Tag Archives: AFL-CIO

Obama State Department Official Kowtows to China on Human Rights

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015monks_468x286In a significant diplomatic victory for the Chinese “communist” regime, the State Department’s leading human rights official, Michael Posner, conceded that human rights is a relative issue not a universal one.

In order to curry favor with the Chinese officials Posner suggested that our treatment of Muslims or the recent law passed in Arizona on illegal immigration was the rough equivalent of the kind of human rights problems found in China. While misguided and likely unconstitutional, to suggest that what is happening in Arizona is morally or logically equivalent to the brutality the Chinese mete out against their ethnic minorities is appalling. Posner also told the Chinese that just like in China the US lacks sufficient resources to insure worker safety and health. While there are (serious) problems in the US in this area there is nothing close to the problems that Chinese workers face. In China there are no unions, there is no independent health and safety agency and workers suffer terrible injuries and death in the workplace everyday.

Relativism has been the major intellectual argument used by the Chinese in their offensive in international agencies like the ILO and elsewhere over the last decade. I examine this issue in detail in my recent book, From Che to China. The argument comes in two forms: either, one, regimes like China, Cuba, North Korea and Venezuela will argue that what we do here in the US to minorities (or labor, women, the poor) is as bad as what they do in their countries; or, two, westerners just do not understand the cultural context in which the alleged abuse takes place – if they did, they would realize it is actually a good thing!

Of course, sadly, Posner is only following the path laid out by his boss, the President, who shocked the international human rights community last year by sending his aide Valerie Jarrett to India to ask the Dalai Lama not to come to the United States for a meeting with the President and then refused to meet with the Dalai Lama when he showed up in DC anyway. China’s occupation of Tibet is only the most visible example of the way that it treats ethnic minorities.

Posner, along with the State Department’s Harold Koh and Sarah Cleveland, the White House’s Samantha Power and Defense Department’s Rosa Brooks, is part of what some have called a Human Rights Dream Team. Yet they have clearly disappointed many. Koh recently defended unmanned drones used to assassinate American citizens as a valid act of self defense.

The Posner concession to China is also a setback for efforts by American labor to support independent unions in China by supporting groups like the China Labour Bulletin in Hong Kong led by Tienanmen Square veteran Han Dongfang. One of the AFL-CIO’s top international officials, Barbara Shailor, was recently appointed to head up the labor rights effort at the State Department under Posner. Historically, Shailor has stood fast in support of independent unions and the universal norms of human rights that make genuine trade unions possible. Her impact is surely now compromised and one hopes she may reconsider accepting the appointment as should the AFL-CIO itself consider registering a protest over Posner’s attempt at “constructive engagement” on human and labor rights with China.

Briefing on the U.S.-China Human Rights Dialogue.

SEIU’s Andy Stern – he didn’t jump off the bridge, he was pushed

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With all due respect to the dogged and important reporting of Randy Shaw at BeyondChron on the SEIU v. NUHW saga, I differ with his suggestion today that Andy Stern, longtime head of SEIU, decided to sail into the good night just because the heat in the kitchen was too much to bear.

Shaw concludes in an account that is only slightly different than the press release apologias coming from SEIU HQ that ”the bottom line: Stern was burned out, saw nothing on the immediate horizon that excited him, and decided he wanted out. He clearly prefers being a spokesperson for political issues to the day to day struggles of running a labor union, and expect him to stay politically involved.”

Sorry, but no one walks away from command of a 2 million member organization that can shut down entire cities (as Stern did as part of the immigrant rights marches a few years ago) or elect presidents (as, arguably, Stern helped do in the case of Obama) quietly or on their own.

Anyone who would should have their head examined. In any case, Stern without those 2 million members is a nobody and he likely knows that. His days as “Obama’s Fifth Man” are certainly numbered. His seat at the table was based on his ability to mobilize those members and their affiliate groups in the low wage immigrant communities they were connected to, such as ACORN and various La Raza-type entities.

No, Stern was pushed – by whom and why remains to be explained. But there is a report circulating that Stern was savaged at a recent AFL-CIO Executive Council by none other than his mentor, former AFL president, John J. Sweeney, who preceded Stern as head of SEIU.

In any case, good riddance. Stern’s organizing “success” was largely made up out of bureaucratic maneuvers.

He appended CSEA, the huge California public sector union (and the union I belonged to when I was on the labor center staff at U.C. Berkeley) to SEIU and then claimed he had organized 100,000 new workers. Yet, CSEA had been a viable labor organization for many decades in California. He engineered top down deals with governors like Blagojevich and Gray Davis to reclassify social welfare recipients as workers and claim tens of thousands more “new” union members.

