Not a bad idea
by tdaxp ~ June 8th, 2009
The Chairman of the China Construction Bank publicly suggested issuing bonds in RMB, rather than USD.
As long as Tim Geithner is Treasury Secretary, this is not a bad idea.
Our Treasury policy is to enrich political friends of Tim Geithner and the Democratic Pary, such as the United Auto Workers and top Wall Street executives. As the focus is not economic growth, it would be foolish for other countries to buy dollars in the hopes that Geithner would suddenly start caring about America’s future more than the future of his friends.
The UAW were large unsecured creditors for GM and Chrysler, and now they are the largest shareholder in this companies, along with Geithner’s Treasury Department. Goldman Sachs was given billions in grants they never have to repay, while Citi is being kept alive as a Zombie bank because Wall Street speculators were Obama’s strongest supporters in the 2008 campaign (and doubtless will be again in 2012).
China and other countries realize this, which is one reason why they are rapidly spending down their dollars, buying less new ones, and in general trying to decouple their future from Geithner’s plans to the extent possible.
The New York Times uses top 1% of income, not wealth. From the legend:...
June 9th, 2009 at 9:56 am
TDAXP the phrasing in your list of horribles is confusing me…
“The UAW were unsecured creditors in much of GM and Chrysler, and now they are the largest shareholder in this companies,”
First of all, I’m not sure this is true as of today, and I note you are conflating GM and Chrysler which have separate restructuring plans. But let’s say it is true, or will be true. This is a bad thing because…? Please fill in the blank. And please be advised that large GUCs are typically the largest shareholders in new co. after an 11… nothing else you can do with that debt except swap it for new equity. Indeed, we might rewrite your statement as:
“As one would expect, GM has proposed converting their largest legacy liabilities into a majority of the common stock in the reorganized company.”
Lastly, you state:
“Citi is being kept alive as a Zombie bank because Wall Street speculators were Obama’s strongest supporters in the 2008 campaign”
What evidence do you have of any of the allegations in this statement?
June 9th, 2009 at 1:17 pm
Fed X.,
Thanks for the comment.
The phrasing of that sentence has been clarified.
Identifying a pattern is not conflation.
In both cases the UAW is a large, unsecured creditor. In both cases, the Treasury’s plan has it coming before secured creditors.
It increases the risk of all future secured and higher-priority creditors. The purpose of having a class of secured creditors and higher-priority creditors is that they are more sure than other investors of getting their money back, and so are able to tolerate lower rates of return.
Traditionally, one of the advantages of investing in the US is that the country was a nation of laws, where predictable rules are followed in servicing investments.
This is less true now, because upholding the consistency of the law is less important to Geithner than rewarding his political friends.
Your statement, that this behavior is expected, is absurd. GM’s debt should be swapped for equitiy (or other renumeration) in order of its preference, so that secured creditors should fully recoup their losses before unsecured creditors begin to recoup their losses. Instead, politically powerful friends are being given a very large share of the company, and then high-priority creditors are being allowed to recoup their losses.
No experiment can be done here, so all we can ever have is a chain of inference:
1. Political power can be converted into cash
2. Geithner’s political friends have political power.
3. Geithner gave them cash without any other apparent reason
Certainly there may be a hidden factor we don’t know about — perhaps Citi is actually in possession of a thermonuclear warhead, for instance — but friendship seems the most obvious explanation.
June 9th, 2009 at 2:16 pm
TDAXP: secured lenders don’t want equity TDAXP, they want cash. my statement that it is expected that GUCs would be lumped into an equity swap isn’t absurd, it’s what happens everyday in large 11s. my living is largely derived from purchasing unsecured debt in bankruptcy and exchanging it for equity, so i’m quite familiar with what is going on in these two cases and i think you are misunderstanding what is going on. the GM b/k is not nearly the give away you are arguing. moreover its all been very consensual, to this point.
the chrysler b/k is a better argument for you. there does appear to be some short-circuiting of the process. but let’s look at it closely. there, what happened is the following:
the sale order proposal includes $2B in cash to secured lenders.
most GUCs take a bath, the federally protected GUCs get swapped out for equity in the NewCorp. (the code does offer protections to various legacy liabilities).
98% of the secured lenders accepted Chrysler’s plan for reorg. Three IN pension funds objected.
lets run the numbers on that really quickly…
the indiana pension funds at play show just under $50M of first lien debt of chrysler at issue on face with a purchase price of around $17M. the IN treasurer is going to get around $15M in recovery instead of $17M for a loss of a whopping $2M. which may seem like a lot until you consider that the three Indiana funds involved have assets of around $10.5B.
now, compare that to liquidation, which the creditors could move for. you’re looking at around $800M in a best case scenario (I actually think that’s high). The IN Treasurer would suffer MORE loss if liquidation was ordered.
On the other hand, the secured lenders have the right to look for white knights and push a new bid. Problem is, no one will do it. There are no white knights with $2B and one dollars out there that want a lot of cool dodge vipers.
Secured lenders DO NOT have a right to compel liquidation if the liquidation event would be more costly to the bankruptcy estate… and here, it looks like that is the case.
The secured lenders CAN, if they want, postpone the sale order in order to find a new bid. But to do that, they would need to post a bond. Insurance on a bond is likely to be heavy right now. This was done in the Adelphia case, and the creditors balked on a $1B bond. Here they would need a $2B bond.
The lenders have created a lot of fuss, but at the end of the day, the economic argument isn’t really there for them, and that’s what is so grinding about an 11. You can’t escape the simple economics of it. Now, there WERE other buyers out there, prior to the credit crisis, and the secured lenders are betting that now that the crisis has eased somewhat, there may be buyers again, but they have no legal right to object indefinitely and let the bankruptcy estate fall apart in value. If they really want to force this thing on through an open sale, then they need to post the bond. The fact that they won’t tells you a lot about the merit of their arguments.
i don’t think this is even close to the highway robbery people are claiming. but it is going to price in additional risk in bankruptcies where large legacy liabilities exist. how much is the million dollar question.
June 10th, 2009 at 12:41 pm
Bad idea for China…Protectionism.
http://jamesfallows.theatlantic.com/archives/2009/06/this_does_not_bode_well.php
July 12th, 2009 at 5:25 pm
Eddie,
China’s retaliation for Geithner’s attacks [1] are no surprise.
Fed X,
Your comment is informative, but it misses the important point. The Treasury is using its money, not to help the economy, or to recoup its losses, but to help politically powerful friends (the UAW, etc) at the expense of the Treasury itself and the relative expense of non-politically-favored creditors.
[1] http://www.reuters.com/article/usDollarRpt/idUSN2148652720090121