Chrysler Bankruptcy: What Are The Workers Owed?

The news of the day is that Chrysler’s creditors have rejected the government’s pittance offering for what they’re owed in the prepackaged bankruptcy, and Obama is pissed. After all, he’s put together what he thinks to be a fair and equitable solution, and those unpatriotic assholes unfeeling greedy bastards creditors dared to defy him.

I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them. I stand with Chrysler’s employees and their families and communities. I stand with Chrysler’s management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don’t stand with those who held out when everybody else is making sacrifices.

So what’s happening as a result? Misinformation and misdirection, much like the worries about what would happen to GM (and their suppliers) in a bankruptcy. I assume you remember that, of course: the bankruptcy of GM would result in the loss of millions of jobs as the ripple effect of a vanishing company would take down suppliers, dealers, and the rest of the nation. After all, a bankruptcy would liquidate GM and they’d go completely out of business, right?? Or maybe not. It’s an argument that Warren Meyer at the excellent Coyote Blog has blasted to smithereens on numerous occasions.

But yet the argument resurfaces, today coming from Ezra Klein (with help) on the fate of the workers’ pensions in this bankruptcy:

In it, he described a hypothetical restructuring, and argued that you needed to think of both the workers and the bondholders as having made the equivalent of “loans” to the company. The difference was that the bondholder had settled on clear terms. They could end the relationship at any time by selling the bond on the open market. Labor’s “loan,” however, could not be cashed out. If the company failed to honor future obligations to workers, the money was, for labor, simply lost. Bloom explained:

They worked a lifetime and deferred a significant amount of current compensation in exchange for the company’s promise that, upon their retirement, they would be paid a fixed stream of cash and provided with help with their medical bills. Then, without their knowledge or consent, the company chose to not set aside enough money to honor that promise. In effect, the company borrowed money from them without even discussing the terms of the loan….So what we have is a bunch of old men and widows being forced to lend the company, for whom they worked a lifetime, some portion of the value of their pension and their health care. This loan was made on terms on which they have no input and they have no ability to liquidate their position.

Labor, in other words, has no ability to liquidate. The hedge funds do. And in the case of Chrysler, the workers have seen their position brutally and quickly reduced, with very little input from them. The hedge fund, conversely, refused to liquidate their own position, and demanded ever more favorable terms from the government. And Obama, it seems, quickly grew to judge their position repellent.

Those people who have lived in a defined-benefit world have a contractual promise of certain benefits if they complete a certain term of service. For those who have completed that term of service and are already owed a pension, they may get screwed in a bankruptcy. Those who have partially completed their service, in that static union world, are still expecting to receive something back for their service. Part of the compensation, known going in, is that at the end of your work career you will have a pension to live out through old age.

So the argument is pretty simple. In a bankruptcy, all those pensioners get screwed because their company didn’t adequately fund the pension to meet their obligations. Thus, giving money to bondholders instead of pensioners is unfair. The argument is simple, but it’s also bullshit.

The defined benefit world is already on the way out. Many unionized corporations have already been obliterated by the defined benefit model, because large corporate managers, much like politicians, are often willing to promise to pay something tomorrow if it means they don’t have to make a tough decision today. Thus, the pensions grow bloated, the corporation becomes uncompetitive, and eventually goes bankrupt.

With this model on the way out, though, there is already a secondary method for dealing with this issue. It’s the same method that many states use to weather unemployment — insurance. Specifically, the Pension Benefit Guaranty Corporation, a government enterprise that charges insurance premiums to pension programs in order to protect the pensioners in case of a bankruptcy or other pension program cancellation.

So if the government’s proposed prepackaged bankruptcy fails, what happens to the pensions in the case of a standard bankruptcy proceeding?

At this point, nothing. The government agency that oversees pensions, the Pension Benefit Guaranty Corp., said it’s closely watching Chrysler’s pensions. Through a bankruptcy, a company could try to dump its pension obligation on the government. If that happens, pensions would not be wiped out, but capped, with younger retirees most likely to face larger reductions. The PBGC said it will work with Chrysler and other stakeholders to “ensure continuation of the pension plans.”

They may, like the bondholders, take a haircut on their pensions. But they won’t simply evaporate.

The bondholders aren’t waiting for another government bailout; they’re waiting for a standard bankruptcy proceeding. They (who I understand are mostly secured creditors) know that they have a position of strength here as bondholders. They buy bonds with less potential return than equities, but because they’re buying debt secured by the assets of the company, they will receive a preferred position in any standard bankruptcy proceeding. They’re sure to lose money, but they went into bond ownership with the understanding that the risk as a secured creditor is less than the risk as an equity holder.

Bankruptcy is a well-known and well-understood process. Obama is trying to change the game for political reasons, in order to protect an interest group [unions] which has been supportive of him in the past. We shouldn’t let the red herring of pensioners get in the way of understanding what is going on here.