He re-organized low wage immigrant hispanic workers in the janitorial and building service sectors in places like Los Angeles only after SEIU had watched for decades while the industry restructured to destroy the unions that often African-American janitors had built over many decades. Then he (and Sweeney too it should be said) imposed trusteeships when the new members thought they should have real input over their labor organizations.

And who can forget Stern’s travels to Beijing to meet with Chinese Communist Party officials in an abrupt and damaging reversal of international labor’s support for genuine independent unions in China? Stern dragged Jimmy Hoffa, Jr., along as well who, likely against his better instincts decided not to press the Chinese on the rights of imprisoned labor activists. Stern claimed, absurdly, that CtW was helping the Chinese state controlled labor organization, the ACFTU, organize WalMart operations there! But the delegations he and UCLA’s Kent Wong led there have ignored genuine labor leaders like Han Dong Fang of the China Labour Bulletin as well as the only real labor union in today’s China, the Hong Kong Confederation of Trade Unions.

Change to Win has turned out to be a pipe dream. Labor intellectuals like Nelson Lichtenstein, Ruth Milkman, Kim Voss, and Ken Jacobs, all based for some odd reason at the University of California which has almost no SEIU presence, thought CtW was the re-birth of the CIO with Stern as John L. Lewis. How quaint. In fact, the five affiliates in CtW went to the mattresses as quickly as the Mafia’s Five Families in New York did in the gangland wars of the 30s or 60s.

First, SEIU betrayed the efforts of the UFCW to lead a campaign among WalMart’s one million non-union workers with a back stage deal with the WalMart CEO. Then, Stern backed Bruce Raynor in an absurd effort to wrest control of the Unite-HERE (home now of the old ILGWU, my grandfather’s proud union for many decades) and its Amalgamated Bank.

Finally, in what has to be the coup de grace in assessing Stern’s legacy, there are reports that SEIU supported a “no union” choice in the ongoing election battle in USC’s hospital system in Los Angeles when the National Union of Health Workers challenged SEIU’s hold on that shop.  But the USC employees were, of course, part of the old UHW when it was inside SEIU.  It was Stern who forced the split that led to the election, one of many occurring across the state to settle the unions’ battle. A recent legal dispute between the two unions resulted in largely a draw.

The upside of the ouster of Stern is that it is very unlikely that his replacement will have anything like the ability or desire to control the union in quite the way he did. It will likely be a very messy transition but we could see the opening of real talks about the CtW affiliates following Unite-HERE back into the House of Labor where they belong.

AFTRA Jumps the Gun – Proposes New Union in Entertainment and Media Space

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n99175441996_28012The American Federation of Television and Radio Artists, or AFTRA, surprised many in the entertainment and media industry yesterday with a call for the formation of a new union to represent employees in the industry. While AFTRA and SAG have been expected to re-open merger talks at some point, the unilateral proposal by AFTRA was not expected. The details are not yet known but in an Open Letter to its members AFTRA leaders called for a “new union for a new world.”

The letter suggests the new union would include actors, performers and broadcast journalists. The letter argues that the major motivation for the new organization would be to “build power” not just reduce the costs of running two unions side by side in the overlapping industries.

Currently, SAG and AFTRA share tens of thousands of members yet have separate pension and health care plans and separate paid professional staff. A merger would presumably have some cost cutting impact at a time when dues flows to the guilds has slowed.

The letter surprised many because one of its signatories, Ron Morgan, an AFTRA Vice President, had only this past week come on to a SAG dominated discussion board to deny that merger was in the works at all.  In light of the mistrust between many in the two organizations Morgan’s behavior was viewed as disingenuous at best. Morgan contends that he only meant to suggest that merger could not take place until after the current round of bargaining was over.

However, the larger question that remains unresolved is how, exactly, a larger new union would change the dramatic loss of leverage of performers in the industry. SAG remains a largely actor dominated organization and many argue, credibly, that the conditions facing actors are significantly different from those facing journalists. Therefore, instead of a merger of both kinds of industry employees, actors should be reassigned to just a larger version of SAG while AFTRA concentrates on journalists.

