Judge Ye Not Chrysler, Lest GM Also Be Judged

Justice Judith Bader Ginsburg issued a writ today, stalling the sale of major assets by Chrysler to Fiat. This writ was issued based on a case brought before The Court by a group of pension and construction funds in Indiana who stand to lose millions of dollars from lost investment in Chrysler secured bonds (or loans).  
Normally such secured credit holders are the first to be paid off in bankruptcy proceedings, but in the case of Chrysler, these bond holders were in fact placed at the end of the line (or not in the line at all). The interesting part about the action brought on behalf of these pensions funds is the two-prong attack:  

1. Why were normal bankruptcy procedures bypassed in this situation by the lower courts, and was it do due to improper pressure brought to bear by the government?
2. The funds used by the federal government to prop up Chrysler prior to bankruptcy and the reason that the federal government has had so much to say about how reorganization would work were taken from the TARP funds.  

For those of you who can't remember all the way back to the last months of the Bush Administration, TARP funds were originally designed to buy toxic assets from banks (hence the name Toxic Asset Relief Program). While actually never used to buy any toxic assets, the funds were generally understood to be used for the bailout of the banking industry. Congress, recognized that TARP funds might not be able to be used for bailing out automobile makers however when that situation appear imminent, and tried to get a separate bailout package passed for that purpose. They were unsuccessful in doing so. 

Ignoring the legislative defeat however, the Administration at the time simply decided to take the money from TARP anyway. Since the fund had no real Congressional oversight in place, they were able to apply it where and how they saw fit. If the Supreme Court now rules that TARP funds were used improperly for one bailout, then obviously they would have been used improperly for both. 

If this turns out to be the case, how will both companies give back money that has already been spent to a government that doesn't want it? An equally interesting part of this is case is not just what happens to these bond holder pension funds and to Chrysler as a result, but what impact this could have on the bankruptcy re-emergence of General Motors, whose bond holders were likewise given short shift when asset reallocation was performed and approved. Not only could this case re-establish the rule of law where these auto bankruptcies are concerned, it could also prove a serious roadblock to the Obama Administration's continued attempts to take oversight control of operation and reorganization of private sector companies. (Can you say medical insurance?)  

We will all be waiting and watching with great interest ...  

Update:

The Court turned down hearing the petition and more's the pity. There seems to be no brakes on this runaway train of government. 

Buy American Automobiles: An Idle Question or Two

There has been a lot of discussion in recent weeks over the automobile industry in the United States (some of it in this blog today). In spite of the fact that almost all of the manufacturers of automobile in the United States have manufacturing relationships with each other for various parts or parts of their product line, we never the less insist upon defining them as either foreign or domestic.  

This definition gets plenty of discussion as well. Is a car foreign or domestic based on where the preponderance of its parts are manufactured, where it is assembled, or where the company in questioned is Incorporated? There are many good arguments for all of these points, but all discussion seems to end when we talk about the country of incorporation comes up. 

We are told that we should buy from the Big Three not because the parts for these vehicles are manufactured in this country (which in many cases they are not), not because they are assembled in this country (which again, in many cases they are not), but because these corporations return and reinvest their profits in the US economy. Forgive me for asking the obvious, but:  

What profits?
 The Big three have routinely proved themselves unable to make a profit, in fact losing money. So what profits are we actually worried about them reinvesting. In many cases quite frankly, the only profit that the Big Three are making is in their overseas sales. Which leads to my next question.

 If we restrict ourselves to the purchase of "American Automobiles", what do we do if the rest of the world decides to do the same kind of restrictive auto purchasing? Where would the Big Three be if their only market was in the United States?  

Maybe I'm being a bit simplistic here, but this problem will not be solved by trade barriers, or worse trade wars, over the manufacturing of automobiles. I recommend a bit of reading on a situation that eerily relates to the current auto crisis, "Well Made In America" by Peter C. Reid. It is the story of the fall, and rise of Harley Davidson in the motorcycle market. It's a real eye opener.

 

TFP Column: The Wheels On The Bus ...

Well another weekend is almost upon us, and I have been once again favored with the acceptance of a column in the Toledo Free Press. This particular effort deals with the circular logic of regulation and bailout in the auto industry; and you should pay attention, as this will end up being your money on both sides of the equation.

