Money Money Money
That’s my favorite headline above. Stole it from Dr. Johnson, an econ professor at Mizzou way back when. He worked in the Johnson (no relation) Administration and was a dyed-in-the-wool liberal, but he was always saying, “Money, money, money — I love it!” Great teacher, too.
I bring him up because one of my regular readers – and a smart guy, too – had this to say about GM’s bondholders getting screwed by the President:
Someone is going to get screwed, but I have a hard time coming up with a whole lot of sympathy for those bondholders. All those years of hearing about how they shouldn’t be taxed for capital gains at the same rate as people who work for a living has made me realize that it’s about fucking time that that “risk” they used to justify that difference probably should bite them on the ass in this instance. GM was a bad investment, and the government is being told that millions of jobs are less important than bond portfolios?
I’m empathetic to their plight, but I’m not sympathetic. Yeah, yeah, I’ll hear about confidence in the markets. But I think saving literally millions of jobs is a bigger confidence-builder than bailing out billionaires. It would be nice if we could do both, but it was the billionaires that got themselves into this mess. Bad investments have consequences.
Evil speculators, blah blah blah. Actually, most GM bondholders (or anyone’s) aren’t billionaires, they’re regular folks looking to save and make a buck. Although even if they were all billionaires, the point would remain the same. And I’ll make that point right now. Two points, actually, but they’re related.
1. All investment is speculation.
2. The secondary market makes the primary market possible.
The first point is easy. You invest, but there’s risk. The higher the risk, the higher the reward sought. Everybody knows that one. You also should bear in mind that no matter how risky (or safe) an investment might be, you always always always seek to minimize that risk. That’s not just the invisible hand or whatever, that’s human nature. And it’s a good thing.
The second point is a little more subtle, but nothing difficult to understand. And it applies to both stocks and bonds. When you buy a newly-issued bond from GM, you’re the primary market. If I buy that bond from you, I’m the secondary market. And if I didn’t exist, you would never buy bonds from anyone.
When you buy a bond in the primary market, whether it’s AAA stuff from the US Treasury or junk from GM, you seek to minimize your risk. You want the best price and return you can get, but just as importantly, you want to know that if you ever need or want to sell that bond, there will be a market for it. That’s the secondary market. In other words, if you change your mind and decide that GM’s (or Washington’s) management sucks, you’ll be able to find someone to give you cash for your bonds. Maybe at a discount, maybe at a profit.
But, and let me reiterate here, you wouldn’t have been a primary buyer unless there was at least the potential for a secondary buyer. You can call the secondary market a bunch of predators or speculators or greedy Jews, but remember Point One — all investment is speculative. And the presence of those evil “parasites” makes your “noble” investment both desirable and possible.
(Why some folks think that the primary market is all nice people and the secondary market is all pond scum is beyond me. Remember that with the exception of the occasional IPO or new stock issue, the entire stock market is a secondary market.)
And another thing…
During bankruptcy, bondholders get paid first for very good reason — they traded power for security. When you buy a bond, you get no say in how a company is run. Instead, your investment is secured by real assets. So your risk is less, but so is your reward — bondholders typically make less than stockholders when a company does well. Stockholders not only get a say in how a company is run, but they also can make some really wild profits. Of course, not being secured assets, stockholders typically fare worst when times are tough. That’s their higher risk.
So. If bondholders discover that their assets aren’t actually secured, or that the bond market has been corrupted, they will disappear. There are no fixed entities called “Bond Buyers” who buy and sell bonds because that’s what they do. No, if the bond market sucks, or appears to be rigged, those people will disappear. And they will take corporate (and public) finance down with them.
If no one buys corporate debt, then say goodbye to economic growth. And if no one buys public debt, then say hello to hyperinflation. And then you really will be looking at millions of lost jobs.
And yet another thing…
If GM goes belly up (which it’s going to do anyway, duh – they’ll file C11 on Monday), millions of jobs will not be lost. Let me repeat: GM could disappear tomorrow, and not much would change. GM barely employs 50,000 people anymore. And the people they do employ destroy wealth, they don’t create it — that’s the definition of a money-losing operation.
