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"Rule of Law," just words

From the Heritage Foundation blog:

Today [May 21] President Obama stood on the world stage and demanded that suspected terrorists be treated under the “rule of law.” In fact, he used the phrase “rule of law” eight times. It is now time for him to use the phrase “rule of law” when it comes to Americans. In the next two weeks, the President will likely endorse a series of measures in his role as CEO of the car companies that may violate a number of U.S. contract laws, bankruptcy laws and financial rules and regulations....

Let’s back up and explain what we’re talking about: A bond is simply an “IOU” in which an investor loans money to a company in exchange for a predetermined interest rate. It has historically been a safer investment than stocks because your principle is generally guaranteed and if a company goes under, you are at the head of the line to get a return on that investment. Bondholders include pension funds, retired auto workers, non-profits, even your own grandparents. They also include workers in dealerships....

But not so fast. Unfortunately, GM’s bonds are different because they are investments in a company that is now controlled by big union bosses in the United Auto Workers and President Obama. The rule of law is apparently out the window. First, the UAW bosses need to be paid, and everyone else second. In fact, many of the individual bondholders are in fact retired union workers. So the UAW and President Obama are actually conspiring against the workers that paid their dues, in more ways than one.

As the Wall Street Journal points out: “The funds paid a premium to buy ’secured’ status, only to discover that they were politically outranked by the United Auto Workers in the White House hierarchy."

You can read the whole thing here. Perhaps President Obama should have said that nobody is pro anti-rule of law, and thus we should work together to make sure that there are fewer anti-rule of law incidents and that when they do occur they are safe and legal.

Comments (5)

This is misleading, in that it represents only the government's proposed out-of-court settlement. GM bondholders can reject it, and probably will. In that case, GM will enter bankruptcy.

This isn't to say the bondholders aren't getting screwed. They are, because debts owed to the gvt get discharged first in bankruptcy (by rule of law). So the recent debt incurred by bailout funds, which would have to be repaid in bankruptcy if the gvt doesn't get an equity interest, will have priority over bond holders.

But this is nothing new. Bondholders get screwed this way all the time, when, say, corporations on the verge of bankruptcy, in order to stay afloat for awhile, fail to put aside funds to cover their tax liabilities.

This is misleading, in that it represents only the government's proposed out-of-court settlement. GM bondholders can reject it, and probably will. In that case, GM will enter bankruptcy.

If there is any credibility to the stories of Rattner threatening Chrysler bond-holders with the press-core, then it isn't so simple as a voluntary rejection of the settlement. This isn't, well they made an offer and we amicably declined. There is an enormous distortion of private contracts going on here, in part, by the demonization of investors as selfish by government officials, and part because of the government's action during the initial and continuing bailout of GM.

But this is nothing new. Bondholders get screwed this way all the time, when, say, corporations on the verge of bankruptcy, in order to stay afloat for awhile, fail to put aside funds to cover their tax liabilities.

Except that in this case the government encouraged exactly that behavior by bailing an unviable company out for seven months with nothing to show for it. It amounts to the same thing, the company owing the government a large debt and stockholders drawing the short-straw, but the distortion comes in when the government is complicit in the creation of that debt.

This is misleading, in that it represents only the government's proposed out-of-court settlement. GM bondholders can reject it, and probably will. In that case, GM will enter bankruptcy.

If there is any credibility to the stories of Rattner threatening Chrysler bond-holders with the press-core, then it isn't so simple as a voluntary rejection of the settlement. This isn't, well they made an offer and we amicably declined. There is an enormous distortion of private contracts going on here, in part, by the demonization of investors as selfish by government officials, and part because of the government's action during the initial and continuing bailout of GM.

But this is nothing new. Bondholders get screwed this way all the time, when, say, corporations on the verge of bankruptcy, in order to stay afloat for awhile, fail to put aside funds to cover their tax liabilities.

Except that in this case the government encouraged exactly that behavior by bailing an unviable company out for seven months with nothing to show for it. It amounts to the same thing, the company owing the government a large debt and stockholders drawing the short-straw, but the distortion comes in when the government is complicit in the creation of that debt.

The double-post was entirely unintentional.

Much suspicion is in order anytime Heritage cries hard times for the little guy. Here we have a threefer - bash the unions, trivialize the "rule of law", and shill for the guys who will really make out if GM has to file for bankruptcy.

Individual bond holders are screwed no matter what. The market currently values GM debt at five cents on the dollar. Twenty percent of GM debt is held by individuals. Note that the articles is silent about other investors who bought GM debt at a discount and then bought credit default swaps that trigger upon a filing. They bought the debt hoping for bankruptcy.

There is a lesson here - if you don't have sufficient funds to diversify (say five percent per issue), buy Treasurys or a bond fund.

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