One rap against President Obama is that he never gets mad. The Chrysler bankruptcy may have proven otherwise.
When Obama singled out “investment firms and hedge funds” that wouldn’t agree to restructure Chrysler’s debt on the government’s terms, his scorn was palpable. “I don’t stand with them,” he said pointedly. “I don't stand with those who held out when everybody else is making sacrifices.”
The president was referring to a group of financial firms that hold a big chunk of Chrysler’s $6.9 billion in debt. Some of Chrysler’s creditors agreed to take 33 cents on the dollar and let Chrsyler off the hook. But other creditors said no to that deal, gambling that they’d get more from a bankruptcy judge. They may be right: Fitch Ratings estimates that bondholders could get 50 to 70 percent of their money back if Chrysler liquidates, and a bit less if Chrysler emerges as a going concern. In either case, that’s a better outcome for creditors than the 33 percent return they would have gotten under the government’s offer.
On $1 billion in debt, the difference between a 33 percent and a 50 percent redemption is $170 million. On the whole $6.9 billion in debt, the difference would be almost $2 billion. Sure, some of that accrues to rich investors who can probably afford the haircut, but much of the money is invested on behalf of pension funds, mutual funds, and the retirement accounts of ordinary Americans. Should they really accept a deeper loss because the government asked them to?
Obama implied that it’s in the nation’s interest for private firms to make sacrifices to facilitate a government bailout of a failed company. There’s some precedent for this. Last fall, the Bush administration and its insistent Treasury Secretary, Henry Paulson, “persuaded” a bunch of big banks to take billions in bailout money. Some of them, like Citigroup and Bank of America, clearly needed it. Others, like Goldman Sachs, could have gotten by without the money. The idea was to include everybody in the bailout, so there would be no stigma associated with a bank taking government money – and hopefully no panic by the bank’s customers.
[See why the auto bailout is a good model for other struggling firms.]
Several months later, many of those banks wish they had said no. Goldman wants to pay back $10 billion in bailout money as soon as it’s “allowed” to. The chairman of Wells Fargo has called the government’s intervention in his firm “asinine” and complained that it has actually hurt the bank’s performance. While universal bailouts may have destigmatized the neediest recipients, they’ve also linked the fate of healthy banks to that of sick ones.
[See why some bank profits don’t add up.]
Taxpayers, meanwhile, are left puzzling over why the government is spending their money to bail out banks that seem downright ungrateful. And instead of allowing bad banks to fail and good ones to survive, which would make the whole industry healthier, the government seems to be administering narcotic to the whole industry, whether needed or not.
Bankruptcy court exists for a good reason: To deal with companies like Chrysler that need prudent relief from their debts, or are so broken that they need to be liquidated. Artificially propping up Chrysler would only prolong problems that are plaguing the whole industry. It could even harm competitors like Ford, which is struggling too but so far restructuring itself without government aid. Other companies, like Circuit City and Linen ‘n Things, have declared bankruptcy without the luxury of a presidential intervention. The only thing that seems to make Chrysler different is that it’s bigger and has better lobbyists.
So if Chrysler’s creditors are making it harder for the uncompetitive automaker to survive on bailouts and giveaways, that may very well be a good thing. It might even mark the return of capitalism to an economy becoming too dependent on government assistance. It must take guts to say no to the president. But it’s a step toward reasserting the role of business in the economy – and diminishing the role of politics.