A recent editorial in the Wall Street Journal discussed Government Motors: GM's new owner (the Obama administration) should stop bullying the company's bondholders. The editorial says,
It is now clear that there is no real difference between the government and the entity that identifies itself as GM. For all intents and purposes, the government, which is set to assume a 50 percent equity stake in the company, is GM, and it has been calling the shots in negotiations with creditors. While the Obama administration has been playing hardball with bondholders, it has been more than happy to play nice with the United Auto Workers. How else to explain why a retiree health-care fund controlled by the UAW is slated to get a 39 percent equity stake in GM for its remaining $10 billion in claims while bondholders are being pressured to take a 10 percent stake for their $27 billion?So $10 billion buys the union 39% of GM but bondholders get 10% for $27 billion? That has to be one of the stranger pricing schemes I have seen in a long while. The editorial goes on,
It's highly unlikely that the auto industry professionals at GM would have cut such a deal had the government not been standing over them -- or providing the steady stream of taxpayer dollars needed to keep the factory doors open.That has to be something of an understatement.
The editorial ends by saying,
The administration argues that it could not risk alienating the union for fear of triggering a walkout that could permanently cripple GM. It also posits that it had to agree to protect suppliers and fund warranties in order to preserve jobs and reassure prospective buyers that their cars would be serviced. These are legitimate concerns. But it's too bad that the Obama administration has not thought more deeply about how its bullying of bondholders could convince future investors that the last thing they want to do is put money into any company that the government has -- or could -- become involved in.And here is the big problem for government ownership, the incentives it provides for investors. Why would anyone put money into an business were there is a chance of being treated the way bondholders of GM have been? Public-private projects are not going to get off the ground if the private investors think they will be treated in his manner. And how will investors react if the government looks like it may intervene in a firm they have money in?
In the New York Times David Brooks summed up the relationship between the public and private sectors in this way,
Recently we were uplifted when the president informed Chrysler’s secured creditors that they had agreed to donate their ownership stake in the company to the United Auto Workers. Just last week, we were enthralled to see a group of auto executives beaming with pride as the president announced that in order to reduce gas consumption, they would henceforth be scaling back on all those car lines that consumers actually want to buy.All of this should be a warning to any private companies that may be thinking of entering into a public-private "partnership" with the government here in New Zealand. The very thought, Gerry Brownlie, a riding crop and pliers .... arrrrrrrrrrr!
These events have heralded a new era of partnership between the White House and private companies, one that calls to mind the wonderful partnership Germany formed with France and the Low Countries at the start of World War II. The press conferences and events marking this new spirit of cooperation have been the emotional highlights of the administration so far.
These events usually begin when the executives gather in the Oval Office, where they experience certain Enhanced Negotiating Techniques. I’m not exactly sure what the president does to inspire the business leaders’ cooperation and sense of public service, though those who remember the disembowelment scene in “Braveheart” will have a general idea
Then the president leads the executives out onto the White House lawn for the announcement ceremony. Often, the president will still be carrying the riding crop and the pliers used in the private negotiation. He moves to the microphone while the executives take their pre-assigned places behind him, the jingle of their leg shackles blending with the dulcet tones of spring. I thought one hospital executive was so moved by the occasion that he had slipped into catatonic shock, except that he was blinking “Save Me! Save Me!” in Morse code to his shareholders.
“We meet at an exciting moment for our country, a time of unprecedented cooperation between government and private industry,” the president intones, lifting his foot from the trachea of an unconscious pharmaceutical executive. “Many of the business leaders behind me have seized an exciting opportunity to join the nonprofit sector without even switching jobs.”
At this, the C.E.O.’s behind him don frozen smiles, exuding the sort of spontaneous enthusiasm often seen at North Korean pep rallies.