  • Bull

    quoting …”They worked a lifetime and deferred a significant amount of current compensation in exchange for the company’s promise that, upon their retirement, they would be paid a fixed stream of cash and provided with help with their medical bills. Then, without their knowledge or consent, the company chose to not set aside enough money to honor that promise. In effect, the company borrowed money from them without even discussing the terms of the loan….So what we have is a bunch of old men and widows being forced to lend the company, for whom they worked a lifetime, some portion of the value of their pension and their health care. This loan was made on terms on which they have no input and they have no ability to liquidate their position.”

    The support by the administration for honoring at least a portin of the unfunded retiree healthcare promises is quite understandable. But when you step back …… many many many companies have folded with retire healthcare simple canceled (yes, its legal). The only difference here is that the UAW group is large, loud, and it’ss a hot potato for the administration. But the UAW retirees are no more deserving of this than others before them that did not get it. All that being said, if the source of the funds to pay for it comes from moneys otherwise payable to the bondholders, I’m not inclined to protest loudly (although the logic is still lacking). If however, the US Taaxpayers will now be subsidizing pre-Medicare-age retiree healthcare for this select group(but not others .. e.g., the groups to which I & amny others belong), I PROTEST ! No one is providing ME with subsidized pre-age-65 retiree health care, and MY taxes must NOT be used to subsidize OTHERS (e.g., UAW retirees) in the same situation.

  • Amy

    It’s a horribly complicated situation, and yet, a deal’s a deal. When Chrysler told my dad they wanted him to retire early and they would pay him x number of dollars for the rest of his life per month, plus medical expenses, should no one be required to uphold that promise? I’d rather pay an extra 40 cents per paycheck than watch entire communities fall apart.
    Even cutting the pensions by 25% will put the millions of retires below what they need in order to make ends meet. I must protest if anyone thinks the retires aren’t planning ahead for this, either, but with so few jobs available, and being over 55, who’s going to hire these people? I don’t know the exact statistics, but what’s going to happen in Michigan with welfare expenses if even half of the retires from Chrysler can’t pay their bills?

  • VRB

    Bull,
    Be careful in your arrogance. You wouldn’t want to be seen panhandling in your old age or need someone to wipe your ass when you loose it.

  • http://cynicalsynapse.wordpress.com Cynical Synapse

    The situation of the “Big 3″ has been dehumanized by focusing on legacy costs, product mix, and inflexibility of the UAW.

    Legacy costs is simply a euphemism for retirees, a cost which the so-called transplants don’t have. The US automakers have been in business for a century or more, but the transplants are all less than 10 years old. And in their homelands, the government helps with pensions and health care. The so-called legacy costs does not provide an equitable comparison.

    As for what the workers are owed, the simple answer is what they were promised. They’re entitled to the good faith benefits—pension and health care—they were promised. They contributed to a defined benefit pension plan

  • Bull

    To the several commenters that demand that the promise of pre-age-65 retiree healthcare tp the UAW workers be kept, would you plase answer this EXACT question….

    If the company does not have the funds to do so, so that the gov’t is the ultimate payor (meaning TAXPAYERS), why is the UAW group entitled to this while the many “others” in the same situation are not equally given this, and yet the “others” (being Taxpayers) will pay for the UAW’s benefits?

    I believe EVERYONE should treated equally …. universal healthcare …. not subsidized pre-age-65 healthcare ONLY for UAW members at taxpayers’ expense.

  • Roger

    Doesn’t anyone see the irony of a foreign car company (Fiat)becoming a major owner of Chrysler without investing any money into the company? They Fiat want to take advantage of Chryslers dealerships. Chrysler is attempting to keep its market share in the US and a foreign company is bringing their cars into the dealerships to compete with Chryslers line up of cars. If Fiat was to bring money to the table like every other investor is required to do maybe the pensions would not be in jeoprady. Hopefully they do not go to the PGB, because they will lose their medical abd 50% of their pensions. Ask the workers from the steel industry how their pensions were affected by the PGB benefits.

  • Jeff in Miami Beach

    There are two realities to the above column. First according to the bankruptcy courts the Bond holders get first dibs on the cash and assets as well they should. They risked their money for a chance to make the company grow.

    The Unions on the other hand did not mandate a set aside for benefits that they knew would have to be paid. The Union knowing the company was having problems didn’t come to the table with their own bailout in the way of a loan to the company to keep it afloat. The unions also were there only for their piece of the pie and never really helped the workers.

    Unions have yet to evolve into a resource for their workers. In Sweden unions work for several companies, large and small businesses, if a company is about to lay off workers or fire one the union is there to help them survive until they get them a new job and will even train them for better jobs. Now there is a reason for unions not to milk a company until dead and even when dead, try to drink the blood that belongs to the bond holders.