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Government Motors By: Steven M. Cohen
FrontPageMagazine.com | Tuesday, June 16, 2009

The Supreme Court has sealed the fate of Chrysler’s secured bondholders practically without comment, consigning them to the equivalent of 29 cents on the dollar under the administration’s prepackaged bankruptcy plan.  Thus, the Obama administration has succeeded in its effort to circumvent, or, more accurately, nullify, the most basic principles of bankruptcy law.  In rearranging the priority list of creditors as well as ensuring the very best outcome it could manage on behalf of the UAW, the administration continues to demonstrate that the rule of law should never be an obstacle to the pursuit of its agenda.  The result is the creation of an ad hoc approach that enables the White House to run roughshod over unimportant matters like property rights and the sanctity of contracts, minor nuisances in the Brave New World of America’s massive overhaul under the auspices of Team Obama. 


That the Court should give short shrift to the argument that the treatment of the bondholders amounted to expropriation of their private property by the government—which effectively transferred its value to the UAW —should come as no surprise.  This is the same Supreme Court that in 2005 delivered its infamous Kelo ruling that local governments are free to force property owners to sell out for the benefit of private economic development, a breathtaking extension of the principle of eminent domain that many states have disavowed through legislation meant to protect private property.  If the bondholders were counting on the justices to defend their property rights, they never had a shot, despite the brave efforts of the Indiana state treasurer, who sued on behalf of several public employee retirement funds, hardly the “greedy hedge funds” singled out by the president as the miscreants who refused to accept what they government handed them.


The government had already bludgeoned GM bondholders into submission the week before, as it completed a mop-up operation of the last few holdouts.  GM’s unsecured lenders will receive a whopping 5% interest in the new, improved GM, the value of which has been estimated to amount to about five cents on the dollar.  Once again the plan pushes the White House-friendly UAW retiree benefit fund to the front of the line, serving them up with 40% of the restructured company plus a cash payment of $10 billion, estimated to be worth about 76 cents on the dollar.  Hardly a recognition that the UAW was a primary culprit in the demise of GM with its legacy costs and “job bank” that helped make its cars uncompetitive with cheaper, better foreign imports.  Thus it pays, literally, to pledge undying loyalty to the Democratic Party, a lesson not lost on the teachers’ union and the plaintiffs’ bar.


About the only reliable ride taken in an inferior GM/Chrysler product will be a round trip back to bankruptcy court in a couple of years, this time in a liquidation mode rather than a government bailout.  By then many more billions in taxpayer money will have been reduced to ashes in the Obama administration money furnace. 


Yet the Fed, the Treasury, and the White House continue to provide assurances that the government’s investment in and de facto ownership of these two companies is justified by the promise of handsome returns to taxpayers.  This will be accomplished through the success of the fuel-efficient Obamamobiles that the government will surely mandate—in one color only, green, of course.  This assumes, however, that Americans will do their part by abandoning their preference for larger, comfortable cars in favor of small, fuel-efficient vehicles.  Large or small, cars remain an expensive purchase for most people, and the country has already demonstrated that old habits die hard even when it comes to cheap items.  Only about 20% of the light bulbs sold in this country are the energy-efficient (but more expensive) fluorescent type.  The other 80% are the sinfully inefficient incandescent variety that generate 90% heat and 10% light.  If Americans can’t make the switch when it comes to light bulbs, it takes an amazing leap of faith to believe that they will suddenly flock to showrooms featuring Lilliputian green cars. 


Ah, you say, but won’t surging oil prices create a buyer stampede to the showrooms of the lucky GM/Chrysler dealers who made the cut (in a selection process that has never been explained)?  Perhaps so, but in all likelihood only for a short time.   During past oil spikes sales of smaller cars increased  temporarily, but even with volatile gasoline prices, it’s been a long time since Americans traded Cadillacs for Volkswagens, as some did during the ’70s oil shocks.  The government is making an awfully large bet with taxpayer money that past consumer behavior won’t be repeated.


Even if Americans are ready to drive green, it is unlikely they will embrace the kind of cars the administration expects from its automotive wards until the technology justifies it.  The much-vaunted Chevy Volt, a hybrid under development for years that may not appear until 2011—if then—has a maximum range of 40 miles in its battery mode, hardly enough to compel a significant number of Americans to start plugging in.


Meanwhile, the government’s foray into commercial collectivism continues to take on weirder, more ironic characteristics.   In an almost bizarre turn of events, the bankrupt corpse of GM, alive again as a Frankenstein’s monster with a government transfusion of $30 billion, will provide a Beverly Hills-based buyout firm with $2.5 billion of the $3.6 billion it needs to buy GM’s (also bankrupt) auto parts supplier, Delphi Corp.  This is reminiscent of the financing Daimler-Benz provided to private-equity shop Cerberus to take Chrysler off its hands, and we all know how that turned out.


And as a companion piece to its attempted purge of Vikrim Pandit from Citicorp, the White House this time succeeded in anointing a new GM chairman, a function usually exercised by the board of directors.   The Treasury Department’s hand-picked recruit is Ed Whitacre, the former AT&T CEO who retired with a package worth $158 million.  How would the compensation-capping administration deal with that today?


The government has never run a business enterprise with the efficiency and intelligence of the private sector.  With its White House-engineered takeovers of Chrysler and GM, that record will remain intact.


Steven M. Cohen has spent more than 25 years in the hedge fund business.  His articles appear on Frontpagemagazine.com. as well as on his own blog site, buyselljump.com.


Steven M. Cohen has spent more than 25 years in the hedge fund business. His articles appear on Frontpagemagazine.com. as well as on his own blog site, buyselljump.com.

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