Bankruptcy allows GM’s assets to go to people who will, it is hoped, use them to create wealth — that’s the definition of a money-making operation. And if GM’s new owners can’t make a go of it, then the company will go away and, at the very least, stop losing money. Workers will find new jobs, because the economy will improve once we stop propping up wealth-destroying outfits like GM.
If Old GM goes away, in other words, we’ll all be richer. But we’ll all be poorer — like, Zimbabwe poorer — if we destroy or corrupt the bond market.
You’d think all this is so obvious it doesn’t need saying. It’s not an investment if you can’t sell it one day and the eaiser it is to sell the more willing you will be to buy. Saving a million jobs today is not necessarily a good thing if it costs 10 million jobs tomorrow. Everyone, even the most hard-core anarchist, wants to make money and any dividing line between good money and bad money is totally arbitrary. It tells you nothing about anything except the value system of the person doing the dividing.
I blame our public education system. It just does not teach basic economics (amongst other things).
If GM & Chrysler went away tomorrow, the slack auto sales will be taken up by other companies such as Ford, Toyota, etc. The unemployed GM workers can get jobs with those companies.
Stephen, a very nice and succinct summary.
It occurs to me that the commenter’s bias is precisely similar to those who kept claiming the Bush tax cuts were for “the rich,” and regular, hard-working folk were getting the shaft.
As a former investment banker, I have to say; very nicely written and explained Stephen.
You really should make this post a PJM article (colloquialisms and all). The world can use all of the easy-to-understand economic articles it can get, and this is written in the finest Sowell and Williams tradition
Carter –
Thanks. It’s always nice to know when I haven’t, for once, embarrassed myself publicly!
Spot on, Stephen. I’m forwarding this to several friends and family members. Hopefully, the nickel will start to drop.
I think, though, that we’re pissing in the wind. Unless Washington gets a massive dose of fiscal reality shoved up its ass in very short order, nothing’s going to change until it’s too late. We’re starting to hear some rumblings from the rest of the world, but nobody with any say in the matter gives a shit. The power-grab is almost complete, and carcass is getting picked clean as we speak.
What’s next? Is it possible to clean up the economic disaster looming on the horizon? Will it take literal pitchforks and stringing the bums up to clean out the detritus and start anew?
Revolution or Evolution? It may already be too late to choose. Even if the Tea Parties, for example, turn into a nationwide force, and bring about wholesale change in 2010, that’s an additional year-and-a-half of catastrophic damage that Obama and his clan can (and will) do the country.
I see no way to recover.
A significant percentage of those GM bondholders are in retirement funds, often for other union employees. So Obama is favoring one group of union employees and retirees over another. But don’t worry – he’ll no doubt turn once again to the US taxpayers to make up the pension fund shortfalls. After all, why should government employees and union retirees have to suffer because of his screw job. Now, those of us without a defined pension who depend on our retirement savings, we’ll getting screwed royally. We get higher taxes to make sure those union and government employees get to enjoy their retirements. To hell with our retirements.
The funny thing is, looking at the SEC filing, what the bondholders are falling for is a complete shell game. The 10%-plus-15%-in-warrants that they supposedly get will be going to the owners of “Old GM”, and there is nothing about any bonds-for-stock swap in that filing.
In fact, unless an unspecified percentage of bondholders agree to that shell game, the owners of “Old GM” won’t even get that.
Steve –
I got so involved with writing about the generalities, I totally failed to notice that particular specific. Indeed, it looks like the bondholders are getting an even worse screwing than I thought.
So… so much for the rule of law and/or the sanctity of contracts and/and/or/or the freedom of the markets. The precedents set here will come back to bite us all on the asses — very deeply, and very, very soon.
In fact, I’d argue the only thing keeping our securities markets afloat right now is that the dollar is still the world’s safest remaining haven. But that’s a relative measure, and as you well know, bond markets can change their minds in a big ol’ hurry.
Regarding the retiree trust funds, there already exists a federally-run “insurance company of last resort”, the Pension Benefit Guaranty Corporation, for them (or at least the first $54,000/year/retiree in general). The fact that the UAW VEBA does not qualify for protection by the PBGC means we’re going through what we’re going through.
