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  Date / Time: 6/5/2009 11:00 PM UTC

  Something Is Rotten In The Auto Bankruptcy Deals
  

  Here's how the Dow News Wire described the carnage: "GM said it would close 17 factories and parts centers and lop off 20,000 more jobs by the end of 2011 in Michigan, Indiana, Ohio, Tennessee and other states [many of those jobs will be bought off with six-figure payouts, courtesy of the taxpayers]. The new price tag will be $30 billion, on top of $20 billion in U.S. funds already put into the company. In exchange, the U.S. will own 60% of the new GM. In all, the rescue of the car industry could cost taxpayers close to $100 billion.   "GM's court-supervised restructuring began just hours after a New York bankruptcy judge approved the sale of most of Chrysler's assets to Italy's Fiat SpA. Chrysler sought Chapter 11 protection about a month ago. President Obama defended his decision to take a majority stake in GM, saying it was unavoidable and temporary." But, if the companies don't become profitable, it won't be temporary. If it takes too long to become profitable and the US keeps pouring billions into the companies, which is almost a certainty, the companies will never be able to afford to buy out the taxpayer interest.   It is amazing, how in a single crisis, a relatively free market system of laws can be overturned into socialism without any debate in Congress. Now THAT's the power of using a crisis to generate change.   "The government-orchestrated shrinkage will cost taxpayers billions. Some Republican lawmakers called the move another sign of the administration's deepening incursion into the private sector. And the risk remains high that the administration or Congress could meddle in the company's day-to-day affairs, an experience familiar to banks that took government bailout cash last fall... GM -- which hasn't made a profit since 2004 -- declared in its filing that it had $172 billion in debt and $82 billion in assets." It's incredible that creditors would keep loaning GM money until its debts doubled its assets!   "The government's plan calls for 10% of the new GM to be owned by existing bondholders, while a United Auto Workers union health-care fund will own 17.5%. The Canadian government will own the remaining 12.5% [leaving 60% for US government ownership]. Next Monday, after 84 years, GM will cease being part of the Dow Jones Industrial Average [to be replaced by Cisco Systems]."   Interestingly, Ford which has long flirted with bankruptcy is "preparing an effort to gain market share while its two main rivals are bogged down in bankruptcy and restructuring," according to Matthew Dolan. But it's very risky. There is no way Ford is going to be able to stay in the market with its own high legacy costs, competing against the foreign companies and the new GM and Chrysler who have dumped most of their legacy costs.   Bankruptcies are inherently unfair since everyone involved is going to lose something. However, in prior years, at least the bankruptcy judge was supposed to follow fairly strict predetermined guidelines about who gets priority and who doesn't. Now, even those guidelines, based in actual law, are being discarded so that the judge can arbitrarily pick winners and losers. Heretofore, the courts have always condemned any judicial action that was not governed by written standards, applicable to all. Now all that is gone. The Obama task force and the bankrupt auto companies have also maneuvered to disallow all existing product liability claims from victims of defective cars.   Reuters reports that, "A U.S. bankruptcy judge on Sunday approved the sale of substantially all of U.S. automaker Chrysler's assets to a group led by Italy's Fiat SpA hours before an expected bankruptcy filing by General Motors Corp. Judge Arthur Gonzalez approved the $2 billion sale of the assets to a new company that will be 68 percent controlled by a healthcare trust aligned with the United Auto Workers union [Fiat was granted the exclusive right to bid on Chrysler and now we know why--Fiat, whose Chairman is on the Trilateral Commission, was the only bidder willing to make a secret deal with the Obama administration that would give the unions a controlling hand in the new corporate entity that Fiat would provide cover for]. Fiat will control 20 percent, the U.S. and Canadian governments will control the other 12 percent [leaving this new healthcare trust the bulk of the controlling stock]."   US bankruptcy courts have long had a reputation of corruption. In California, several bankruptcy judges went to prison after it was discovered in the late 80s that they were getting kickbacks on companies they forced into Chapter 7 bankruptcy which were capable of restructuring under Chapter 11. They would then allow crooked lawyers to dispose of the assets at a discount to colluding buyers--and split up the gains. Judge Gonzalez, who has destroyed what was left of the rule of law in these bankruptcy cases, is, I believe, government stooge inside the bankruptcy court system. It is no accident that he also oversaw the two other largest bankruptcies (Enron and WorldCom) that favored insiders and shafted innocent investors.   So it is no surprise, as Reuters noted, that "Gonzales, in his nearly 14 years on the bench, rejected nearly every argument objectors to the deal offered up in a three-day hearing last week. He also questioned some of the objectors' legal rights to make such arguments. Objectors to the deal had included a group of Indiana pension funds holding secured debt, some of the 789 dealerships Chrysler plans to reject, and consumer groups. They had argued that Chrysler was moving too quickly, that the sale violated bankruptcy principals and that the company was needlessly closing hundreds of its dealerships.   The issue of closing dealerships is a sore point across the nation. GM will be closing over 2,000 dealerships. While Chrysler and GM claim that there are too many dealers competing with one another, economic principles would say "if that were true, then the market would quickly sort out the unprofitable from the profitable." In point of fact, the dealers being cut are mostly profitable. It appears that GM and Chrysler are making these decisions on criteria other than profitability--not to mention the egregious breach of contract involved. The dealers are not party to the bankruptcy and so bankruptcy law cannot breach these contracts--but they are attempting to do so anyway and certain controlled judges refusing to stop it. Worse, it is beginning to emerge that many dealerships being cut were either contributors to the Republican party or those that failed to make political contributions at all--just trying to do an honest business. Some that were cut were the only dealer in a small town, making a lie of the claim that there were too many dealers competing against one another. Even if that were true, what business is that of the manufacturer? The more dealers the better in terms of total sales of cars. It looks like the government, GM and Chrysler are all lying about this one.   