SAG is currently run by more moderate pro-merger forces and the Guild and AFTRA have committed to engage in some form of joint bargaining with the AMPTP later this year when contract talks over their major contract covering TV and film get underway. But to date neither union has begun any public effort to increase union leverage in advance of the talks. Thus, one test of AFTRA’s commitment to “build power” will be whether they suggest any innovative approaches to the upcoming bargaining round.

To date, the unions have signaled a reluctance to strike which means they must develop other means to change the balance of power prior to the start of talks. Little sign of that yet, however. The unions seem to be relying on the old method of just soliciting input from the members and then showing up at the table and making demands.

AFTRA had its origins in live radio performances and then helped form a Television division which attempted to compete with SAG in representation of actors in television motion pictures.  A running battle has continued between the two groups for several decades, most recently over the success of AFTRA in winning representation in a large number of pilot programs, territory once dominated by SAG.

The AFTRA “new union” approach is similar to that being taken by groups like SEIU and the Teamsters which favor lumping large numbers of workers into large local unions across occupations.  Typically such unions end up with very centralized staff power which gives that staff some leverage in bargaining and the political arena but at the cost of internal union democracy.  Recently, inside SEIU there has been a revolt against these organizing methods leading to a breakaway group in California known as United Healthcare Workers. The conflict has pitted many erstwhile labor allies against each other in a costly legal and political battle.

While that kind of conflict is unlikely here, the argument made by AFTRA would seem to open the door to amalgamation with Actors Equity and the IA, as well. AFTRA recently formed an alliance with the IA and was also elevated to the Executive Council of the AFL-CIO. SAG President Ken Howard is also on the EC but only because of SAG’s membership in the so-called 4A’s, a longstanding alliance of performers unions that pre-dates the AFL-CIO.

The new initiative by AFTRA could not have taken place without the tacit approval of the AFL-CIO hierarchy and likely was made known to the SAG leadership in advance. It is not clear why SAG would allow AFTRA to jump first but the momentum is clearly with AFTRA and that may set the tone for the negotiations to follow.

SAG’s NED Un-Debate – Vallywood replies to the critics

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My post The Dog That Did Not Bark has struck quite a nerve on both sides of the aisle, so to speak, among SAG members.

Just to summarize the state of play for those who are catching up: SAG’s National Board met over the weekend, the first meeting of the board since the election of the new moderate SAG President Ken Howard. Howard was a no-show, but his new majority pushed through, without a widely expected fight with the Membership First opposition group, a two year deal with the interim chief executive of SAG (called the “National Executive Director”), David White.

White had been brought in early this year to handle the final stages of negotiations with the producers, which had been at a stalemate under Membership First’s leadership. The moderates had gained control of the national board in the fall of 2008.

I pointed out in my post that ordinarily a board like SAG’s would want to make sure that it satisfied its fiduciary duty of care when hiring a CEO and would not just hand the job to a candidate favored by one political faction on the board without going through a thorough search process.

But apparently Membership First raised few objections to the moderates’ decision; some even voted for White. One of my critics, Membership First backer Steve Barr, pauses long enough in his tirade against my arguments to indeed confirm that MF is keeping its “powder dry” for future fights.

So what might that future fight be all about?

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My Op-ed on AFL-CIO President Trumka

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The McClatchy Newspapers have picked up my op-ed on Richard Trumka, the new AFL-CIO President.  So far it’s run in the Providence (RI) Journal, Buffalo News, Sacramento Bee, the Pittsburgh Tribune and the Bellingham (WA) HeraldAFL CIO.

Here is the introduction:

America’s leading union federation, the AFL-CIO, just elevated longtime Secretary-Treasurer Richard Trumka to its presidency, replacing the plodding 75-year-old John Sweeney and providing hope that organized labor will finally get the breath of fresh air it has needed for many years.

To reverse labor’s slow descent into irrelevance will require a bold shift by Trumka, ironically perhaps, back to trade unionism’s first principles, including advocacy of “bread and butter” improvements in pay and working conditions and support for workers abroad.

Once before in its long history, American labor found itself socially isolated, facing intransigent employers, feckless politicians and a challenging combination of rapid technological change and a multi-ethnic immigrant workforce.

You can read the rest here.

Richard Trumka – Former Coal Miner is new AFL-CIO President

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minerThe Wall Street Journal interviewed me for this story about the ascension of Richard Trumka to the Presidency of the AFL-CIO.

I explained to them that the labor movement faces an internal governance crisis, an external change in the macroeconomic environment and an important shift in the political culture.  These are all interrelated, of course, but they add up to what I once called a near “perfect storm” for organized labor.

