Bondholders are kicking and screaming, but it appears as if General Motors Corp. is headed for an orderly bankruptcy, and the Obama administration is about to be handed the keys to a venerable corporate institution. Again.
And again, the administration seems to be rewriting the rules of capitalism to fashion a deal to its liking.
Purists -- and virtually every academic economist one happens to encounter -- wonder what happened to the once inviolate principle of rewarding risk-takers. Unsecured creditors will get less of a stake in the new GM than its employees, and you can forget about poor unadorned stockholders. (The administration promises some unspecified protections for creditors; we shall see.)
As in the deal with Chyrsler's bondholders, the administration muscled its way through the negotiations and used its considerable leverage to convince secured debtholders -- the highest class of investors -- to accept a fixed return that was significantly less than many of those investors had expected when they put money into the falling company. Who benefits? The question isn't very apt, because everyone is losing something. But, on balance, the unions are getting a better deal.
The unions, who support Democrats -- and whose work rules arguably hastened the collapse of the American auto industry.
Asked whether the Chrysler and GM bailouts were sops to unions at the expense of secured creditors, administration officials answer the subject of the question. That may be the case, they respond, but the other choices were untenable. As to the charge that the Obama economic team is redefining capitalism, erasing incentives for investors and acting like a gangster, I would wager an hour's worth of UAW productivity that officials, in private moments, would concede that these things are so. But they'd argue that, where critics see a contempt for capitalism, what's actually taking place is a revision of the informal rules that governed capitalism into the ground. A cultural revolution, if you will.
It is absolutely true that there are exigent circumstances; that the domino effect of two major auto company failures would cascade into a catastrophe even greater than the one we've experienced. The government's $15 billion stake in GM gives it actual leverage. At the same time, though, the Obama team is pushing a policy outcome that will advance Mr. Obama's economic worldview, one that treats the era of money capitalism, and all of its rules, as suspect.
The pattern is clear: threats from the government to abrogate employment contracts...public repudiation of the Wall Street bonus structure...proposals to change tax rates for corporations doing business overseas...the equating of hedge fund managers with "speculators," a term rife with history -- and a word that came out of the president's mouth during the frenzied Chrysler negotiations.
Note that, aside from threats and suasion, the administration hasn't done anything. The bondholders (with notable exceptions) agreed to these two deals. No laws have been broken. Everyone has sacrificed. And the unions have already given up a great deal -- and, in doing so, put their trust in the administration. Here's the Obama perspective on these deals, in six bullet points.
1. Secured debtholders were the blood cells of the money economy, and they're very important now. But employees ought to be valued by the market system, even if there is no way to measure their contribution. The Obama administration supports the union movement. Mr. Obama ran on a platform of empowering unions. This move empowers unions.
2. The administration believed that, absent tough talk, hedge funds and debt holders would have driven GM into bankruptcy; they'd get paid by, say, stripping down and melting the metal beams from the factories, and everyone else would get screwed. Incentives, in this case, would not have saved GM.
3. Chrysler, a much smaller company, might well have been left to die. But its failure at the time when the decision needed to be made -- its failure, in other words, in the context of a collapsing economy -- would have been much more catastrophic. The administration believes that its intervention will buy Chrysler a few more years. If it fails in a few years, that's bad -- but not destructive.
4. Unions aren't getting off scot free. They've got to reorganize the company. They're going to have to meet aggressive profit goals. They're now responsible for the legacy benefits. And investors aren't necessarily going to be willing to put money in GM now, especially given the precedents set by the government. The UAW may be on its own.
5. Here's a version of this argument, by private equity manager Scott Sperling:
"Far from harming capitalism, the Obama administration's policies concerning GM and Chrysler are very much in line with the process of "creative destruction" that the economist Joseph Schumpeter described as the active heart of capitalism's success. The government has been willing to support an important industry -- but only on the condition that all stakeholders make the tough choices necessary for the companies to succeed in the long term. This is capitalism at work."
This argument may not buy Obama good will on Wall Street, but it faithfully represents what he's thinking.
Editor's note: A version of this column appeared on CBSNews.com