected to recover around $0.70-$0.80 on the dollar if the letter of law was followed. After the company was given away to UAW, however, that number dropped to $0.29.
Would you buy an auto company’s bonds in your retirement account if you knew this industry often flirted with death, the rule of law was suspended, and workers could take your money if/when things go wrong?