Coyote Blog

Via Zero Hedge

today, in a unanimous vote, “The U.S. futures regulator approved on Monday a rule that puts tighter limits on how brokerage firms can use customer funds, a measure that the now-bankrupt MF Global had encouraged the agency to delay.” In other words, while before commingling client accounts was assumed to be a clear violation of every logical fiduciary imperative, now it is set in stone. For real. The CFTC means it.

In the past, I believed that a lot of financial regulations were honest (though often misguided) attempts to create transparent and trustworthy markets.  I am increasingly being pushed to the cynical conclusion that financial regulations, like, say, licensing of funeral homes, are mainly aimed at making it impossible for small competitors to survive, while larger competitors either have the scale to pay for compliance departments, or in the case of MF Global, have the political muscle to get themselves exempted (by Administrations of both parties, I should be clear, though the current one certainly gets a hypocrisy award for standing beside OWS while handing out finance and health care law exceptions to the powerful).

MF Global is far worse in my mind than, say, Enron.  In Enron’s case, the management was at least mostly pursuing the activities and investments that they were supposed to be pursuing.  They were making bets of the type shareholders expected, though they were likely masking the cost and risk of these bets by aggressive pushes at the margins of accounting rules.

MF Global was doing exactly what everyone supposedly knew to be an absolute no-no, ie using client funds to make leveraged bets for their own account.  If Joe Schmoe in Florida did the same thing, he would already be incarcerated.  In the case of MF Global, no one even seems to be interviewing Corzine and so far the bankruptcy committee has put a higher priority on repaying JP Morgan and Goldman for Corzine’s bad bets than on getting investors’ money back.

Via Business Week

 Beacon Power Corp., an energy- storage company that received $43 million in backing from the U.S. program that supported failed solar-panel maker Solyndra LLC, filed for bankruptcy after struggling to raise private financing.

The money-losing company, which makes flywheels that manage energy moving through a power grid, had sought to avoid the fate of Solyndra, which entered bankruptcy last month after receiving a $535 million loan guarantee from a U.S. Energy Department program designed to spur alternative energy development. Beacon faced delisting of its shares by the Nasdaq Stock Market and warned in an Aug. 9 regulatory filing that it might not remain a “going concern.”…

In addition, Beacon received $29 million in grants from the U.S. and Pennsylvania for a 20-megawatt plant in that state and hired Group Robinson LLC to help raise more funds for the $53 million project. Group Robinson, a Menlo Park, California- based renewable-energy consulting company, also was helping Beacon find customers outside the U.S.

This is not an accident.  By definition, the government is investing in companies that every other private lender and investor turned down.

I was going to leave this topic behind, but I just couldn’t resist after Krugman’s bit of snark on the topic.   Please see my new Forbes column here.  One bit, actually off topic from the rest of the article, that I added as a postscript:

Perhaps the worst Administration decision of the entire Solyndra affair has yet to receive adequate scrutiny.  Just 6 months before Solyndra failed, the Administration allowed Argonaut, the largest shareholder, to grab the senior debtor position from the US taxpayer in exchange for $75 million in new financing.  The Administration’s argument was the loan was needed to buy time, but buy time for what?  Solyndra’s relative cost position was getting worse, and it was experiencing a huge loss on every unit sold.  No one involved has been able to say what the company was counting on to save it in the 6 months this loan bought it, except perhaps the opportunity to cajole another half billion out of the US taxpayer.

But the loan did accomplish two things.  First, it gave Solyndra time to sell every liquid asset it owned that might have been of value to…. Argonaut.  And once this bit of self-dealing was complete and the company was cleaned out, the bankruptcy process could be entirely controlled by Argonaut such that it will likely end up with all the assets, most important of which seems to be a $500 million dollar tax loss carryforward.  If Argonaut can take advantage of these tax shelters, it will end up costing the US taxpayer an additional $150 million or so.

In short, the taxpayer got rolled.  Again.

Update:  Marc Morano:

 ’When we had (Gulf) oil spill, we immediately had moratorium on off shore drilling. The oil industry was demonized & literally shut down’

‘But after the green energy debacle, they are being feted and rewarded — $9 billion more is being sent out to 14 more companies…Solar power is less than 1% of our electricity, yet this is being feted’

I thought this article from Zero Hedge was a pretty good window into the bankruptcy process for those of us unfamiliar with what goes on.  The most interesting point is that by allowing Argonaut to cut ahead of taxpayers as the senior creditor, the Obama Administration virtually ceded control of the bankruptcy process to Argonaut.  Argonaut has put up the debtor-in-possession financing as well, and the combination of these two positions gives it pretty tight control of the process going forward

The plan put forward is a four-week sale of the company. The logic behind this very rapid schedule is that Solyndra is still burning cash at the rate of $1mm a week. How long will the $4mm DIP financing last? Four weeks. The terms of the DIP makes it a sure thing that Solyndra is going to be sold ASAP. That sounds good. But not for the DOE.

The one-month period is a very short time frame. The likely result will be that no serious alternative buyer will appear. Should that happen, the senior creditor will get all of the assets of the company at the end of 30 days. That would be Argonaut. It’s possible that Argonaut will end up owning a company that lists $850mm in assets for less than $100mm.

