Whatever the number of a man's friends, there will be times in his life when he has one too few; but if he has only one enemy, he is lucky indeed if he has not one too many. -- Edward George Earle Lytton Bulwer-Lytton, 1st Baron Lytton, What Will He Do With It?, Bk. IX, ch. III
Below you will find an editorial from Investors Business Daily entitled "Stiffing GM's Creditors Will Backfire." You will find it here. Read it and I will comment on the other side.
Stiffing GM's Creditors Will Backfire
By INVESTOR'S BUSINESS DAILY
Wednesday, May 27, 2009
The Law: Sure as the sun rises, the U.S. government's manhandling of GM and Chrysler bondholders will ripple outward, striking not only companies and their creditors but the very basis for U.S. power and prosperity.
Historians pinpoint the beginnings of U.S. power at 1811, with the liquidation of the First Bank of the United States, founded by Alexander Hamilton. Amid the winds of the War of 1812, First Bank ignored political pressure and insisted that even British bondholders, from the nation the U.S. was preparing to fight, be paid in full. The debt was paid because that was the law.
This single act reverberated for years. Word got back to Europe that the word of this fledgling country was good, even with enemies. As a result, European capital to finance the great steamships, railroads and other engines of American growth flowed.
"The return of their funds became an important chapter in American finance because it showed that the government was willing to do business on an impartial basis, and that would influence future British investments for decades to come," wrote Charles R. Geisst in his 1979 "Wall Street: A History."
Scroll to 2009. What's good for General Motors is no longer what's good for America. GM and Chrysler faced restructuring in a last-ditch bid to avoid bankruptcy. But unlike 1811's British lenders, their bondholders have been treated like enemies.
In setting terms of the restructuring as a result of its $30 billion bailout, the U.S. government saw to it that the United Auto Workers got more than their share, shredding the claims of bondholders who normally have first priority.
Chrysler bondholders got 29 cents on the dollar and were pilloried as "vultures" by the very government sworn to uphold the law. And for their $27 billion investment, GM's 1,200 bondholders, many of them small stakeholders, got an equity stake of just 9%.
By contrast, the UAW, whose only claim is the $20 billion the automaker owes in gold-plated employee benefits, got 20%, with the government ending up with the rest.
"They cut into line," said Kenton Boettcher of California-based Main Street Bondholders, 90% of whose members rejected the restructuring offer Wednesday. "I lose completely. I can't even write it off as an investment loss. It was a predetermined, prestructured bankruptcy," he told IBD.
"If 'secured creditor' no longer has meaning, who's going to make an investment by buying a corporate bond?" asked Richard Mourdock, Indiana state treasurer, who's suing Chrysler on behalf of Indiana's state pension holders.
Already fewer investors want to lend money to companies with exposure to unions or government bailouts. A new Garman Research study titled "Priority Lost" determined that corporate bonds already are losing value based on the bondholder slap-around.
"Creditors to major U.S. automakers are discovering that absolute priority may, or may not, apply to their holdings," the study said. If the slighting of bondholders is not an aberration, "this could mark a new period of uncertainty."
"This is much bigger than Chrysler," added Mourdock. "If the words 'secured creditor' have no meaning, investors are going to ask if the words 'good faith and credit' of the U.S. still have meaning.
"Americans depend on bonds purchased by people outside the U.S. right now. If the Chinese investors buying our debt see American bondholders treated this way, is it a long stretch to imagine foreign creditors won't be either?"
Word is spreading. "I think the punishment for mugging bondholders will be a reduced trust of foreigners in the U.S. legal system and an increase of the interest that foreigners will request for investing in U.S. instruments," said Ottavio Lavaggi, an Italian bondholder who sued deadbeat Argentina over its $100 billion sovereign bond default in 2001. "There is no free lunch, and robbing bondholders . . . will have consequences."
If so, this could be a turning point. In "A History of Credit and Power in the Western World," Scott B. MacDonald and Albert L. Gastmann warned of a direct correlation between credit and power. "The combination of new muscle in industrial manufacturing . . . and finance clearly elevated the military and economic power of the United States, pushing it to the apex of the global credit system," they wrote.
Is succoring the UAW worth throwing all that away?
It strikes me that, as Bulwer-Lytton warned, Obama is making one (or more) too many enemies. If you rob a man, he will want justice. If you threaten further robbery, even to the point of penury as Obama's policies logically point, you motivate the victim to take steps to prevent it. If his attacker is a common criminal, you call the police. But if the thief IS the police -- an agent of Gangster Government?
Well, then, you go and find a soldier to get a different government.
This is the position that Obama is putting many people in this country, the wealthy along with the poor.
The American Revolution took place when the wealth creators of the Colonies could no longer tolerate the threat that the Crown's policies posed to their futures. Thus it was, as it always has been, about free trade and property rights as much as free speech and elections. They are two sides of the same coin.
So now Gangster Government is alienating large numbers of the wealthy with its attacks on the rule of law. Obama once threatened them with the sentiment that he was the only one who stood between them and the populist pitchforks. Now it could well be that the wealthy may decide that the only solution is to make alliances with some pitchfork wielders of their own.
Give me a call.