Wednesday, May 06, 2009

Careful what you wish for, UAW

NYU's Thomas Cooley says, you'll be sorry:
Government interference in the normal conduct of business has had a chilling effect on financial markets and threatens the progress of the recovery.

....Investors, other than the banks who desperately needed TARP funds for survival, are leery of any program that uses them. Anyone who took TARP funds has been subject to government interference in managerial decisions. The restrictions on bonuses and executive pay have been widely discussed in the media. Less well known are restrictions on the banks' ability to hire foreigners, and the constant harassment by Congress over internal management decisions on everything from the use of private aircraft to the locations of conferences. Some of these concerns are well justified, of course, but it wasn't clear ex-ante what all of the rules were and it isn't clear ex-post either.

....The Obama administration has shown repeatedly that it is willing to change the rules and even challenge the sanctity of contracts in the interests of its political agenda. The best, most recent example is the Chrysler restructuring.

The administration decided to tilt the restructuring in favor of the unions. The government proposed giving the United Auto Workers' retiree health fund a 55% equity stake in Chrysler--more than the combined stakes of Chrysler's merger partner, Fiat, or the other secured creditors that are owed roughly $7 billion. When some of the secured creditors, who were offered 30 cents on the dollar, balked, they were attacked by Obama as speculators.

....Citi, JP Morgan Chase, Goldman Sachs and Morgan Stanley, all major recipients of TARP Funds, all deep in the pocket of the Treasury, agreed to the administration's plan. So it looks like bankruptcy law will take a back seat to social policy.

There is at least some poetic justice in this outcome. The unions, whose years of work rules, and pension and health care deals helped sink the company, will have to eat their own cooking from now on. But their future success needs not only labor but capital.

Why would private capital get involved when the rules of the game are so capricious? No one would take that gamble when it is clear that, in dealing with the government, private capital will always take a back seat to politically powerful entities.

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