I am not sure taxpayers were ever going to get anything out of this mess — the combination of a high-cost manufacturing plant with me-too technology in a commoditized business was never going to be wildly valuable — but the Administrations decision to allow Argonaut to jump the seniority line has pretty much assured that whatever value that might be there will go to Argonaut and not the taxpayers.

Postscript:  Someone might argue that the decision in February to allow Argnaut the senior position was required to get them to put up the $75 million that was necessary at the time to keep operating.  I am positive this is true, given the condition of Solyndra finances at the time.  However, the right answer at the time was to shut the thing down then, while the US had seniority and before Argonaut cleaned out all the assets of value (as they did this summer, selling inventories and receivables to themselves).  The company had no real prospects of ever making money when it was first financed two years ago and certainly did not in February.  The $75 million in February was less financing and more a pre-emptive bid for the company’s carcass in the inevitable bankruptcy, and it will likely play out exactly this way.

Update:  I have read that Argonaut may be interested in the $500 million of tax losses.  These are tricky to use, and only Argonaut of all potential buyers could reasonably make use of them.  These might be worth $150 million in avoided taxes, so the $75 million price might make sense.  If Argonaut pulls this off, it would mean that the decision to accept their $75 million in financing is even more costly to the taxpayers.  Not only did they miss out on whatever value might be in the company, but it also created the opportunity for $150 million in tax avoidance that comes right out of Uncle Sam’s coffers.

As GM was failing, I argued for the normal laws of bankruptcy to be allowed to work.  After all, valuable brands and manufacturing facilities were not just going to go *poof* — someone would purchase them and employ them, and hopefully those someone’s would to a better job than the previous owners and managers.

A big part of the “logic” for bailout and Presidential intervention in the auto companies was that auto purchases would halt if consumers were unsure whether their warranties would be honored and service would be available.

From an AP story, November 13, 2008

Advocates for the nation’s automakers are warning that the collapse of the Big Three – or even just General Motors – could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Industry supporters are offering such grim predictions as Congress weighs whether to bail out the nation’s largest automakers, which are struggling to survive the steepest economic slide in decades….

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

Well, it turns out that this was partially bogus.  The written warranties are still honored, but GM argues it left liability for any defects or design problems in the old shell company

General Motors Co (GM.N) is seeking to dismiss a lawsuit over a suspension problem on more than 400,000 Chevrolet Impalas from the 2007 and 2008 model years, saying it should not be responsible for repairs because the flaw predated its bankruptcy.

The lawsuit, filed on June 29 by Donna Trusky of Blakely, Pennsylvania, contended that her Impala suffered from faulty rear spindle rods, causing her rear tires to wear out after just 6,000 miles. [ID:nN1E7650CT]

Seeking class-action status and alleging breach of warranty, the lawsuit demands that GM fix the rods, saying that it had done so on Impala police vehicles.

But in a recent filing with the U.S. District Court in Detroit, GM noted that the cars were made by its predecessor General Motors Corp, now called Motors Liquidation Co or “Old GM,” before its 2009 bankruptcy and federal bailout.

The current company, called “New GM,” said it did not assume responsibility under the reorganization to fix the Impala problem, but only to make repairs “subject to conditions and limitations” in express written warranties. In essence, the automaker said, Trusky sued the wrong entity.

“New GM’s warranty obligations for vehicles sold by Old GM are limited to the express terms and conditions in the Old GM written warranties on a going-forward basis,” wrote Benjamin Jeffers, a lawyer for GM. “New GM did not assume responsibility for Old GM’s design choices, conduct, or alleged breaches of liability under the warranty.”

Of course, this happens all the time in bankruptcy  (and it is my experience, but I am not a legal expert) that GM may or may not succeed in this argument.  It is not always possible to leave liabilities behind in an old corporate shell, or else companies would reorganize every year.

But the point is that the special treatment of GM was supposed to be to protect consumers, and that turns out to be BS.  The warranties were likely always going to be protected in any bankruptcy, as such consumer benefits nearly always are in chapter 11 (the fact that you still hold any frequent flyer miles is proof of this, as nearly every airline in the country has been through chapter 11 in the last couple of decades and none of them disavowed their frequent flyer miles, despite the fact that holders are the most unsecured of unsecured creditors).

I have often described this statist feedback loop:

• Create government program
• Government programs messes up certain aspects of the market
• Blame such messes on “failure of markets” or capitalism or even the rich, rather than the government program
• Create new government program to fix problem created by last program
• Repeat

Obama’s new political strategy seems to be even more brazen

• Democrats pass new program over Republican objections
• New program has unseemly subsidies for rich people
• Blame subsidies on Republicans, to the point of using subsidies as example of bankruptcy of Republican party

Specifically, tax breaks for corporate jets:

The chief economic culprit of President Obama’s Wednesday press conference was undoubtedly “corporate jets.” He mentioned them on at least six occasions, each time offering their owners as an example of a group that should be paying more in taxes.

“I think it’s only fair to ask an oil company or a corporate jet owner that has done so well,” the president stated at one point, “to give up that tax break that no other business enjoys.”

But the corporate jet tax break to which Obama was referring – called “accelerated depreciation,” and a popular Democratic foil of late – was created by his own stimulus package.

Which is not to say that the losers in the Republican party would not likely have supported the same plan had it been their idea.

By the way, this is nearly exactly what Obama has been doing with those so-called special subsidies for oil companies.  This subsidies are in fact the identical tax breaks that all manufacturers receive that allow them to accelerate expensing of capital investment.  This is a tax policy that has enjoyed bipartisan support and no one is suggesting should be eliminated in general — just eliminated for industries that have bad PR.