The bad news is, while the PBGC currently does not draw on tax revenue, its sources of income (premiums paid by defined-benefit funds, assets of seized funds, recoveries from bankrupted companies that had defined-benefit funds, and investment income) are already insufficient for its long-term liabilities. Increased failures of defined-benefit funds reduce the first three items, and Obama’s anti-investment bias crushes the fourth.
Don’t blame yourself; everybody else I follow missed it as well, choosing to believe what was spoon-fed to the media.
Of course, things will change by Monday. I believe several items did change between what Chrysler announced just before bankruptcy and the plan the Treasury filed on the bankruptcy date.
Spot on, Stephen; although I do have to take a small exception:
Yes, it’s true that barely 50,000 people draw a paycheck directly from General Motors, but as I wrote back in January:
“…after all, we suppliers make the parts that the automakers merely assemble to make cars…”
Asserting that GM only employs 50,000 people overlooks the “ripple effect” that their bankruptcy will cause (and it’s already started).
Case in point: my former employer (they went Chapter 11 yesterday) was a supplier to Chrysler, somewhere around 10% of their business was with Chrysler. After Chrysler declared bankruptcy, two weeks ago the downsizing at my former employer began. (Yes, I was one of the “downsized”) In my division alone, 84 out of 122 people were given their walking papers: we’re talking blood on the floor and growd men crying. And, no, these people aren’t going into the UAW (Usually Ain’t Workin’, AKA: The Gettlefinger Crime Family) “jobs bank” and drawing 85% of their base pay. All we got for our troubles was two cardboard boxes and thirty minutes to clear out our desks.
Here in the Peoples’ Republic of Michigan, for every one directly employed in the Stoopid Business™, there are seven people who’s livelyhoods are dependent on the auto industry…those “barely 50,000″ now-out-of-work GM employees ripple into some 350,000 “other” job losses…
350,000 unemployed in the Rust Belt alone is a substantial down-payment on “millions unemployed” nationwide. A lot would change.
Michael
The bondholders are getting screwed, the unions just voted to screw themselves a bit more to try to save things, the government is sticking its hands in things it probably shouldn’t, and I’m pretty much out of sympathy for everyone involved. I wasn’t really saying, “Woo! Unions win!” when I think the whole system is pretty much failing (and I’ll stick to my millions of jobs figure when I count the fact that those GM 50,000 jobs support or create a base upon which many more jobs than even Michael X mentioned above spring up.) The bondholders are negotiating from a weak position. The owners are negotiating from a weak position. The union just did its weak-position move. And the government is on the side of keeping the whole thing going like it’s some sort of Dr. Frankenstein providing more and more juice to the mostly-dead thing that is GM. (Chrysler is like the Bride of Frankenstein: made up of some good parts, but an overall mess we probably should marry off to some foreigner.)
My sympathy well is still very dry.
I think things are going to hell and will go to hell. Our entire economic health has been based on illusions of growth and easy credit to pay for it. Now we’re having a correction and the easy credit system is failing miserably (even without the government meddling.) Obama is flailing away at the problem as if it’s fixable. The Republicans are claiming their version of flailing would be better. And they’re both R-O-N-G wrong (the wrong so wrong it can’t be spelled correctly:) the old market will not come back.
It’s as if we’re concerned about the office chairs and the stock options, while the Enron security guys are asking us all to leave as quickly as possible so they too can get in line at the unemployment office before it closes. Hate to sound like a protege (I nearly said “lovechild” but retched at the thought) of Glen Beck and James Howard Kunstler, but things suck more than a few billions here and a few billions there will fix.
Yeah, yeah: it’s the principle of the thing. But the Principle Thing is that the worthless piece of cash-hemorrhaging shit that is GM is still worthless and the government would like to have its influx of billions go where it wants. If those bondholders were doing something at their meetings over the last decade other than counting their winnings, I’d have sympathy. But they’re just another in a long line of people who only saw the balance sheet. Some would say that’s their job, but I’d argue they were bad investors if that’s all they were looking at. They’ll eventually sue and get a settlement, and the Administration will just hand out some more monopoly money. So justice will prevail and we’ll all be deeper in debt without even having the fleeting moments of fun that private debt allows us.
