Washington's Short-Sighted Action May Haunt Unions
As General Motors teeters towards bankruptcy, with a looming deadline of midnight tonight for bondholders to agree to a stock swap, Reuters reports that the talks don't look promising. The Wall Street Journal got the scoop regarding how the unions will shake out in all of this: very similarly to how they did with Chrysler. This seemingly good news for unions might actually turn out to harm them.
According to the WSJ, unions will end up owning 17.5% of the company's common stock, along with $6.5 billion in preferred stock (which includes a whopping 9% annual dividend).
The agreement largely mirrors concessions the union granted to Chrysler LLC last month, including a suspension of cost-of-living allowances, bonuses and some holidays, people familiar with the agreement said. It also includes a provision for job buyouts, as well as to forbid strikes until 2015, these people said. Wages are expected to remain unchanged.
And, of course, one should expect the GM bankruptcy proceedings to go exactly like the Chrysler proceedings: very well for the unions and very badly for bondholders. Hedge fund manager George Schultze was on CNBC earlier arguing that bond investors are going to be very wary about funding unionized firms, given GM will likely shake out just like Chrysler did. That led me to this gem from Bloomberg last week. In it, Schultze is quoted about lessons learned by bondholders though the automaker bankruptcies:
The obvious one is: Don't lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.
This strikes me as an extremely important conclusion, which is difficult to deny. Bond investors literally can't afford to lend to unionized companies because it's clear that current power in Washington will take the unions' side, despite past bankruptcy law precedents that favor senior creditors. That means Washington's actions in pushing for these bankruptcy verdicts to come out in favor of the unions will probably hurt unionized companies in the long run. As a result, it might be wise for Washington to reconsider the precedents it's setting for unionized companies undergoing bankruptcy.
business.theatlantic.com
Comments (4)
market karma May 26, 2009 5:39 PM
I suspect that across middle america there are numerous manufacturers that directly or indirectly supply the auto industry, employ a large number of union members and are under varying degrees of financial distress.
I also suspect that as a result of the way the administration has handled Chrystler and GM -- the prospects for those manufacturers finding financing at the time they may need it most just got significantly more difficult.
Reply
Capital May 27, 2009 8:52 AM
First off, the UAW President, Ron Gettelfinger confirmed in a press conference that the union's Voluntary Employee Beneficiary Association will sell part or all of its holdings once the companies stock appreciates. VEBA is designed not to control a company but provide retiree healthcare, and with the organization lacking liquidity it will be forced to sell these shares (ie "The VEBA's going to be stressed in order to pay the benefits. So what we will need to do ... is as soon as we possibly can, to start selling these shares,")
Secondly, despite being one of the controlling holders, these are nonvoting shares. In addition, VEBA/UAW is only given one seat on the board at Chrystler.
The problem is that too often the financial sector loves to privatize the profits and socialize the losses. Honestly, the bigger question is what are the unions giving up in this deal and how will it effect their long-term survival? As we talk of SSI doom and gloom, microcosmically how will the UAW honor its pensions years down the road?
Reply
AG (Replying to: Capital) May 27, 2009 1:14 PM
You're missing the point. The problem is that the interests of bondholders are being bypassed in favor of the interests of unions. First, you don't seem to distinguish or even understand the difference between equity holders and bondholders. The latter has less inherent risk, because if a company goes belly-up, bondholders will be at least partially compensated through the sale of the now-defunct company's assets.
So, if you are a potential investor, who is interested in buying corporate bonds, and you have the option of investing in Company A, which is unionized, and Company B, which is not, you'll likely choose Company B. This is because you know that in the worst case scenario, if Company B becomes insolvent, you will be guaranteed some sort of compensation. If Company A becomes insolvent, however, you may run the risk of the unions trying to demand a piece of the pie (of which you rightfully own a part), based on the precedent of what's happening now with GM and Chrysler. You may receive no compensation whatsoever.
This situation makes it much more difficult for Company A to raise capital, and they will most likely have to offer a higher coupon payment in order to attract investors, which makes them less competitive.
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