Every person considering student loans should make sure they understand what is in this post from Megan McArdle.  Americans are spoiled, to some extent, by non-recourse home loans (ie, unlike in the rest of the world, they can’t come after assets to pay the loan beyond the house itself) and pretty generous terms for escaping credit card debt.  These cause us to forget that most other types of lenders out there are pretty hard-ass about actually, you know, getting paid back.

I never held any student debt, so I was not aware of many of the facts she provides, but my guess is that many people who do have student debts aren’t that aware either.  Here is the most important part:

I don’t know why Mystal thought I was only talking about federally guaranteed loans, or that I didn’t understand that his debt had been sold to a collector, but there you are. If I had thought that he was talking only about federally guaranteed loans, I would simply have said “Mystal is dangerously deluded and needs to issue a correction immediately before someone gets a very harmful idea from his post.”  Federal loans don’t settle.  Period….

Private lenders have more incentive to settle, but not a great deal more. Most unsecured debt, like credit card balances, personal loans, and medical bills, can and will be settled for pennies on the dollar–as low as ten cents in some cases (though this usually means that they don’t have any verification of the debt, so I wouldn’t take a settlement this low.) It’s not unheard of for a credit card collector to take 25 cents on the dollar on a valid debt, and 50 cents on the dollar is eminently achievable for many people.

But my understanding is that student loans are the great exception to this rule. Why? Student loans are not bankruptable, not even private ones. A collector for normal sorts of unsecured debt is always working with the threat of bankruptcy in the background; if you try to hold out for full repayment, the debtor can always file Chapter 7. In most cases, that means that unsecured creditors get nothing.

But that’s not the case with student loans. There are only two ways to erase the debt: prove you’re permanently disabled and will never again earn more than a pittance; or die

Don Boudreaux had these two rejoinders to the notion that the GM bailout is a success simply because GM is making a profit.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health.  Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses.  Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so.  No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.

Economically literate bailout opponents argued also that it sets a bad precedent.  By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future.  It’s far too early for Mr. Dionne to conclude that this prediction is mistaken.

I would offer a third concern — that the government has kept hundreds of thousands of skilled workers and billions of dollars of physical assets under the management of the same group that have decidedly underutilized these assets in the past.  A bankruptcy without Federal intervention would likely have shifted assets and skilled workers into new companies with different management teams and cultures pursuing different strategies with different information.

I always have trouble explaining this issue to people.   Think of a sports team with great players but a lousy coach and management team.  Having the government ensure that the lousy management stays in control of the great players is a waste for everyone.  I explained it more in depth in this post, where I concluded

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as “management” but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together “management”, we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case – Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA…

So what if GM dies?  Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe’s productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe’s most productive human and physical assets into organizations with DNA multipliers less than one.

Dish Network is going to buy Blockbuster out of bankruptcy for $320 million.  I am frankly floored there is that much value.  I have found that one can make a surprising amount of money riding an obsolete business down over the years if it is managed correctly — but this is generally for product businesses.  Retail businesses are really hard to ride down because you need to be closing stores every year and that is hard to do cost-effectively given typical lease terms.  Never-the-less, I expected the winning bid to be from a liquidation company, someone like the folks who took wound down Circuit City.

But the purchase by Dish Network implies that the buyer wants to continue operating Blockbuster in some form, and the identity of the buyer implies some sort of on-demand or streaming service.  But what does Blockbuster offer?  Is the brand valuable in this context, or a liability?   Does it have customer loyalty with a segment (old people?) who have so far shied away from Netflix / Hulu?  Does Blockbuster have favorable royalty / licensing contracts with studios that are transferable to other video delivery models?

If I had to guess, I would bet on the latter.  There have been examples of whole businesses built from legacy contracts.   One of the best examples is a little noticed contract Carl Icahn had with TWA, which spawned a huge new travel agency and later really helped to build Priceline.com.  Here was the story:

When TWA got a loan from Carl Icahn, an almost unnoticed part of the deal was that a certain travel agency owned by Icahn, small at the time, would be guaranteed TWA tickets at a healthy discount off the lowest published fares.  This agency, with this boondoggle, grew to enormous size as Lowestfare.com.  TWA, beyond the reasons listed above, therefore had a second reason for not wanting to publish their lowest possible fare.  Normal limitations that most airlines could set on how many seats would be available at their lowest fare could not be enforced by TWA.  If they offered a new $100 fare, Lowestfare.com could blow out an unlimited number of tickets at $80 or less and TWA would have to accept it.  Therefore, by offering discounts unpublished via Priceline, TWA prevented the travel agency from getting inventory even cheaper.  And so, a huge portion of the early Priceline inventory was TWA.  (ironically, after the American Airlines acquisition of TWA killed the deal, the Lowestfare.com URL was bought by … Priceline.

I wonder if Blockbuster has something of similar value in their royalty / licensing agreements?

Todd Zwicki has a great article on the auto bailouts.  Here is a brief excerpt of a long and very comprehensive article.

Of the two proceedings, Chrysler’s was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the “absolute priority” rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company’s secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a “deficiency claim” — the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the wronged creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.

