General Motor’s long awaited trip into bankruptcy is official as of this morning. Of course, conservatives have been decrying the plight of the company’s creditors, who are receiving a ten percent stake in the company, while a 17.5 percent stake will go to the United Auto Workers’ health trust. First, the Wall Street Journal’s editorial board:
Every decision the feds have made since December suggests that nonpolitical management will be impossible…Treasury bludgeoned the bond holders in both Chrysler and GM to take pennies on the dollar, which will not make creditors eager to lend to the companies in the future.
“The proposal seems to favor the rights and claims of the UAW, a political ally of the current administration and a powerful lobbying force in Washington, over the rights and claims of the company’s diverse group of bondholders,” according to a letter from 20 House members, led by Rep. Jeb Hensarling (R-Tex.), to Treasury Secretary Timothy F. Geithner. “Contractual rights of investors are being trampled by the government under the rationale of ‘extraordinary circumstances.’ ”
We went through the same song and dance with Chrysler’s bankruptcy filing earlier this month, and the concerns don’t hold any more weight now. As the Washington Post noted today, “there are a number of precedents for retiree health funds getting preferential treatment during bankruptcies, particularly in the steel industry in recent years when Bethlehem Steel and others were sold off”:
“We felt that we needed the strong support of the union going forward,” said Wilbur Ross, who ran the private-equity firm that acquired Bethlehem after its 2001 bankruptcy filing. “It’s one thing to compromise a union contract. It’s another thing to get them working with good morale.”
“The only difference here is that you have the government playing the role of the vulture investor,” Ross added. “They are the only ones willing to make this investment, so they’re calling the shots.”
It’s also likely that the GM bondholders would get no more in liquidation than they are getting under the current deal, which may be why a majority of bondholders (54 percent) have jumped on board. Plus, as Harold Meyerson put it, “shareholders and bondholders knew they were taking risks when they invested in the company, but workers were flatly promised pensions and health benefits in retirement, payments for which were deducted from their paychecks.”
GM workers have already given up a lot in wage and benefit cuts, and they’re going to see their ranks thinned by some 21,000. In light of this, refusing to gut their health trust seems like the right decision.
Felix Salmon has more.