Trumka is a far more articulate and flexible person than outgoing AFL-CIO President John Sweeney who, frankly, had less personality than a funeral home director – in light of the downward slide of labor during his fourteen years in office it’s a wonder anyone knew the difference.  Sweeney emerged as a compromise candidate when the AFL faced the first wave of crisis to hit it – the end of the cold war and thus the end of American labor’s privileged position inside the world’s most powerful capitalist society.

Now, globalization and technological change have made clear how serious the shift away from the old Cold War era is for trade unions. Andy Stern led SEIU and several other affiliates into the wilderness a few years ago in a vain (double entendre intended) attempt to set up a competing union group known as Change to Win. They have failed.  But life at the AFL has been no picnic, with declining revenues, staff layoffs and growing political hostility to their lead agenda items, health care and the mis-named Employee Free Choice Act (did they really think they could get away with card check?).

To revive labor must lead and to lead requires an independent political and social program that appeals to broad numbers of workers.  But how many workers know what the AFL-CIO or any of its affiliates stand for other than pouring dues money down the drain of feckless politicians?

Twenty five years ago Trumka, the young lawyer who spent seven years in the mines that his father, father-in-law and grandfather worked, took over the United Mine Workers, when that union meant something in the US economy, after a a rank and file revolt against corrupt and violent leaders.  He then led a valiant strike against the Pittston Coal Company.

trumka

But can he recall that experience and translate it into a viable program to pump life into the entire AFL structure?

Unfortunately, his opening speech to the AFL-CIO Convention offered little sign of his plans, lacking specifics other than a retreat to the “public option” from labor’s longstanding support for the “Medicare For All” single payer proposal.

Given how long the plan for his new role was underway, the 2000 assembled delegates would be justified in feeling some disappointment.

Tian’anmen – Then and Now…

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bodies-of-dead-civilians-0011

Around the world this week millions will remember the brave Chinese students and workers who stood up to the Chinese “communist” autocracy in May and June of 1989 and paid for their courage with their lives. Thousands were likely murdered in the streets around Beijing, while many thousands there and elsewhere throughout China ended up in prison.  The picture above was taken in the days after the crack PLA troops went on their bloody offensive on June 4 – only after regular troops refused their orders to shoot on unarmed Beijing residents.

Influenced by the uprisings of Polish Solidarity the Chinese protestors thought that China, too, could emerge from the era of neo-stalinist authoritarianism and join the global community.

The party/state apparatus that controls China had other ideas. Their implicit alliance with global capital has provided that apparatus with a new lease on life – as long as Chinese workers are willing to comply with the cheap labor/non-union regime imposed by the alliance.

In the west policy makers and intellectuals bend over backwards to justify the alliance with arguments about “progress towards democracy” and an “emerging rule of law.”  Some like David Brody, the eminent American labor historian, contend that the state controlled labor organization can evolve, as did some American company unions, into genuine labor unions. Others, such as labor educators Ken Jacobs and Katie Quan of the UC Berkeley Labor Center, Kent Wong of the UCLA Labor Center and Elaine Bernard of Harvard’s trade union program, work hand in glove with the regime itself in various exchange and “education” programs. They seem to think the American labor movement can actually learn something from the Chinese regime.  You can watch me debate these issues with Brody and Jacobs as well as labor historian Nelson Lichtenstein here. 

Some US labor leaders such as Andy Stern of the bureaucratically controlled SEIU buy the line of Brody et. al and believe an alliance with the Chinese regime offers a chance to counter balance the power of global multinational capital. He seems oblivious to the impact of the alliance that has already been established between capital and the Chinese regime.

What is striking about these kinds of defenses of the brutal labor regime in China by westerners is that the Chinese working class itself has been, on and off since 1989, in near open revolt against the Chinese government and spurns its labor arm, the All China Federation of Trade Unions.  One analyst – Ching Kwan Lee – described this as a veritable “insurgency.”

Even official Chinese statistics admit the level of resistance. According to the China Labour Bulletin, the leading independent labor advocacy group based in Hong Kong and led by 1989 workers leaders Han Dong Fang, there has been a huge increase in labor disputes referred to the official arbitration bodies used by the state to resolve labor conflicts.  There has been a similar explosion in the number of lawsuits filed by workers.

In a recent interview with the Financial Times, party dissident Bao Tang, now under house arrest in Beijing, said:

“China has almost erased the memory of Tiananmen by making it illegal to talk about what happened. But there are miniature Tiananmens in China every day, in counties and villages where people try to show their discontent and the government sends 500 policemen to put them down. This is democracy and law with Chinese characteristics.

