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.