Michael Miller this week describes what I believe to be the typical experience with the red light / speeding cameras with an column "I fought the law" (and forgive me for quoting the old song Michael, but it looks like the law won). This is a subject that Maggie Thurber spoke about in a column just a couple of weeks ago. 

Maggie contributes this week with some interesting thoughts on how drillling for oil might be better than the $1,000,000,000,000.00 stimulus package (I'm going to keep writing out all of these zeroes until I finally start to scare the hell out of everybody.)

There is also a fantastic article by Adam Mahler on one of my favorite subjects in the world. His take on the wine the opinions of the wine magazines is well worth your time.

But as usual there is a lot to this weekend's edition of the TFP, in either the print or online edition.

TFP Column - The Big Three Bailout

While the Toledo Free Press Website is back up and functioning, my column from last week no longer appears in the online edition (maybe they are getting wiser about the burden that they are willing to place on their readership). At any rate, I have had numerous requests (OK, a couple from family members) to permit those of you outside of the circulation area of the TFP to see one of my more venomous rants. I hope that it gets you as stirred up as I am about this.  

Following a series of disturbing clues, I was finally able to decipher the secret message in the “DiVinci Code” from the latest puzzle of the current bailout program(s). It came as Congress, currently in lame duck session (a strangely appropriate term considering), and in the midst of its seemingly non-stop effort to throw good money after bad, was trying to decide whether they should funnel additional bailout money into the auto industry. Surprisingly enough, they couldn’t. 

Make no mistake; the auto industry is going through tough times. Consumer cash and the credit to finance major purchases is in short supply and the brief but abrupt rise in gasoline prices has forced consumers to reconsider their purchasing decisions. Not surprisingly as a consequence, sales of cars are down. 

These bleak financial conditions are further exacerbated for automakers GM, Ford, and Chrysler because of their poor decision to manufacture big cars, SUV's, and big pickup trucks; vehicles which fit neither the current consumer’s fuel efficiency requirements, nor their depleted budgets, but do have a higher profit margin for manufacturers. 

Do not fear for our intrepid US auto manufacturers however, as the Federal government had already decided to make $25 billion available to the US auto industry to retool itself in order to meet the CAFÉ standards (Corporate Average Fuel Economy) that these car makers claim is one of their biggest problem. Not content with this piddling amount however, they came to beg for another $25 billion (and probably more later); saying without it that they might not survive, and that 2.6 million jobs may disappear. (Can you say doomsday threat?) 

This additional money is not for additional retooling however, to build manufacturing plants utilizing the latest in labor-saving technology (something mostly forbidden to them in the US by current labor contracts), or even to provide them with capital for the massive change to their business plans that's undoubtedly required for their survival. Amazingly, the bulk of this money appears to be needed to cover the pension and medical funds of union workers, current and retired. After much debate and negotiation however, the vote on their bailout has been delayed this week to provide the automakers time and opportunity to provide something that looks like a business plan. 

Their plight will then be taken up after Thanksgiving in Senate committee review, and relief undoubtedly provided in some form using part of the original $25 billion in special session. They will then get to make their case for even more cash with the new Congress next year. Let’s be clear however, about the fact that this bailout has little to do with the continued operation of these US automakers (as opposed to all of the other automakers in the world currently operating manufacturing plants in the US and employing non-union US workers in those plants). 

This bailout is little more than a quid pro quo by a bunch of politicians attempting to prop up the unsupportable pension and medical plan of unions who have supported them through yet another election cycle. Worse, it’s a poorly hidden attempt to tell taxpayers that they should willingly hand over this cash knowing that it will undoubtedly raise taxes, increasing the odds that they will have to look forward to retiring on little more than the pittance provided by what is an all but bankrupt Social Security System and hope to survive on whatever level of medical care is capable of being doled out by a Medicare / Medicaid Program already strained past the breaking point. 

They should do this so that union auto workers can sleep safer at night, knowing that they will have bullied the elected representatives of those taxpayers into supporting what for them will be a much more comfortable level of retirement and better grade of medical care (you know, like Congress gets), negotiated at almost the point of a gun with their former employers and now ultimately funded at the expense of their fellow citizens. Based on this new found revelation, the secret message of the puzzle is obvious for all but the most gullible to decipher. It reads that "The Big Three really means: U A W”.