Goldman Sachs Foreshadowed UAW's Chrysler Coup

I feel like I have seen this bad gangster movie before.

In the opening scene, a naive investor buys some bonds, explaining to his staff that they are a sound investment secured by hard assets. Even if the company goes under, the investor explains, bond investors stand to get about 80 percent of their money back.

The next day, a government official calls and offers to buy up the bonds at 33 cents on the dollar, while giving controlling interest in the company to the labor unions. The investor refuses. That night, a man shows up at his home.

"We're not saying anything bad is going to happen to you," the tough says, "but the big boss is going to be very disappointed in you if you don't take the deal. By the way, how's your little girl? Is she still going to school down on Federal Street?" The investor caves.

The evolution of the Chrysler LLC bankruptcy seemed almost as bad. The Obama administration brokered a deal that gave labor unions a 55 percent equity stake in Chrysler, putting their interests ahead of the secured interests of bondholders.

The bondholder response to the deal was positively creepy.

Politicians were probably offering them a worse deal than they could expect to get in bankruptcy court. Bondholders that have been participating in the government bailout program for banks--and thus are especially susceptible to political pressure--agreed to accept the deal. But many of the independent investors balked.

"Financial Sacrifices"

The reasoning of the hold-outs was captured in a statement by OppenheimerFunds Inc., which said the government "unfairly asked our fund shareholders to make financial sacrifices greater than those being made by unsecured creditors."

All the government stops were pulled out to present the United Auto Workers with a sweetheart deal.

Stories circulated that the Treasury Department exerted extreme pressure behind the scenes when investors refused to take the deal. Public pressure was exerted as well.

President Barack Obama went to the podium to criticize the recalcitrant investors, and Democratic Representative John Dingell of Michigan pressed the threats even harder: "The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury--firms I label as the 'vultures'--will now be dealt with accordingly in court," Dingell said.

All the government stops were being pulled out to present the United Auto Workers with a sweetheart deal that, incredibly, gives its retiree health-care fund majority ownership of Chrysler.

Yes, those are the same workers who pushed the firm toward bankruptcy in the first place with their extraordinarily generous compensation packages. DaimlerChrysler AG's average cost to employ a UAW worker in 2006, including benefits, was 1.7 times that of Japanese automakers, according to company estimates.

Expensive to Fire

Firing that worker is expensive, too. The 2007 collective-bargaining agreement required the automakers to pay up to $140,000 in severance to a worker whose position was eliminated and who agreed to leave with no additional benefits.

The spectacle should sicken any fair-minded citizen, especially since organized labor contributed about $68 million to Democrats in the last election cycle.

The sad truth is there is enough data on the government rescue efforts to indicate decisively that OppenheimerFund would have received a much better deal if it was politically well- connected. It's an especially good idea to have connections in both parties.

For comparison's sake, consider the treatment of Goldman Sachs Group Inc.

When American International Group Inc. crumbled, threatening Goldman Sachs with huge losses, the government stepped in and made the firm whole. It funneled a whopping $12.9 billion to Goldman Sachs through the AIG bail-out.

Part of the Club

Might the government have been so generous because Henry Paulson, Treasury secretary under President George W. Bush, and Robert Rubin, an Obama adviser, are both former Goldman Sachs men?

Maybe it's just a coincidence, but time after time, it is precisely the politically well-connected players who present so much systemic risk that the government needs to protect them at all costs.

Obama recently conceded to an interviewer that "the only thing less popular than putting money into banks is putting money into the auto industry." With Democrats riding a winning streak, it's clearly a political risk he is willing to take.

If this were a Hollywood production, a virtuous politician played by Tom Hanks or Jimmy Stewart would speak out against the bailouts and sweep the corruption out of Washington.

Sadly, in real life, it seems there is nobody in either party ready to stand up and fill that role.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.

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