To make matters worse, both bankruptcies were orchestrated as so-called “section 363″ sales. This meant that essentially all the assets of “old Chrysler” were sold to “new Chrysler” (and “old GM” to “new GM”), and were pushed through in a rush. These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a “sub rosa plan.” The reason is that the re-organization process offers all creditors the right to vote on the proposed plan as well as a chance to offer competing re-organization plans, while an asset sale can be carried out without such a vote.

In the cases of GM and Chrysler, however, the government essentially pushed through a re-organization disguised as a sale, and so denied the creditors their rights. As the University of Pennsylvania’s David Skeel observed last year, “selling” an entire company of GM or Chrysler’s size and complexity in this manner was unprecedented. Even on a smaller scale, it would have been highly irregular: While rush bankruptcy sales of much smaller companies were once common, the bankruptcy laws were overhauled in 1978 precisely to eliminate this practice.

At first, the fact that the companies’ creditors (and especially Chrysler’s creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler’s secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders’ acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.

Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly.

Over the last few weeks I have been following the story of the city of Glendale, AZ, in order to protect a previous $200 million public investment in our hockey team, proposing to issue another $100 million bond issue to help subsidize the purchase of the hockey team out of bankruptcy.

The real furor began when the Goldwater Institute, a local libertarian-conservative think tank, said they were considering suing over the bond issue because it violates the gift clause of the Arizona Constitution, which basically bans municipal governments from providing direct subsidies or lending their credit to private institutions.  The gift clause has been frequently breached in the past (politicians do love to subsidize high-profile businesses), but of late Goldwater has successfully challenged several public expenditures under the gift clause.

I won’t rehash the whole argument, but I found this bit from Senator McCain interesting

He called on the Goldwater Institute, a Valley watchdog that intends to sue to block the deal, to sit down and negotiate to keep the team

The buyer Matthew Hulsizer and his staff have taken this position throughout the deal — they have lamented that they are more than willing to “negotiate” with Goldwater, and they are frustrated Goldwater won’t come to the table with them.

This claim seems bizarre to me. If Goldwater thinks the deal is un-Constitutional, what is to “negotiate?” I don’t know Hulsizer or anything about him, but it strikes me that he is working from a Chicago paradigm, and is treating Goldwater as if it were a community organizer. In Chicago, community organizers try to use third parties to protest various deals, like the opening of a Wal-Mart or a new bank. These third-parties are nominally protesting on ideological grounds, but in fact they are merely trying to throw a spanner in the works in order to get a pay off from the deal makers, almost like a protection racket. The payoff might be money or some concession for the group (e.g. guarantee of X% jobs for this group in project, $X in loans earmarked for group, etc).

Everything I have seen tells me Hulsizer is approaching Goldwater in this paradigm.  Even going out and rounding up the most prominent politician in the state (McCain) to put pressure on Goldwater is part of this same Chicago paradigm.

Here by the way  is what Hulsizer is apparently offering

As one part of the deal, Glendale would sell bonds to pay Hulsizer $100 million, which the Chicago investor would use to purchase the team for $210 million from the National Hockey League.

Hulsizer said he notified Goldwater he would guarantee the team will pay Glendale at least $100 million during its lease on the city’s Jobing.com Arena through $75 million in team rent and fees and by covering $25 million in team losses that the city promised to pay the NHL this season, which is included in the hockey team’s purchase price.

“We need to move forward now,” he said. “I expect that Goldwater and other people who have come out against this deal will hopefully recognize the benefits of it and will now use all of that energy and tenacity and aggressiveness to go out and help us sell these bonds and make hockey work in the desert forever.”

Hulsizer said Goldwater had not yet responded to him.

By the way, I hesitate to trust the Arizona Republic to report such deal terms correctly, but if what is reported above is correct, the offer appears to be non-sense

1. What kind of guarantee is he offering?  Is it a guarantee by the corporate vehicle buying the team, because if it is, this is worthless.   The last team ownership group promised to pay the lease for 30 years — what does that mean once they went bankrupt?  I am sure Borders Books promised to pay a lot of real estate owners money for leases, and many of them are going to end up empty-handed in the bankruptcy.  If this is a personal guarantee, that is a nice step forward, though not enough because….
2. The $75 million in rent is largely irrelevant to the new bond issue — these rents support the old $200 million bond issue.  What they are saying is “issue a new $100 million bond issue for us and we will guarantee you can make 40% of the payments for the old bond issue.”   So?  When Balsillie wanted to move the team, he didn’t ask for an additional bond issue and agreed to pay off $50 million of the old one as an exit fee.
3. At the end of the day, if the $100 million is not a subsidy, not at risk, and fully backed by guaranteed cash flows, then Hulsizer should go out and get a $100 million private loan.  Period.

Unfortunately, this might be enough to get the deal through the courts.  Glendale will argue that for the $100 million, they will get $100 million paid against their existing bond issues that would not otherwise be paid if the team folds or leaves town.  This may fly with the courts, unfortunately, but it still sucks for taxpayers.   At the end of the day, nothing about this offer makes the $100 million bond issue any safer.   If the team goes bankrupt, it is lost.  That is an equity risk the city is taking with taxpayer funds, and equity risk for which we are getting no equity.  See here for full discussion of the risks and problems.

