"You don't need banks and bondholders to make cars"?

The WSJ’s "USA Inc" series continues today with detail on how the US got secured lenders to abandon their fight to get paid more than 30% of their claims, as against giving more than half the company to unsecured workers. Which prompts this zinger from Larry Ribstein:

As the government takes over more of the economy, these pressures on formerly free markets will intensify.  The problem for government is that it is running out taxpayer money for buying the economy.  The sources of private money will long remember what happened to Chrysler's lenders.

The Journal report quotes one anonymous -- but asinine -- Obama administration official as opining that:

"You don't need banks and bondholders to make cars," said one administration official.

As Larry's observation suggests, that official -- who's probably never run any business more complicated than a lemonade stand -- will soon discover just how wrong s/he was. It's called CAPITALism for a reason, after all.

In fact, we know from experience that over the last 2 decades, firms are more likely to use debt than equity when relying on external financing. If creditors get tired of getting screwed, the Chrysler debacle and the looming repeat at GM may mark a major shift in the ability of American business to finance operations and growth.

Indeed, this particular chicken may come home to roost almost immediately. the Business Law Prof observes:

... when the government got tough it did so by threatening to bring nasty public pressure on the creditors.  Creditors that were already on the government dole with TARP money caved immediately; hedge funds held out a bit longer - took incredible public heat - and eventually caved as well.  The hedge funds, by the way, are the players the government needs to get into it public/private partnership program and its TALF program for either to succeed.  So the government ended up ripping players it needs to play in the future for the success of its programs. 

Like most bullies, the Obamabots seem unable to realize that their conduct may have long-term consequences.

Pondering all this, it occurs to me that the single most patriotic thing one could do right now, if one is in the market for a new car, is to buy a Ford. In today's Journal, Paul Ingrassia writes that:

While General Motors and Chrysler will emerge from the government restructuring wringer with significantly reduced debt, Ford will still likely be obliged to repay its lenders. This could put Ford at a competitive disadvantage -- an unfortunate irony for the one Detroit car company that has gotten the decisions mostly right in the last few years. ...

Ford has about $26 billion in automotive debt -- about the same as GM's $27 billion. Ford's debt is secured by its assets. And secured lenders must be repaid -- unless they happen to be Chrysler lenders and get clipped by a company bankruptcy plan that's backed by President Obama.

So Ford is like a homeowner who planned prudently and can pay his mortgage, while his spendthrift neighbors get their mortgage reduced by some new federal program.

All of which creates a potential win-win. Ford is finally producing some cars that even a gearhead like me might want to buy. The Fusion hybrid gets better gas mileage than the Toyota Camry hybrid. The Focus has gotten a ton of positive reviews. The new Taurus is impressive and the 2010 Taurus SHO should give sports sedan enthusiasts soemthing to seriously consider. In sum, if I were in the market for a car, I'd probably get a Ford. It'd be a good car for me, it'd reward Ford for staying out of Obama's clutches, and it'd spank everybody associated with the CM and Chrysler debacles.

Update: If you liked this post, be sure to check out this one before you leave.

Comments

[Amazed in Michigan]

Two fore: Who in their right mind will buy bonds from a corporation with a unionized workforce while the adults are out of office? Where will said entities get captial?

[anon]

Well done post. Bankers are all of a sudden going to have to add to the end of their risk equation the "what-if-the-government-takes-over-the-company-and-gives-all-the-assets-to-someone-else" scenario. I am still hoping the Administration wakes up QUICKLY. Is this really happening?

[mark buehner]

Actually you don't need outside capital to make cars... if one of your major investors owns the printing press. What's being lost in the wash is how irredeemably the automotive market is about to be warped by have 2 of the major car makers owned and financed by the federal government. Chrysler (and soon GM) have no need to make a profit- their owners are the UAW and the federal government who together are perfectly capable of running an unprofitable corporation indefinitely. Bad news for Ford.

[willis]

With government control over banks and writing the rules for investment companies, such as hedge funds, credit will be forth coming when commanded by the government. However, the market will no longer determine the allocation of capital. This will be done by corruption, graft, and political payoffs. Our economy will rot on the vine, along with our political institutions. Unless this is stopped soon, the great experiment of the US Constitution will be a thing of the past and life here will be back to survival of the rottenest.

[Jim,MtnViewCA,USA]

One troubling comment I saw on another site is that the bondholders started to get death threats only hours after saying they would oppose the gov't. Who knew the names of these people and how to contact them?
For example, did gov't officials pass along info to ACORN goons?

[elHombre]

You don't need generals to fight wars either.

"Defense Secretary Robert Gates said he asked for the resignation of Gen. David McKiernan. Gates said new leadership is needed as the Obama administration launches its strategy in the seven-year-old campaign." AP

Bondholders, generals, etc., under the bus to make Obama look decisive.

I wonder if McKiernan would have liked to have a shot at the Taliban with 21,000 new troops.

[tim maguire]

Unfortunately, I think Mark is right on. It is probably part of the plan that large unionized companies will no longer be able to secure private financing. The Obama team can pull all the double crosses it wants on the TARP program if it intends to leave corporate America dependant on the government for its financing.

[RickenAxer]

I'm not sure that capital will "go Galt." Where else will it go? The US market is still the biggest game in town.

[Steve]

How can the UAW by owning Chrysler and GM negotiate a contract with Ford? Wouldn't the anti-trust provisions kick in?
Oh, wait. I forgot that in Obama Nation, laws are only to be applied to Republicans.

