Government Strongarm Tactics in the Chrysler Bankrupcy

This is an interesting video from the State Treasurer of Indiana about his state's experience as a secured creditor of Chrysler, and how their legal claims were pushed aside as the Administration moved more politically-favored constituencies (e.g the UAW) ahead of the secured creditors in line.

One side issue here.  Early in the video he explains that the State of Indiana held a lot of Chrysler bonds because Chrysler is a big employer and they try to support companies with a big footprint in the state.

Isn't that terrible risk management policy, closely akin to Enron employees putting all of their savings in Enron stock?  If Chrysler goes down, this means loss of investment returns in key retirement funds at the same time there is a large loss of tax money that will likely be the source of replacement funds.

  • http://southbend7.blogspot.com/ SB7

    Overall I really liked Mourdock's talk, but that part bugged me too. Between that talk and the interview he did for the Cato Daily Podcast today I get the impression that he made the decision partially because he was politically constrained, and partially because he's a bit of an economic nationalist. Granted, I'm reading pretty far in between the lines, but that's how I see it.

    I was also concerned with the comments he made in today's interview about how he doesn't think the US "makes anything" anymore. I think he's wrong to be concerned about that and wrong factually, since the US still manufacturers more than anyone else in the world.

  • Allen

    SB7 --> On the note of making things, there are some of us in the software world that argue writing code is making something. It's really quite similar and, especially during the last decade, the software engineering realm has been borrowing heavily techniques from the physical manufacturing world to improve it's own processes.

  • Chris K.

    This is outright theft from the FEDGOV, expecting the SC to do anything about this is insanity.

    Sick and wrong.

  • http://southbend7.blogspot.com/ SB7

    Allen, you don't need to convince me that software counts as making things. I'm a CS grad student, so I'm totally on board with that idea.

    Obviously we need to create some value for someone else, I just reject the notion that that value has be stored in a physical object. It could be made of bits like you say, it could be a binder full of procedures, it could be an ad campaign, it could be an abstract concept like "McDonald's franchise." I suspect you'd agree.

    I also differ with Mourdock in that I don't particularly care if some other country overtakes us in economic output. The relative rankings don't matter to me anymore than who gets the most gold medals at the Olympics.

  • Tim

    Allen, yes; software is making something; but it isn't the same as physical manufacturing. For one thing, the failure modes, and their mitigation techniques, are completely different. Software doesn't have failures related to things like wearout, aging, and common cause variation. There's also a lot smaller value chain for non-physical manufacturing. For example, how many tool-and-die shops are needed to support software manufacturing, and how much does the software industry spend on tooling per year? It's this value add in the supply chain that makes industrial manufacturing an economic engine.

    I don't want the government to step in and pick winners and losers; like Michigan does.... er, is trying to do, but I think there's a real disservice to the discussion to conflate non-physical manufacturing (e.g. software) and durable goods manufacturing. They're both valuable; and the best government policy encourages both, mainly by getting out of the way. But, they're different.

    And, to answer Warren's question; government fund investment in local interests is pretty common. The two thoughts are that it props up the local industry; and I've also seen local industries use leverage to get the investment. It usually goes along the lines of: "Have the municipal retirement fund invest, or we'll move/shift jobs/shut down. And then you'll be sorry." It's the same kind of whipsawing that gets tax breaks for "job creation".

  • ElamBend

    He's wrong anyway on his point, the US is still a manufacturing behemoth and in terms of value, still number one. It's just that the things we make, like say huge GE tubines, are very expensive and complicated. That kind of technical expertise cannot be duplicated overnight or even through a decade.

  • http://southbend7.blogspot.com/ SB7

    Tim, I think it's a little spurious to ask how many machine shops you need to support software creation. Software often sits lower down on the food chain, as it were. While it may not cause as many people to be employed making inputs for a software company, it can cause many people to be employed using the output of a software company, or cause people downstream to increase their productivity.

    Besides, saying that something like heavy manufacturing is an economic engine because it requires more machine tools is just another way of saying that it requires more intensive capital investment. That means society is stuck devoting more resources to producing the same amount of value. If anything we should actually prefer to have industries with lower capital investment needs. The economy exists to satisfy the needs to the consumer, not of the producer.

    As to failure modes, I really don't see the point. Oil refining and consumer appliance manufacturing have really different failure modes as well, but we recognize them both as industrial.

  • http://devilish-details.blogspot.com/ Mesa Econoguy

    Isn’t that terrible risk management policy, closely akin to Enron employees putting all of their savings in Enron stock?

    Not really, because under non-bizarro world (i.e. actual bankruptcy law, and subsequent asset allocation rules) secured creditors, which State of IN was, had recourse. Stock is riskier than bonds, etc.

    Since Obamalini singlehandedly rewrote bankruptcy law to favor his political cronies and union thug allies, that left IN out in the cold (along with other secured creditors).

    It may have been excessive asset concentration in an unwise area, but under actual law (not Obamalini law), it wasn’t as risky as it actually turned out.

  • Brandybuck

    It's really easy to invest other people's money. I wish I had more opportunities to do it.

  • Jim Collins

    Where would software be without the hardware that uses it? It's the hardware that requires the machine shops.

  • tomw

    Was it noted what percent was in Chrysler bonds? There used to be an AC-Delco plant in Kokomo along with the Chryco transmission plant. Columbus has Cummins diesel. Indianapolis has a large [bzzt. BigPharma Co] Pfizer? Hoffman-LaRoche? pharmaceutical presence.
    So, even with just a few mentions, there is a variety of industries. If they have faith in their ability to run Indiana well, keep it from bankrupting its resident employers, why not invest strongly in those employers?
    If the Federal employees were constrained to obey black and white law, Indiana would have some portion of the Chrysler bonds in their account. To expect that the law would be ignored is to look for the red goose, white and black already having been sited...

    tom

  • Tim

    SB7, I agree that the economy exists to satisfy the consumer; but not to belabor the point, there's a huge value difference between software and the output of heavy manufacturing. Even look at retail software versus retail transportation. There's a two order of magnitude difference between the transaction costs.

    The point about failure modes was really to point out that there's other big differences between non-goods and goods manufacturing. Things like software or ad campaigns *don't* have these concerns. And like most skills; if they're not used, they'll atrophy. So, really, the point is that knowledge work, while it is work; isn't industrial.

  • http://herdgadfly.blogspot.com/ gadfly

    The Indiana State Teachers Retirement Fund, the Indiana State Pension Trust and the Indiana Major Moves Construction Fund owned $42 million in old Chrysler bonds that they bought for 43 cents on the dollar or paying approximately $18 million. The bankruptcy court granted about $12 million repayment.

    My concern, as an Indiana resident, was why Mourdock and company would make such high risk investments from pension funds. I have always believed that he chased the $6 million loss into bankruptcy court to transfer blame to the federal government and protect his own ass from future fiduciary claims.

  • http://genericconfusion.blogspot.com Greg

    Yes, it's a concentration of risk, but a political position like state treasurer is not all about diversifying risk. There's politics involved. Of course, buying distressed assets and losing on the bet is different than, say, investing in Chrysler over a period of twenty years. It seems the market priced the risk better than the Indiana treasurer.

    For a similar reason, you shouldn't expect a state insurance commissioner to necessarily act in the interest of following state law and reflecting actuarial principles when it comes to approving premium rates. That's particularly true if it's an elected position, or if the commissioner wants higher elected office.