I have not written about the subject of the Chrysler bailout so far since, not being close to the action in the US, I did not feel I had much to say that was not already voiced by the US blogs. But it does occur to me that there is a general problem right now in the way that the US administration – and arguably the UK one as well – has been acting in respect of bailouts of certain industries, such as carmakers as well as banks. What do I mean? Well, this report (H/T: Instapundit) suggests there is real fear about the “Nixonian” tactics employed by Mr Obama’s administration against bond-holders who have been angered by the expropriation of their capital via the Chrysler bailout.
For those who have not been following this story, bond-holders have been pushed to the back of the queue, as far as potential recovery of capital is concerned, with the auto union membership getting preferential treatment. Maybe Mr Obama figures that investors can be rained on right now because it is more important to get the votes and support of traditionally Democrat-leaning car workers. With mid-term Congressional elections a couple of years away, he will have his sly, Chicago machine-politics mind working out how to garner important support in the event that the US economy is still sluggish by that time. But pissing off investors – such as, let it be noted, pension funds – is not smart. The US requires large amounts of capital for any economic recovery that may take place. Ask yourself one of the most basic questions any investor should ask: can I get my money back if I need to? If the answer is no or only maybe, and if there is the threat of governments robbing investors, then less investment occurs. The problems of such behaviour explain why, for example, Africa has been such a bad investment bet for so many years.
It is an ugly business. Part of the trouble with the automakers is that even if they had been put into a Chapter 11 bankruptcy process, with the banks and bondholders put on a more even footing for any recovery of assets, there is still the issue of what to do about the enormous unfunded pension obligations that these heavy industrial companies have. It is the same with airlines and steel. I have heard it said of British Airways – to take a UK example – that is is a pension scheme that happens to have a lot of aircraft. The pension tail can wag the corporate dog. And that is a hideous issue to deal with against the background of an ageing population. So in fairness to US policymakers, running down Chrysler involves dealing with a lot of tricky contractual issues.
Even so, it strikes me that the Obama administration is showing a level of political ruthlessness and “bugger-the-investor” attitude that is hardly going to endear people towards investing in that economy. My fear is that Mr Obama is making the cynical calculation that memories will fade; after all, how many investors in the UK remember how the Blair government, in the form of the charmless Stephen Byers, the-then industry minister, shafted investors in Railtrack?
Like I said, an ugly business.