Still, thanks for the clarifications. I’m still a hater, but I’ll stockpile some of my vitriol for the inevitable “Save California and Keep Home Prices High” government program which is sure to be a bipartisan effort to top everything that’s happened already.
Jon –
Did you even read the post? There are no “bondholder meetings.” Most of what you’ve written has nothing to do with what I’ve written or the situation at hand. You remain ignorant, only now willfully so. I’m sorry my efforts were so wasted.
I read the post. Most bondholders have small stakes in things, yadda yadda yadda. It’s not just a few old rich guys in a smoky room, yadda yadda. I get that. (Mostly it’s a presentation put on by the company, and if the numbers look good nobody asks any question about anything other than lunch and airlines out of Detroit.) Still, people and groups invested in crap (or portions of crap or portions of portions of crap, et cetera) And now that their crap investment is going belly up, they want their share. Only thing is, the government stepped in to keep the rendering of the roadkill from being a full-on vulturefest and turned it into an Extravaganza of Life or some other sideshow barker’s nightmare salesjob. And the big bondholders (or at least their lawyers and spokesmen) are getting antsy, as they should be, but they should have been much earlier. But they mostly weren’t, because so many of the ones holding the paper probably didn’t even know what their investments were in, since mutual funds and retirement accounts and insurance portfolios and similar investment things keep most people largely ignorant of where their money is. Which makes those institutional investment managers all the more important, and why it is so bad that they failed miserably at their jobs. So I’m not sympathetic to people like me who have less of a retirement to look forward to (right now,) I’m not sympathetic to the big bondholders who are getting screwed (right now,) and I’m hardly sympathetic to those who are crying foul about this and that (forever.)
I’ll cop to my bias at not caring much that people who invest are getting hurt as much as workers. Part of me says it’s about damn time. I still feel sorry for them, especially since I’m a recent inductee in the Investor Class (not that I haven’t been reliant on it all my life, only now I have some part of it in my name.) But when people are losing good-paying jobs and new good jobs are not appearing at a similar rate, I have a hard time feeling optimistic in general, much less generous with my sympathy.
And this easy credit economy is deader than Studebaker. There isn’t going to be a full recovery in the car industry until financing returns. And there won’t be financing until credit eases. And credit won’t ease until jobs return. And jobs won’t return until people need things that they can pay for with cash. And people won’t have cash until their credit is paid for. And the credit getting paid for isn’t making the banks lend to people until the banks are sure things aren’t getting worse. But things are getting worse. And all the propping up of homes, banks, loans, cars, and the rest isn’t going to change that fundamental equation that says we were on a bender and now it’s headache time. The budget is too big to be called Hair of the Dog, since the goal isn’t sobriety (which is too depressing for the American people) but another lost weekend to last as many years as possible. Fewer cars are going to be sold, they’ll be far more utilitarian than you’d like, and this country isn’t going to realize just how bad things are until a few more years pass and we realize how our car companies are the least of our worries.
Stephen – one hates to think poorly of people. You say jon is a smart guy; unfortunately, I know him only from his comments, where he comes across as an arrogant jackass, standing aloof from Democrats, Republicans, bondholders, and the American people (but mostly Republicans, bondholders, and the American people) and letting us all know that we shall be denied the precious gift of his sympathy. If you’re in a position to present him in a better light than he presents himself, I’d be glad to hear it.
bgates, I love standing aloof from what I see as idiocy. And there’s plenty of it going around, especially in the hopeless flailings of those who haven’t yet realized just how broken our economy is. There is a ridiculous amount of money and hope being poured into the notion that we can fix the problem by clapping louder, wishing harder, and spending more to get us out of this mess. And that’s being countered with an equally ridiculous notion that by tax reduction alone we can get everything back in shape to become whatever it was we were a decade ago when we still had all the same economic problems only at that time they were only predicted by wack jobs and goldbugs and people with agendas that were called anti-American and anti-capitalist. I’m none too happy with our future one-term President, despair at the thoughts of the damage the next one will do, and am none too pleased to often feel like I’m being a Cassandra. As an arrogant jackass, I probably shouldn’t care. But I do.