It might be of interest to my readers how bankruptcies are supposed to work. Retirement Investing Institute put out this summary of the law: "When a company files for bankruptcy protection, a federal court oversees its 'reorganization.' Claims of people and entities that are owed money come first. Stockholders come last if at all. Preferred Stock owners, if any, come before those who own the common shares. The order of priority for claims is approximately as follows: 1) Taxes owed, 2) Wages owed, 3) Trade Creditors (suppliers etc., if the company is to continue operating), 4) Bank lenders, 5) Commercial Paper and Bond holders (order depends on the relative strength of covenants in each document) and 6) Preferred stock   "In a very high percentage of cases (well upper 90s!) the common stock of the old stockholders is wiped out. It is valuable only as a souvenir or as wallpaper. If the company emerges from the bankruptcy process as a continuing going concern, it will issue new common stock. Who gets that? People and entities on the list starting below the   'wages' line. In many bankruptcies, the reason for the corporate failure is the use of too much leverage (is that word familiar from the current financial news?). In order to keep operating, the company must stop paying so much interest on debt and dividends on its preferred stock (if any). So the court converts old debt and preferred stock to new common shares. Common holders get nothing in virtually all cases."   Greg Palast feels there are some other secret payoffs at work in this bankruptcy selection of winners and losers. "While GM workers are losing [some of] their retirement health benefits, their jobs, their life savings; while shareholders are getting zilch and many creditors getting hosed, a few privileged GM lenders - led by JP Morgan and Citibank - expect to get back 100% of their loans to GM, a stunning $6 billion. The way these banks are getting their $6 billion bonanza is stone cold illegal.   "I smell a rat. Stevie the Rat, to be precise. Steven Rattner, Barack Obama's 'Car Czar' - the man who essentially ordered GM into bankruptcy... When a company goes bankrupt, everyone takes a hit: fair or not, workers lose some contract wages, stockholders get wiped out and creditors get fragments of what's left. That's the law. What workers don't lose are their pensions (including old-age health funds) already taken from their wages and held in their name. But not this time. Stevie the Rat has a different plan for GM: grab the pension funds to pay off Morgan and Citi. Here's the scheme: Rattner is demanding the bankruptcy court simply wipe away the money GM owes workers for their retirement health insurance. Cash in the insurance fund would be replaced by GM stock... Yet Citibank and Morgan, says Rattner, should get their whole enchilada - $6 billion right now and in cash - from a company that can't pay for auto parts or worker eye exams."     WHICH BANKS WILL DIE?   Anand Chokkavelu says that "1,562 banks will be gone in the next few years. I heard this startlingly precise number from one of the panel members at the Wall Street Journal Future of Finance Initiative conference -- a meeting which featured a keynote by Treasury Secretary Tim Geithner, as well as participation by such heavy hitters as George Soros, Meredith Whitney, Robert Shiller, and Paul Volcker.   Let's put that prediction in perspective. Since the fall of Bear Stearns, only 61 banks have been taken over by the FDIC. If you believe this presenter, we've only seen 1/25 of the likely banking deaths. It may or may not come to pass that 1,562 banks go under. It's merely a guess, after all, albeit an educated one. But what's even more important than predicting how many banks are going down is predicting which ones are most likely to fail. And, for the greedy folks like me, which ones are most likely to succeed. The recent stress tests were the government's golden opportunity to separate the winners from the losers -- and nationalize the losers. Instead, the government has effectively split banks into three classes: Big banks that passed the stress test [and got more bailout money] Big banks that failed the stress test [and got more bailout money] and Smaller banks [who won't get bailout money]. Only banks that have more than $100 billion in assets were subject to the government's stress tests. These 19 largest banks (out of 8,246 FDIC-insured banks) comprise about two-thirds of all U.S. banking assets. Call them too big to fail if you'd like, but these are the banks that the government really cares about."   Aside from the fact that all bailouts are unconstitutional, I continue to point out the utter impropriety of Congress giving the Treasury the power to arbitrarily bail out some banks while denying other smaller banks equal access. Government cannot play favorites, but it does. The FDIC says there are 350 banks on the problem list. Bob Chapman asks, "Why can't they be bailed out like the 19 money center banks?" Good question. It is clearly meant to allow the favored, most insolvent banks, to buy up the others using taxpayer funds. "The treasury will inject a fresh $50 billion in support of GM. GM debt will drop from 170 billion to 12. US treasury is bailing out Jp Morgan Chase and Citgroup of 100% of their GM debt by paying off all of the CDS they placed on GM bankruptcy. This is selective sheltering." Indeed it is, and it is a violation of every principle of law the US has known for 200 years.   (End Excerpt)   World Affairs Brief - Commentary And Insights On A Troubled World   Copyright Joel Skousen. Partial quotations with attribution permitted.   Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com )   World Affairs Brief, 290 West 580 South, Orem, Ut 84058, USA

   

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