Postscript: The following is pure speculation, but I think it is close to correct.  The team is worth about $110 million at best (remember, it has never made money in AZ).  Forbes values it at $117 million but several similar franchises have sold for under $100 million lately.   The reason it is selling for $210 million is that the NHL, which bought it out of bankruptcy, guaranteed its other owners the league would not lose a penny on the team.   But the team has been racking up losses, and the accumulated cost to the NHL is now $210 million.  The NHL is insisting on a price that is $100 million north of where it should be.  In effect, the taxpayers of Glendale are bailing out the NHL for this crazy promise to its owners.

I can just see the negotiation.  Hulsizer, who by every evidence is a savvy financial guy, is not going to pay $210 million for an asset worth $110 million.  Glendale has way too many chips on the table to fold now, so it rides in and says it will contribute the $100 million difference.  In fact, the best evidence this is a subsidy is the difference between the purchase price and any reasonable team value.  Someone has to make up the ridiculous gap between the NHL asking price and reality, and Hulsizer is too smart to do it.   I have been calling this a subsidy of Hulsizer, but in fact this is really a subsidy of the NHL.   The NHL has Glendale by the short hairs, because Glendale knows (from the Balsillie offer, among others) that the only way the NHL can get a $210 million price is from a buyer who wants to move the team.

This, by the way, is EXACTLY the reason I opposed the original stadium funding deal.  Once they built the stadium, and then went further and lured businesses to develop around it, they were wide open to blackmail of this sort.

The problem with doubling down at this point is that the team has never made money and has no real public plan for doing so.  I have talked to NHL executives and none of them see how the turnaround is possible.  So how many years will it be before the new owners tire of their plaything and throw the team back into bankruptcy, so that Glendale will be in the exact same spot except $300 million, rather than $200 million, in debt.

There seems to be discussion in Washington about creating a legal framework for state bankruptcies.  My guess is that any law that might be passed will simply be a Trojan Horse.

A lot of people (including myself) would like the idea of the tough provisions applied to individuals who are bankrupt being applied to states.  Unfortunately, it is wildly unlikely that this is actually what we will get.  Any such law would likely just be a bailout program renamed “bankruptcy” to make it more palatable to the public, a transfer of obligations from state to federal taxpayers without any real imposition of discipline or cleanup of long-term obligations like pensions.  Heck, this is exactly what happened at GM, and that was just a private company.

Some might assume that a Republican House would be loathe to support bailout provisions for California, but two thoughts come to mind.

First, California, despite being a blue state, has plenty of red Congresspersons who will scream support for a bailout (for a parallel, think ethanol or farm subsidies, where grain state Republicans are among the first to break ranks with their brethren to support government interventionism).

Second, it is not clear that the Administration even needs the Congress any more to dish out money.  It has found so many extra-Constitutional ways to appropriate money without actually having to go to Congress (e.g. use of TARP funds for about anything, use of the Federal Reserve, etc.) that it should be no problem to do this without the House.  Take just one idea — Imagine California issues a $100 billion in 0.0000005% 100-year bonds that the Fed then buys at face value with printed money (as they have been buying US securities).  Instant bailout, no Congress.

This week in Forbes, I argue that tallying up the taxpayer money that has been poured into GM actually under-estimates the price of the bailout.

So what if the U.S. government had let GM’s bankruptcy proceed unhindered? Allowing the GMs of the world be liquidated, with their assets and employees taken up by more vital entities, is critical to the health of our economy and the wealth of our nation. Assuming GM’s DNA has a multiplier below one, releasing GM’s assets from GM’s control actually increases value. New owners of the assets might take radically different approaches to the automobile market. Talented employees who lose their jobs in the transition, after some admittedly painful personal dislocation, can find jobs designing and building things people want and value. Their output has more value, which in the long run helps everyone, including themselves….

This is the real cost of the GM bailout–not just tens of billions of dollars of wasted taxpayer money, but continued unimaginative use of one of the largest aggregations of wealth and talent in the world.

I am not sure that Tiger Mike Davis was really missed in the business world after his bankruptcy, but I have to say that my reaction to these memos of his (via Tom Kirkendall) waiver back and forth between “what an asshole, glad I never worked for him” and “too bad political correctness has purged the world of a lot of real characters.”

The memos seem to have a common theme of reminding everyone who is boss.  I run a 500-person business and have never in 10 years felt the need to remind any employee that I was boss, or to make it clear that I was somehow subject to different rules.  I could subject myself to different rules, but the downsides of doing so would be large and fairly predictable.  I try to work at least as hard as everyone who works for me.

If I was, say, LeBron James and 99% of the value created among myself and the circle of people working for me was created by me, I might see copping an attitude.  But since 99% of the value in my company is created by someone who works for me, I spend most of my time convincing my employees that I don’t know everything and that I am therefore reliant on their ideas and initiative.  A long while back I wrote that I tend to hide my degrees from Ivy League schools from my employees, as these tend to intimidate people into assuming I know more than they do.  This may be a correct assumption about, say, the origins of the reformation or solution approaches to partial differential equations.  It is not correct, however, when it comes to knowledge of day to day operating issues (and their potential solution) at our facilities my employees manage for me.

Interestingly, and almost inevitably, Tiger Mike seems to have a problem with his employees not sharing information or ideas with him, as evidenced by this memo:

Jacob Sullum writes about the gnashing of teeth among Arizona politicians that suddenly must rely on voluntary contributions rather than campaign funds taken by force from taxpayers who may not even support them.  I liked this quote from Goldwater:

“If they behaved reasonably,” they would have a contingency plan,” Dranias said. “After 19 months of rulings from the district court saying this is unconstitutional, no serious candidate would not be prepared for this contingency.”

