Wednesday, May 06, 2009

note to self: unions, government, always have first lien

blogger Dave Cribbin of TailWind Capital notes:
In the Chrysler deal, the [United Auto Workers] were unsecured creditors and the Chrysler bondholders were secured creditors. The bondholders received 28% of the value of their $6.9 billion in bonds in cash; the Union will receive stock worth approximately $4.2 billion, and a note for an additional $4.58 billion, which represents 82% of the value of their claim. Either the government negotiators have dyslexia and have made a terrible mistake in their paperwork, or this is political payoff writ large. Is this not the equivalent of financial waterboarding?

Hedge fund manager Cliff Assness notes:
The President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along

Law is an interesting subject. The letter, intent, and popularity of the law, all interact in a game with a great deal of strategy. Having been involved in costly litigation, I know the game is anything but straightforward, because if you try to be reasonable in a game with someone who has bad faith, you will lose even more (most litigation involves loss for both parties, it's just damage control once you start). Further, the end-game is hardly limited to what some jury decides, because of the precedent, judge's decisions, the signaling, the costs, and the fact that most disputes do not go to trial.

While this gaming is all unavoidable in a world with people, it is disturbing when something as solid as liability law and throws it out the window (debts used to have an explicit priority).


defixated said...

What I like best (and truly, it's hard to choose) about your blogging is your continual insistence that casting those who disagree with you as stupid or lying is not a mature way to interact with the world. Very smart people often bifurcate political actors into these categories or are simply confounded. The Masonomicists attract bandwagoneers for their work on signaling even though it's less perceptive or sophisticated than, say, Goffman 1959 because that worldview is almost perfectly designed to appeal to people who perceive themselves as both smart and honest. The signaling model with self-deception "explains" all those successful 130-IQ people as smart, dishonest, not necessarily self-aware and more socially, politically and sexually powerful because of it.

Your take here, however, seems to recommend assuming bad faith when the chips are down. It may be that litigation both indicates and requires this assumption. Indeed, some philosophies of jurisprudence are predicated on the assumption of aggressive bad faith by both parties.

In any case, if everyone took the view that the legal process consisted of loss-minimization we might have a society with more sense and fewer lawsuits. (But I'm assuming that everyone doesn't already ascribe to my, ahem, sensible view.)

Patrick R. Sullivan said...

Thomas Cooley also had a good piece on this:

Government interference in the normal conduct of business has had a chilling effect on financial markets and threatens the progress of the recovery. The Treasury and the Fed have created many new programs to provide liquidity to the financial system, to help banks restructure their balance sheets and to re-invigorate securitization markets.

So far, the interest in these has been distinctly muted because potential participants fear the longer term consequences of getting involved with any of these programs.

But What do I Know? said...

Is this analogous to the "Crime of 1934" where the Supreme Court rejected a contract that explicitly demanded repayment in gold rather than paper dollars?

Just another step on the Road to Serfdom--now it is the holders of capital that will be brought under the thumb of government. After all, if contracts and the rules of bankruptcy are not enforced, who has any property rights? And then where does wealth reside?

I know that's a little dramatic, but straight is the path and easy the way that leads downward to perdition. . .