Monday, January 12, 2009

We Should Have Seen That Coming

AP reports: GM exec says automaker may need more gov't money

Well, that was predictable. But you’d think these guys would at least wait until the Obama administration takes office next week before shooting off their mouths on the subject. This kind of talk won’t win them any popularity contests outside of the rust belt.

This was also predicable:
“UAW President Ron Gettelfinger has said the union will approach President-elect Barack Obama's administration to end what he called unfair requirements in the [auto company bailout] loan terms for concessions from the union.”
Even before the bailout, the union had agreed to take over the trust fund that administers their retirees’ generous health care benefits in 2010. This single measure will go a long way toward bringing Big Three labor costs closer in line with those of domestic-foreign auto makers like Toyota and Nissan.

Among the ‘unfair’ elements of the bailout, per the union, is the requirement that the union “take company stock instead of cash for half the payments into the union-run health care trust.”

Receiving half of the trust payments in stock would incentivize the union to work for improved company stock values. Getting stock while the price is at historic lows is a good deal — if you truly expect the companies to be viable in the future.

If you get a chunk of GM stock at $4/share and the company then performs so well that the price eventually returns to $64, your trust has improved its GM holdings by 1,600%. In this scenario, $100 million would become $1.6 billion.

Of course, if you expect the car companies to tank completely, or you expect stock prices to decline even further and remain depressed for a long time, this provision would seem unfair. If you expect the car companies to continue to press for more largess from the apparently bottomless well of the federal government (many seem to think that it’s like Utgarda Loki’s drinking horn in his challenge to Thor), you’d want cash up front instead of stock.

At any rate, it should be expected for the union to seek better terms from the new Democratic (more union friendly) administration. And everyone knew that when the Bush administration did the car company bailout last month it was merely kicking the ball into the Obama administration’s court. So it shouldn’t shock anyone that the car companies will also lobby the new administration for more cash and easier terms.

The car companies and the banks are just the tip of the iceberg. The Bush administration has established a bailout precedent that will bring the Obama administration an endless line of seekers. But the Chief Executive is not a giant enchanter king like Utgarda Loki, and the federal budget is not a bottomless well.

Nor are these seekers heroes of great feat like Thor and his companions. Rather, they are more akin to wolves that are content to devour the product of others’ labors, even if it means that they are shackled to become the government’s lap dogs.

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