Added Bolick, “People who gambled that public subsidies would be available to them now are reaping the folly of such a gamble.”

But if they were reasonable people who considered long-term consequences and took responsibility for their own actions, would they even be politicians.  Is it any surprise that a class of human beings who, in response to looming bankruptcy in Medicare, pass a trillion dollars of new health care spending commitments closed their eyes to what would likely happen when this campaign finance law reached the Supreme Court?

By the way, I met Clint’s Bolick’s wife Shawna who is running for the Republican nomination in District 11 for the state House.  I am not registered and refuse to register with a party so I can’t vote, but if you are looking for someone to support she seemed pretty sharp.

The recent bankruptcy of the USPS and the proposal to cut Saturday delivery has interesting implications for government and health care.  Everyone, from the GAO to the management of the USPS know that there are substantial productivity improvement that could be had with better labor deployment and employee accountability, but no one has the will to take on the union.  As a result, the only cost cutting idea they can propose is service cuts.  Which is further proof of what I have been saying for a couple of years — that despite all the hopey changey talk, the only real idea anyone in the Obama administration or Congress can come up with for health care cost reduction is reduced services and/or price controls (which reduce supply and thus services).

After famously throwing out 200 years of bankruptcy law to hose secured creditors in favor of uni0ns at GM and Chrysler, the Obama Administration is again bailing out the unions that helped get him elected

Barely 15 percent of all construction-industry workers in the United States are union members, while the remaining 85 percent are nonunion, according to the U.S. Department of Labor’s Bureau of Labor Statistics. So why has President Obama signed Executive Order 13502 directing federal agencies taking bids for government construction projects to accept only those from contractors who agree in advance to a project labor agreement that requires a union work force? Obama’s new order applies to all federal construction projects with price tags of $25 million or more, and it means all such contracts will only be awarded to companies with unionized work forces.

The costs of this to the public are pretty obvious, not only in terms of fairness but in increased costs and reduced competition.

Another factor helps explain Obama’s willingness to sign an executive order that will put millions more tax dollars in union coffers. Mix points out that unions under PLAs typically exact agreements that include requiring contractors to make payments to union pension funds. This is an increasingly urgent issue, as the Washington Examiner’s Mark Hemingway has recently detailed in these pages. According to Labor Department filings, the average union pension has only enough money on hand to cover 62 percent of the benefits it has promised to union members. Pension plans with 80 percent funding are considered “endangered” by federal auditors, while those with less than 65 percent funding are put on the “critical” list. With this latest executive order, it’s clear that Obama intends to give unions on the critical list a massive dose of federal tax dollars to cure what ails them.

I’ll keep saying it – this is right from the playbook of the European-style corporate state.

I am a bit late to this but from Arnold Kling:

The further into this crisis we go, the greater the share of subprime loans and mortgage losses are turning out to be located at Freddie and Fannie. Even one year ago, if you had asked me, I would have told you to expect at least 2/3 of the losses to be at companies like Citi and Bear, with less than 1/3 at Freddie and Fannie. It now looks quite different. Conservatively, 3/4 of taxpayers losses will be at Freddie and Fannie. Perhaps as much as 90 percent of taxpayer losses will be there.

Given the large role of Freddie and Fannie, it makes sense for politicians to create as large a diversion as possible. Hence, the brouhaha over bonuses at bailed-out banks.

Incidentally, the debate over the “public option” in health reform also can be viewed as an exercise in symbolic politics and diversion. The point is to divert attention away from the bankruptcy of Medicare.

Apparently, Chrysler is toast.  Which is what a lot of us were saying before taxpayers put billions of dollars into it.  (ht:  Maggies Farm)

Rumors, credible rumors, are beginning to circulate in the car industry and the automotive press, that Chrysler may not make it another year primarily due to its falling sales and growing financial losses at partner Fiat….

The Congressional Oversight Panel has already said taxpayers will not see most of the $81 billion that they put into the American car industry. The $14.3 billion put into Chrysler is more and more likely to be lost completely. The biggest single loser if Chrysler cannot survive is the UAW which owns 55% of the company.

I struggle to cry much for the UAW with that last part.  They only own 55% because the President intervened to give what should have belonged to the secured credit holders over to the UAW in exchange for being so helpful in getting him elected.

In January 2009, Chrysler stood on the brink of insolvency.  Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP).  Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt.  The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence.

When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler.  Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors.

I had more here.

Update: A firsthand account from a hosed secured creditor (pdf)

Details of the bankruptcy were unprecedented. For the first time in American history and totally counter to all established laws of bankruptcy, secured creditors would receive less than nonsecured creditors….

Indiana’s legal filings in the Chrysler, LLC bankruptcy sale made three essential points: First, the bankruptcy laws which have been in place protecting the rights of secured creditors cannot be arbitrarily overthrown by an act of the Executive. This is a violation of Article I, Section 8 of the U.S. Constitution in that Congress is solely assigned the role to determine uniform bankruptcy law. Neither the Courts nor the Executive can do this arbitrarily. Our funds suffered a “taking” in violation of the Fifth Amendment in that there was no “due process of law”. There was, and is in all financial arrangements between debtor and creditor, a contractual relationship, which is here being rendered null and void. If allowed to stand, this violation of two party contracts undermines a basic and essential tenet of debt financing in the capital markets.

