Goldman Sachs Foreshadowed UAW’s Chrysler Coup

conhunter/Flickr/Creative Commons

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.”

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.