How much more money will the Obama adminstration pump into GM before it, too, declares bankruptcy.
Early on in the New Deal, President Franklin Roosevelt repudiated private contract clauses that required payments to be made in gold. Abruptly, debtors were permitted to settle up with newfangled "Federal Reserve Notes" secured only by commercial paper and other assets on the Fed's balance sheet. Furthering parallels with FDR, President Barack Obama recently wrapped up his first 100 days in office by abrogating the contracts between Chrysler and its bondholders. In doing so, he confiscated their senior claims to the company's remaining market value in favor of a new troika of owners: the United Autoworkers' healthcare trust, the Italian car maker Fiat, and the U.S. and Canadian governments, all sweetened by a new $6 billion federal loan.
The administration's plan for restructuring General Motors, whose bankruptcy looms on the horizon, currently calls for the federal government to take a much larger stake, perhaps more than half of its equity, than the 8 percent of Chrysler America's taxpayers now own. Forcing Chrysler's lenders to cede the priority for compensation over shareholders they thought they had — and would have had in an ordinary bankruptcy proceeding — is a dreadful enough policy. If and when it emerges from Chapter 11, the company will be at a serious disadvantage in the credit market. Lenders, having just seen their contractual rights evaporate, will be unwilling to advance money to Chrysler except at a substantial premium.
But there is an even more fundamental reason for expecting Chrysler's emergence from financial insolvency to take much longer than the two months the Obama administration has forecast. After all, the ownership structure of a business enterprise determines its performance.
Three broad categories of ownership arrangements can be found around the globe. Private companies, which are owned wholly by their shareholders, are the most familiar to Americans. At the opposite end of the spectrum are state-owned enterprises (SOEs) that operate fully under the control of the public sector. Venezuela's oil and banking industries, national commercial airlines, the Tennessee Valley Authority, the local public school system, and the office where you register your car or renew your driver's license are a few examples.
The third type of organization comprises so-called mixed enterprises, which are owned partly by private stockholders and partly by the public sector or other "stakeholders," such as customers or employees.
Economists have studied the performances of these three types of enterprises extensively, evaluating them on a variety of outcomes, including profitability and cost-efficiency. The results of those studies consistently show that privately owned companies rank first, SOEs in second place, and "mixed" enterprises dead last.
A logical explanation for that ranking is not hard to come by. Owners have objectives. Stockholders want the private firm in which they have invested to maximize its profits, for that maximizes their wealth. The "owners" of an SOE rarely have the same aim in mind, but they want to advance some public purpose, such as ensuring that everyone has equal access to the enterprise's goods or services. As long as there is only one set of owners, those distinct goals can be pursed single-mindedly.
But the objectives of the owners of mixed enterprises are incompatible. Profit-maximization is inconsistent with universal access or other public purposes, which predictably are subject to political pressure; the organization's performance predictably suffers, causing it to be inferior to that of one that is wholly either privately owned or publicly owned.
The reconfigured Chrysler stands to have three sets of owners: Fiat (35 percent), UAW retirees (55 percent), and the U.S and Canadian governments (10 percent collectively). Reconciling their separate and divergent objectives may well be impossible. Fiat will want profitability, the union will want to protect pensions and healthcare benefits, and governments will want to protect jobs and pursue who knows what other political ends — tellingly, the administration's first priority is to preserve UAW jobs.
The Obama administration's plan to restructure Chrysler sets bad precedent. Its exit strategy, which depends on restoring the company to profitability, is as naïve as the Bush administration's plan for withdrawing from Iraq. Don't bet on a robust Chrysler or GM materializing anytime soon.
Republished with permission from the Independent Institute.
Not only Chrysler but any entity that used to depend on first mortgage bonds will be unable to borrow at any rate…unless the government owned banks will be willing to offer unsecured loans junior to all other claims on the corporation. A simple review of normal business practice then suggests that provately owned companies will cease to exist unless they can operate fully on paid in capital (shareholder equity) with no need for outside borrowing, but of course they face the possibility that their equity could be seized if they need to go outside for financing.
This is worse than socialism it is destruction of the entire economic system. By the way SOEs rarely operate very well, note Venezuela Mexico and others attempting to operate their nationalized oil industries as well as the clear failure of education in the United States.
Welcome to the dawn of change we can trust: The United States as 4th world country. Hail the Obamamessiah!
At a more fundamental level, it is mutual self interest that assures the best possible outcome for all parties in an exchange in the free market – like a Nash equillibrium in a simple two player game. Take away the pursuit of self interest and you will by definition be pursuing a less-than-ideal outcome. State run enterprises (national oil industries, the Postal Service) as well as hybrid enterprises (Fannie Mae and Freddie Mac) both eliminate pursuit of self interest, and are therefore incapable of pursuing optimal outcomes. The more industries the government decides to subject to its exclusive purview, the more companies will fail until the government eventually runs out of its own money to spend, borrow, and print to keep them afloat. It’ll almost be worth watching just to see the utter and epic failure of the grand culmination of liberal utopian theology and union thuggery. Almost.
Patrick, fundamental flaw in your analysis. Government does not have its own money. When the government is unable to extort more from the producers in the population then it runs out of money.
You’re correct of course. When I said “run out of their own money”, I meant when they’ve run out of revenue from extorting the producers (which they already have, to the tune of 2 trillion bucks this year) AND they cannot sell any more debt or print enough new dollars to keep their ponzi scheme operational, even on paper (that’s the situation we may well be rapidly approaching, and one which really will be the largest economic failure since the Great Depression).