Nasty Implications of the UAW Owning Too Much of the Auto Industry

Many observers charge that the US government, in its attempts to clean up the auto industry mess, has used strong-arm tactics to force speedy bankruptcies for Chrysler and General Motors (GMGMQ.PK). In doing so, the rule of law and our country's reputation as a safe place to do business may have taken a very bad hit that will resound for years.

The State of Indiana, representing its state retirement plans which hold secured Chrysler bonds, has filed suit in the Chrysler bankruptcy case. Indiana claims laws were broken when the US Government gave the United Auto Workers (UAW) 55% of the ownership of the post bankruptcy company, far in excess of the UAW's secured interests. Indeed, the deal the government struck with the Chrysler assets appears to go against all existing legal precedents and statutes. The secured bondholders were thrown from the train in favor of the mostly unsecured union claims.

The fact that President Obama was widely supported by the UAW brings some clarity to the situation. Political spoils, however, should not extend to rewriting bankruptcy laws on the run.

I have spoken with many legal authorities in recent weeks. Not one of them could explain how the UAW could have ended up with such big pieces of the post-bankruptcy auto industry. "Politics" was the only consistent answer I received.

Here's the problem. Who will ever loan GM or Chrysler money again? Indentures are no good, precedents are no good, and laws are no good. The answer is no one will loan these dinosaurs money again, except perhaps in some form of equipment trust certificate arrangement. That means the United States government will be in the auto business for a very long time. And that means US taxpayers will be asked again and again to ante up to support the UAW.

Here's hoping that Indiana can get their case to the Supreme Court. If the case gets there, things might get very interesting. If it doesn't, the shotgun wedding that was performed by the United States Government will stand and fairness and the rule of law will fall.

Disclosure: I do not own any GM or Chrysler securities.

Comments

[ROBERTGM:]

I feel that a lot of people don't understand that the money is not going to the UAW. Its is going into a fund for the workers that is part of their wages that is owed to them for the work they already have done on the production line and the workers already made a profit for the stock and bond holders they had already recieved over the yeats. GM pays their electric bill, their bill for parts, etc., etc. this is GM'Slabor bills that they owe too & needs to be paid before any profit is paid to anyone else. Thank you.

Jun 08 05:43 AM

[ROBERTGM:]

I feel that a lot of people don't understand that the money is not going to the UAW. Its is going into a fund for the workers that is part of their wages that is owed to them for the work they already have done on the production line and the workers already made a profit for the stock and bond holders they had already recieved over the yeats. GM pays their electric bill, their bill for parts, etc., etc. this is GM'Slabor bills that they owe too & needs to be paid before any profit is paid to anyone else. Thank you.

Jun 08 05:44 AM

[casey00001:]

RobertGM:

Please enlighten us all on how this is past due "wages". This is the first I am hearing of it and Ron Gettelfinger has never stated as such.

Look forward to hearing your answer.

On Jun 08 05:44 AM ROBERTGM wrote:

> I feel that a lot of people don't understand that the money is not
> going to the UAW. Its is going into a fund for the workers that is
> part of their wages that is owed to them for the work they already
> have done on the production line and the workers already made a profit
> for the stock and bond holders they had already recieved over the
> yeats. GM pays their electric bill, their bill for parts, etc., etc.
> this is GM'Slabor bills that they owe too & needs to be paid
> before any profit is paid to anyone else. Thank you.

Jun 08 08:36 AM

[elcopone:]

Regardless of where the ownership of GM's shares reside over at the UAW, please explain why the interests of UAW should be any more or less protected than a) the interests of the state of Indiana's secured bonds b) previous bankruptcy laws and precedents c) the interests of all other bondholders? Additionally, why should they be entitled to more than their secured interests?

Please enlighten me.


On Jun 08 05:44 AM ROBERTGM wrote:

> I feel that a lot of people don't understand that the money is not
> going to the UAW. Its is going into a fund for the workers that is
> part of their wages that is owed to them for the work they already
> have done on the production line and the workers already made a profit
> for the stock and bond holders they had already recieved over the
> yeats. GM pays their electric bill, their bill for parts, etc., etc.
> this is GM'Slabor bills that they owe too & needs to be paid
> before any profit is paid to anyone else. Thank you.

Jun 08 11:34 AM

[norom:]

Employee ownership is a great way to get off the hook for obligations that normally accompany Union contracts. Privately-owned companies and even a lot of publically owned ones award the ability to purchase stock to employees, which, if the company does well, can pay off big in the long term. I'm not sure about the agreement, but I think the actual employees should be awarded the stock not an employee organization like the UAW.

Stock ownership rather than contractual obligations allows for an employee's fringe or future benefits to be within the confines of reality. They can hold it or sell it. If its worth less than so be it. A lot of the Big Three's problems would never have happened if this plan were in place decades ago.

Jun 08 12:17 PM

[Rollerball:]

I could be wrong, but I suspect the UAW merely traded equity for removing a huge pension liability from the PBGC, and, in so doing, bought preferential drawing rights at the TARP/Fed discount window.

Jun 08 01:20 PM

[dybydx:]

in related news, GM (GMGMQ.PK) is trading up to $1.15 on the lastest trade. if GMGMQ.PK shareholders are gonna get 1% on the new company, this imply new GM currently has market cap of $70B, which corresponds to book value of GM's assets. (this assumes the new GM has no debt.)

Jun 08 03:04 PM

[J. Crighton:]

Also in related news the Supreme Court stayed the sale - 6/8/9

Let the fur start flying!

Jun 08 05:27 PM

[Old Trader:]

Hmmm....I seem to recall Obama saying something publicly about "greedy speculators" when debt holders threatened to not sign off on Chrysler's BK plan. Now, when its pension funds balking, he's strangely silent.....of course, maybe I missed his comments...

Jun 08 07:38 PM

[Teutonic Kn...:]

To Rising Dividend Investing -

I would be very interested in what the Supreme Court would have to say in their opinion, which will go down in history as a record for the next generations to witness.

Jun 08 10:15 PM

[JosephN:]

Regardless of the final decision made the supreme court needs to take up this case simply to decide once and for all what the law of the land will be going forward. Otherwise no one will have clarity to invest in or loan money to these car companies in the future.

Jun 08 10:19 PM

[Graham and ...:]

Dear (Fellow) Teuton:

Ich, auch, I, too, am watching the Supreme Court proceedings with baited breath.

Did you know that Ben Graham's real name was Ben Grossbaum, which means that he was a German-American? I'm a follower of his because of this fact (und ich habe eine Deutsche Weltanschauung).


On Jun 08 10:15 PM Teutonic Knight wrote:

> To Rising Dividend Investing -
>
> I would be very interested in what the Supreme Court would have to
> say in their opinion, which will go down in history as a record for
> the next generations to witness.

Jun 09 11:04 AM

[Rainmaker986:]

I will not be buy cars from either of those two. It is not condusive to good health financially or physically to do business with the Mob. Evidently the UAW made Obama a deal he couldn't refuse. The Godfather has plenty of money so don't worry. Where are you when we need you Jimmy H.

Sep 15 08:56 AM