Second, money provided by the federal government to Chrysler is being provided illegally and clearly counter to the intent of Congress. When TARP was being debated then Secretary of the Treasury Henry Paulson testified the money was NOT for the auto companies. It was targeted to aid the ailing financial industry, i.e, those with “Troubled Assets” that needed a “Recovery Program.” Evidence that the money was NOT intended to be an automotive bailout bill could not be more clearly illustrated than to review the failure of the separate automobile bailout bill presented in Congress in December 2008. If Congress had intended the TARP bill to cover the auto companies when it passed in October 2008, why were they even attempting to pass a separate automobile bailout bill just two months later? We believe both the Bush and Obama administration have acted illegally in this use of TARP funds.

Third, we argue that a sub rosa or “under-the-table-arrangement” between the Treasury and Chrysler prevented a fair valuation of the assets. In a legitimate auction sale, no potential bidder would be allowed to set the value of the assets being auctioned. But that is precisely what happened in this case as the Treasury was assigning values to creditors, determining which assets would be liquidated, what new parties, (i.e., Fiat SpA), would be brought into the deal, and how a new dealership network would be defined, etc. It was known from the outset that when the Chapter 11, Section 363 sale of the assets would occur, there would be only one bidder: the U.S. Treasury. Secured creditors could not have their rights protected or fairly valued in such an arrangement. Such an “insider-deal” reeks of impropriety.

I have seen several folks of late testing out a meme that opposition to health care reform is mostly about churlish unwillingness to help people.  My sense is that this is dead wrong.

As a strong libertarian, that may well be my motivation.  But the vast majority of Americans accept and support the government safety net and generally will support reasonable expansions of it to address true need.   I think most Americans would be willing to help people who honestly need financial aid to pay the health care bills.  This is particularly true for children — you don’t remember people going ballistic over SCHIP, do you?

I am not representative.  The vast center of this country is willing to accept, even embrace, increased government interventions in the right cause.  I forgot to blog on it, but remember that poll a few weeks ago that a majority of Americans think the government should required that women take their husbands last name after marriage?  I think the notion that there is any kind of sizable block of small government libertarian type folks out there is simply a myth.

So health care intervention and spending can be sold – again remember SCHIP but also the prescription drug bill.  I think the Administration is having trouble selling it in this case for two reasons:

• They are having difficulty showing people who truly are not getting care.  Sure there are a lot of people who are uninsured, but I think that meme has been around enough for people to deconstruct.  Who isn’t getting care?   Sure, for some folks getting care is a real hassle, but there are arguments to be made that accepting charity should not be that easy (remember the old Welfare?)  And sure, some folks have financial straights and can even face bankruptcy over health care bills, but our bankruptcy laws are incredibly generous and when tens of thousands are facing bankruptcy because they bought too many TV’s on their credit cards, it almost seems honorable to face bankruptcy over your wife’s cancer treatment.
• The second problem is what I call the public housing problem.  In the late 1960s, Americans were concerned about the poor and homeless and spent billions to build housing projects for them.  It turns out that this doesn’t work out so well, but that is not my point.  My point is that Americans could be convinced to spend money to build poor people government homes.  BUT their position would have been very different if investments in public housing required the rich and middle class who were paying for the program to move out of their homes and into public housing as well.That is the fear that I think much of America has today.  If asked, they would likely pay to provide government health care in an instance where it was demonstrated that health care was entirely lacking.  They would likely suspect that such care, like much of public housing, would suck, but as it was being offered to someone who supposedly had nothing, it would represent a net improvement.  But they don’t want to move into the projects themselves, and frankly don’t understand why agreeing to help poor people afford more health care also means they have to move into the government system themselves.

GM is apparently emerging from bankruptcy.  It will have the same (though fewer) managers, employees, and assembly plants.  It will have the same product designers, marketers, strategists, and planners.  It will have roughly the same organization systems, the same culture, and the same history.   Though it was able to shed some plants and employees, it will have most of the same stifling work rules on the shop floor.  It did, however,  manage to shed a lot of interest payments to creditors who entrusted their money to GM in return for claims on GM assets, only to be given the shaft by the Obama administration,

The main difference in the new GM is that it will have an ownership group whose primary concerns are NOT the financial success of the company.  The UAW will be primarily concerned with keeping union members employed and happy and not shifting any manufacturing to lower-cost venues.  The US Government will be primarily concerned with making sure the UAW is happy and promoting a number of its own goals, like “sustainable” plants and smaller cars, irrespective of whether these goals make business sense.  It will be a company more concerned with whether plants have recycling programs and workers with American passports rather than cost or quality.  Both the UAW and the US government can pursue such non-business goals secure in the knowledge that financial success is virtually irrelevant, as the US taxpayer can be counted on to make up any shortfalls.

The scare story, from November 2008:

Advocates for the nation’s automakers are warning that the collapse of the Big Three – or even just General Motors – could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Industry supporters are offering such grim predictions as Congress weighs whether to bail out the nation’s largest automakers, which are struggling to survive the steepest economic slide in decades.

Even if just GM collapsed, the failure could bring down the other two companies – and even the U.S. operations of foreign automakers – as parts suppliers run out of money and shut down….