[Hyperpotamus]

Another question: what happens when the UAW, which owns Chrysler, starts labor negotiations at its competitor, Ford? Will Ford not only have to pay taxes to the US government to bailout competitors but also see its workforce pushed into a strike if Ford gets too far ahead of GM and Chrysler in sales?

[K T Cat]

I'm with Mark. This is essentially Juan Peron reincarnated. There isn't enough investment money in the world for them to borrow to fund all of the madness they've begun. Mathematically, they aren't going to be able to escape printing. Once the printing has started*, it's going to be like crack cocaine to the Obama Administration.

* - it already started. $1.2T of Fed purchases of government debt earlier this year.

[Mike K]

The Fed may print money but has anyone looked at the ten year bond chart ? They cannot control those interest rates although they are trying.

[Cowboy]

I'm very concerned about how all this madness will affect Ford.

Even if Ford survives intact, and even strengthened, from the this crisis, it's got a huge problem. Ironically the stronger it emerges from the crisis the worse the problem gets.

Here's the problem: its current union contract is up for renegotiation down the road. Now the UAW has been getting amazing deals from the Chrysler deals, and will also from the immanent GM implosion. What do you think the expectation will be from Ford at that bargaining table in the future?

Ford's going to get its clock cleaned.

Were our storybooks as children wrong? This is world where, between the grasshopper and the ants, grasshoppers win. Everytime.

[mrkwong]

It's unfortunate in so many respects because GM has a lot of very good and interesting product.

Admittedly, their best product - the CTS-V, the G8 GXP, etc. - are the kind that cause the bile to rise in the throats of the Obama team's green Gestapo and their enablers like the execrable Henry Waxman, but frankly if by my purchasing activity I could cause those people to turn blue on the floor choking on their own vomit I think I'd be out spending myself broke.

[Trouble]

>>>Were our storybooks as children wrong? This is world where, between the grasshopper and the ants, grasshoppers win. Everytime. <<<

Unless the ants become fire ants, sting the grasshoppers into submission, and eat them alive....

Picture this: UAW strikes Ford. Ford, knowing that its plants will be idle for awhile anyway, responds with, "Anyone who doesn't report to work within 48 hours is fired" and shifts what production it can to Mexico. Ford then hires new non-union workers, trains them, and is rolling again within 4 months.

It's an interesting thought experiment.

[ComradeJoeInAlbania]

Comrades,

Did USSR need capital to build Lada's?

Did Yugoslavia need capital to build Yugo's?

NYET!

Comrade Obama will have a glorious 5-year plan to build Chryslers without dirtying his hands at the feeding trough of the bourgeois bonds and capital!

[vladimirilyich]

Comrade Joe,

Perfect!

Vlad

[Steve ("Professor") Bainbridge]

Comrade Joe: Well done. I your honor, I've posted this:

http://tinyurl.com/q7gczh

[Brilliant 34-Year-Old]

Unfortunately buying Ford would help the UAW. Maybe we can start importing Fords that are made in other countries.

Of course since Obama clearly wants to control the banks, he probably just plans on having the banks make loans to these companies whether they get a return or not. That is also the Dems strategy on housing issues.

Don't forget that great photo of the Dear Leader instructing his students about the Alinsky world view (discussed in the TNR article at the link). Obama has always been a huge lefty and the press covered for him. He praises Frantz Fanon in one of his memoirs for crying out loud.

The guy got everyone of his credentials because he was able to read and parrot the great socialist canon. Unfortunately, both he and a significant part of the nutroots think this is the same thing as being smart. It isn't.

http://www.pickensdemocrats.org/info/TheAgitator_070319.htm

[Frankly]

Capital is already sitting on the sidelines. I know mine is, insofar as practicable.

Capital is also going Galt; I won't support the UAW anymore. They helped elect Obama, and now they want a taxpayer payoff. My next ride will be a good ol' USA Toyota or Nissan. I have always bought American, but no more UAW.

Now the newspapers are begging for a bailout. Same scenario; they elected Obama, now they want a taxpayer payoff. I've already cancelled my subscription; maybe I'll boycott selected advertisers.

[Melvin Winter]

We're rapidly approaching the time this Onion-style parody rings more of truth than satire:

http://optoons.blogspot.com/2009/05/obama-gives-uaw-55-control-over.html

[Murgatroyd]

"Picture this: UAW strikes Ford. Ford, knowing that its plants will be idle for awhile anyway, responds with, 'Anyone who doesn't report to work within 48 hours is fired' and shifts what production it can to Mexico. Ford then hires new non-union workers, trains them, and is rolling again within 4 months."

Then a Mexican Ford veers off the road, rams into a tree, and bursts into flames, according to ACORN and SEIU witnesses. For days, the national media feature this heartbreaking story of a family with four kids that burned to death in the wreckage, all because of the Unsafe Car. In response to the Urgent Problem, the federal government bans the importation of cars from Mexico ... to save The Children, of course. The media praise the government for its benevolence.

[Hucklebuck]

Good post, but you're missing the underlying assumption: GM and Chrysler are going to be permanent government run projects. They won't need private capital, or need to make quality product or a profit. They will, however, boast the most highly paid unskilled work force in history.

[aynrandgirl]

Anybody else think that the UAW will try to crush Ford in order to take it over, like they did with Chrysler?