At no point in recent memory have I been more proud to be born and raised a Hoosier. No, not a graduate of Indiana University, but to be a resident of the great State of Indiana, one of the last remaining bastions of common sense in this country we call the United States of America.
Political convenience is being placed ahead of common sense and rules, laws, and ordinances that have existed for centuries. Common sense and tradition are being hurriedly tossed to the wind. To what do I refer? I am referring to the recent lawsuit filed by no other than Indiana’s State Treasurer to stop the bankruptcy fire sale of Chrysler to Fiat.
I have intentionally avoided writing anything about the automotive industry on my blog site. My father-in-law retired from GM, my grandpa, uncle, and cousin all retired from Chrysler, and many, many friends and clients are either employed or retired from Delphi, Delco, GM, Chrysler, or work in auto sales. The automotive industry has been a staple in Indiana for decades, but for many Hoosiers it is a love-hate relationship with the carmakers. Employees, retirees and their families all love the industry; others blame the UAW for the current automotive crisis and are more than willing to say that "they are getting what they deserve." Knowing that I would receive hate mail or fan mail from one side or the other, regardless of what I would write, I have tried to avoid the situation altogether.
However, this article, while dealing indirectly with the automotive industry, deals directly with the property rights and legal rights of every American citizen. Why does real estate in the US cost more than like properties in most other areas of the world? Because we have a long-standing tradition of actually recognizing the legal owner. Anyone that buys a piece of property knows that our government will not just arbitrarily come in and take our property away. That is, until recently…..
There is a pecking order in the structure of capital. A company could issue common stock, preferred stock, senior debt and junior debt. If a company were to go belly-up, the long-standing rule is that senior debt holders could seize any assets that have been pledged as a security, and then sell them to satisfy claims. If any value remains in the company, holders of senior debt are then paid. Junior creditors are next in line, followed by preferred shareholders, and common shareholders are last in line, getting paid only if everyone else has been paid back first. For example, let’s say you have a first mortgage and a second mortgage. If you had to declare bankruptcy, the first mortgage would be paid back from the sale of your property before the second mortgage would get a single penny. And, all things being equal, the interest rate you pay on a first is generally less than you pay on a second. Why? Just like most securities, the more perceived risk, the higher the expected return. A first mortgage (being senior debt) has less perceived risk than a second mortgage (junior debt).
And so it was with Chrysler. They had senior creditors and junior creditors. The senior creditors should be the first to be paid back in a bankruptcy. And this is where the State of Indiana comes into play. The Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust, and Indiana Major Movers Construction Fund represent approximately 100,000 civil servants, police officers, school teachers and their families. These three funds were senior creditors to Chrysler, investing millions of dollars, receiving less interest in return than junior creditors, and are now being told that they will not be paid back before junior debtors; in fact, it is just the opposite!
Now that Chrysler has filed for bankruptcy, Indiana and other secured creditors are being told that they will get roughly 30 cents on the dollar. But the UAW, an unsecured junior creditor, will get approximately fifty cents on the dollar. Doesn’t quite sound equitable, does it? Would it be fair for your second mortgage or home equity line to be paid back before your first mortgage? No. Common sense tells us that this is wrong. So why was it just Indiana making a fuss?
Turns out the major holders of secured senior debt to Chrysler were none other than the big banks – you know, those same big banks that received billions of dollars in TARP money. The President has already demonstrated that he IS the CEO of every firm receiving federal aid: remember, the President fired the CEO of General Motors not long ago, and the CEO’s of the banks would like to remain in their positions. So the big "I took the TARP money" banks reluctantly agreed not to fight for more than 30 cents on the dollar for their secured debt.
The powers that be in Washington knew that with the banks out of the way, they could brush away any investors – including the State of Indiana – that would try to hold out for what is rightfully theirs. What truly amazes me is that the Supreme Court agreed to the sale, and effectively slapped Indiana – and all secured creditors throughout the United States – in the face. This decision will change the way that companies will issue debt in the future, and it will change they way that foreign investors view the United States indefinitely. From now on, there may be better places to invest – countries that have more solid property rights and contract rights than we do.
The President helped out the UAW at the expense of other unions, such as the Indiana State Teacher’s Association. But what has he done to capitalism as a whole? Why would anyone be willing to accept a lower yield as a "secured" debt holder, after the junior creditors with Chrysler were paid back before the senior creditors? Why become a bond holder at all? How will future companies raise capital?
My hat goes off to State Treasurer Richard Mourdock for displaying common sense. He lost the battle, but hopefully common sense will eventually win the war.
Of course these are just my thoughts – Clark’s Thoughts.