You say that “one hates to think poorly of people,” yet I think that’s exactly how you should think. Go ahead and mock me for my lack of sympathy, but please add why the bondholders deserve it. What’s happening is a process before the company goes to bankruptcy court. Various proposals are offered, sometimes taken, and sometimes refused before the parties involved risk the decisions of a court. The government holds the strong hand right now, but in the morning that could change. Still, knowing where GM stands in the balance books, it doesn’t look like the government will ever be far from a controlling party. Is that a good thing or a bad thing? I’m with those who say, “Yes.” We’ll see what tomorrow holds, probably not see any sort of resolution come from this for many months if not years, and pretty much all the parties (which includes all Americans) will be screwed. GM should go under and be liquidated, but won’t. Saving GM won’t happen in the end. Many jobs will be lost, though over a longer span of time than they would otherwise. And the whole thing is a sideshow in the long downward trajectory of our entire economy. But what do I know? I’m just an arrogant jackass who loves Democrats more than the American people. I’d mock my sympathy, too, for all the good it will do.
jon,
No one here is advocating sympathy for bondholders. What we are upset with is the wholesale abrogation of the rule of law here by Dear Leader’s administration. There have been rules long in place about who gets what in a bankruptcy, and with Chrysler & GM these rules are getting ignored for a pure political reason: buying union votes. That is not how a mature, stable democracy operates.
Bailouts corrupt the usual rules. I can argue back and forth enough just with myself as to whether or not this is a good or bad thing, but it certainly is A Thing. I predict failure on most fronts: legal, political, economic, and Presidential historical. Still, the biggest lesson for bondholders is to sell before a bailout. Sure, no one in their right mind would be buying, which is why DC moved in.
As for “mature, stable democracy”, we have that. What we don’t have is a mature, stable economy. The well-deserved panic and panicky suggestions of politicians is a direct result of that.
Jon,
May I suggest that there is a lot going on which you are unaware?
Your arguments are politics disguised as economics. When people engage in a contract, both parties agree to the terms of the outcome, for better or worse. It is equality under the law, and it is the same for all before the law regarding private contracts. When our government steps in and makes a judgment, base on social justice or empathy for one party over the other, it ruins the confidence of free markets for all investments and enterprises. Whether you like the parties involved or not, it’s the precedent that counts. That it involves GM or rich investors, or Klingons makes no difference. This point is not lost on investors, domestic or foreign; and for you to think of yourself as “working class” (whatever the Hell THAT means) and that you are interacting on a unique existential plain aside from everyone else is shocking nativity for someone who can spell. These same Constitutional foundations of private contracts are what keep the tenets of legitimate elections and protection of individual liberties sound as well.
One of the cornerstones of a free market and a democratic republic like ours is the creative destruction of industries and companies that no longer provide viable goods or services. Much to Stephen’s argument, GM and Chrysler are still alive today because there are risk takers in the secondary that are willing to roll the dice on long shots like American car makers. If they were not there, businesses in times of transition, economic downturn, or even economic prosperity would not be able to execute the most basic tasks such as making weekly payrolls. The risk of capital through loans fully entitles loaners to first crack at liquidation value of GM and Chrysler’s assets because they are not owners, but loaners. This is nothing new or unexpected; and certainly not unfair.
It is the same as when banks loan you and me the money to purchase our houses. If we can’t make the mortgage, it’s the bank that takes the house, not Uncle Fred who helped us build the deck. To suggest anything less betrays a deep ignorance of centuries old tested traditions of risk and return in viable banking. I would like to suggest Thomas Sowell’s “Basic Economics” as a good blue print of how free markets work to the general benefit and fairness for all.
To keep the analogy within the realm of cars, I’m reminded of Biff Tannen, when he brings back George McFly’s car, totaled:
“I can’t believe you’d *loan* me your car without telling me it had a blind spot. I could’ve been killed!”
“Now, now, Biff, now I never noticed that, uh, the car had any blind spot before when I would drive it.”
“But what are you, blind, McFly? It’s there. How else do you explain that wreck out there? “
“Now, Biff, um, can I – Can I assume that your, uh, insurance is gonna pay for the damage? “
“My insurance? It’s your car. Your insurance should pay for it. I wanna know who’s gonna pay for this. I spilled beer all over when that car smashed into me. Who’s gonna pay my cleaning bill?”