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

I called BS on this at the time.  Turns out it was yet another made-up scare story to justify government coercion and more unthinking expenditure of taxpayer dollars:

One of the biggest fears of a GM bankruptcy filing — a collapse of revenue — appears to not be as prominent an issue as originally thought.

Car buyers appear undaunted by GM’s bankruptcy, assuaging one of the auto maker’s biggest fears heading into Chapter 11. Early signs point to stable demand for GM cars and trucks since the company filed for Chapter 11.

Mr. Henderson said June retail sales are tracking higher than May. “June sales are moving along just fine,” Mr. Henderson told reporters at a summit in Detroit. Sales to rental and other fleets are down from last month, he said. “We’re very gratified for the support of dealers and customers that we’ve received through this.”

I have not blogged much in the last week on the Obama takeover of GM, but you can take all my old Chrysler posts and just substitute “GM” for “Chrysler” and you will have it pretty much straight.   Having gotten away with hammering secured creditors in favor of the UAW at Chrysler, Obama is setting the same course at GM.  Via Q&O:

The United Auto Workers retiree health fund is set to own as much as 39 percent of the restructured GM, in exchange for giving up its claim to at least $10 billion that the company owes it….

The chief obstacle to an out-of-court settlement for GM remains: There has been no agreement between the company and the investors who hold $27 billion worth of GM bonds.

Under orders from the Obama administration, GM has offered to give the bondholders a 10 percent equity stake in the restructured company in exchange for giving up their bonds.

Hmmm…  let’s give unsecured creditor the UAW a 10x better deal than the secured creditors.  No wonder Obama wants to keep this out of bankruptcy court — laws and contracts and stuff actually would have to be applied there.   But the company will be set for the future — the US and Canadian governments will control a majority of the board seats, with the rest presumably controlled by the UAW.  Does everybody believe me now when I say we are heading toward a European-style corporate state?

The only thing standing in the way, of course, is those pesky secured creditors, who are actually holding out for what they are legally and contractually due.   Obama’s got a bit more difficulty here at GM than at Chrysler because a smaller percentage of the secured creditors are TARP recipients, and therefore he has less leverage to make them give up their rights  (at Chrysler, the TARP majority was pressured successfully into selling out their non-TARP brethren among the creditors).

Of course, Obama has the advantage of Chrysler as a precedent, which makes it pretty clear why he set Chrysler up as the first to be intimidated, as he had the most leverage over them with TARP recipients in the creditor group.  Interestingly, this is very similar to how the UAW has always dealt with the Big 3, targeting the most vulnerable for pressure in contract talks, and then using that settlement as a precedent in the rest of industry.  One wonders if the UAW hasn’t been whispering in his ear through this whole process.

I couldn’t believe this when I read it:

General Motors is open to considering moving its headquarters from Detroit, selling off U.S. plants and even renegotiating parts of its restructuring plan with its major union, the new chief executive said Monday….

A move by GM to leave Detroit would represent another blow for the economy of a region already reeling from the bankruptcy of Chrysler and the sharp downturn in auto manufacturing.

GM purchased its glass-towered headquarter building known as Detroit’s Renaissance Center last year for $625 million.

The article moves on to other topics, but I was struck by this:  A year ago, when bankruptcy was only months away (delayed only by injections of taxpayer money), with the real estate market teetering at its peak and just starting to fall off, with GM hemorraging cash, GM decides to … spend $625 million on Detroit commercial real estate.

This is outrageous.  All the more so because GM’s fortunes and the value of downtown Detroit real estate have a beta coefficient that is probably well above 1.  In other words, if GM decides it wants to sell the building, Detroit commercial real estate is going to tank on the news that GM is leaving Detroit, making the real estate virtually worthless.  It is very dangerous to buy an asset for which you are the only possible buyer if there is any possibility you might want to sell it some day.

I understand that companies that have losing business models often find it more profitable to invest outside of their business**, but GM seems to have found the only investment on the planet worse than their own stock.

** Postscript: I am not a huge Roger Smith fan, but this was essentially his strategy — GM sucks as an investment, so I am going to invest outside of the auto industry.  Though he caught a lot of grief for it, most of his investments outside of GM turned out to have a substantially higher return for shareholders than his (or his successors’) investments inside of GM.   Wikipedia writes:

Smith’s purchases of EDS and Hughes were criticized as unwise diversions of resources at a time when GM could have invested more in its core automotive divisions.

But what if investments in your core business are even more unwise?

Via Zero Hedge:

A group of Chrysler creditors opposing the carmaker’s reorganization is likely to disband after two more investment firms withdrew from its membership, a person briefed on the matter told DealBook on Friday.

The withdrawals of OppenheimerFunds and Stairway Capital Management will likely drop the group, calling itself the Committee of Non-TARP Lenders, below 5 percent of Chrysler’s $6.9 billion in secured debt, this person said. That would almost certainly eliminate the group’s standing in federal bankruptcy court.

Ever since the group made public last week, its membership has shrunken by the day as it faced public criticism from President Obama and others. That continued withdrawal of firms led Oppenheimer and Stairway to conclude that they could not succeed in opposing the Chrysler reorganization plan in court, the two firms said in separate statements.

Just another step closer to a Mussolini-style corporate state.

Update: David Skeel argues the Chrysler bankruptcy settlement is a sham sale of the sort that was outlawed in 1938.  Except, of course, when the President does it, I guess.