“The first sentence of the Chinese national anthem goes like this: ‘Arise! All those who refuse to be slaves.’ I believe there will be real democracy in China sooner or later, as long as there are people who want to be treated equally and have their rights respected.

“It will rely on our own efforts, it will depend on when we, the Chinese people, are willing to stand up and protect our own rights.”

So this week, in the words of the American labor radical, Mother Jones, “mourn for the dead, but fight like hell for the living.”

The first thing we do, let’s kill all the lawyers…Shakespeare said that

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You can measure the difficulties of the labor movement by the number of lawyers in the room.  The more there are the deeper the problems.  

I started out in the labor movement fighting against the idea that lawyers should have a central role in decision-making in the labor movement.  As a rank and file shop steward and local union officer I recall often having to fight against the idea that the lawyers on the union staff knew more about the union and its potential than the union’s own members. 

Now I am a lawyer, I train future lawyers and I often advise labor union members and officers. But my early conviction about the inverse relationship between the presence of lawyers and the effectiveness of the labor movement has not wavered.

Thus, it is disheartening that in three of our most important and visibly symbolic unions, the United Auto Workers, the Screen Actors Guild and the Service Employees International Union, lawyers are taking an abnormally large role.  And while there is less public discussion I have a feeling that the role of lawyers is also looming large in the battles between the once allied unions, UNITE and HERE.

At the UAW, the rank and file workforce is now at the mercy of bankruptcy lawyers because the labor movement is unwilling to take a forceful stand on behalf of industrial working class America.  Despite the opportunity to lead the way to restructure our national transportation industry by reorganizing the Big Three into a new Public Trust Transportation Company, the UAW seems more interested in going down with the ship.

Over at the Screen Actors Guild, a well-intentioned opposition group led by New York based actors and a group called Unite for Strength in LA sent two lawyers into negotiations today with the AFL-CIO over its contentious relationship with its sister union AFTRA.  These groups hold the balance of power in SAG these days having pushed aside a damagingly dogmatic faction called Membership First. In any case, apparently also AFTRA sent two lawyers to the meeting and the AFL-CIO sent a lawyer and…well, one can only imagine what these people were thinking without a single actual rank and file actor to be seen.  

The tools being used by SAG’s new leaders are as arbitrary and bureaucratic as those used by the old Membership First leadership. They included an ultra vires attempt by the SAG National Board to muzzle their own national President (granted, this particular President has very little to say that is worth listening to).  Of course, the President decided to sue instead of fight politically and there were more lawyers!

If that is the way the union is being run nowadays no wonder the entertainment industry treats labor negotiations like they are a side show hardly worthy of prime time.

SEIU is in the view of some the one shining light in American labor as it has expanded its membership by hundreds of thousands over the last decade or so under the leadership of Andy Stern.  But very few of those new members are the result of actual organizing but rather acquisitions modeled, consciously, on corporate raiders.  For a while the illusion could be maintained but in the last few months it broke apart as the California based United Health Workers led by a Stern loyalist bolted and formed a new independent union after Ray Marshall (an economist!) backed yet another bureaucratic effort by Stern to crush the vibrant UHW.  The UHW was acquired in a sense by SEIU in a deal brokered with then-California governor Grey Davis. It was a top down attempt at organizing but the rank and file have woken up and have their own ideas about how to run their union.

Finally, in the least well-known battles inside labor these days, the once amalgamated UNITE and HERE are splitting apart at the seams. (Pun intended – hey, I realize I am no Shakespeare.)  UNITE led by Bruce Raynor who at one point was a key organizer of southern textile workers seems content to try to run to the side of Andy Stern who is backing them against HERE.  HERE is led by John Wilhelm, a popular former Yale University union leader. 

Wilhelm has attempted to push Raynor out who in turn says he is pushing Wilhelm out.  At the heart of the mix is the Amalgamated Bank based in New York and historically linked to one of UNITE’s predecessor unions, the Amalgamated Clothing Workers, with $11 billion in assets under management, most of it union pension funds.  The Amalgamated has been an important player in many battles for progressive corporate reforms including being the first lead plaintiff in the shareholders lawsuit against Enron.  God only knows how many lawyers are caught up in this showdown.

In the very same scene where Shakespeare, sardonically, suggested that we have had enough with lawyers, he wrote:

“…and yet it is said, labor in thy vocation; which is as much to say as, let the magistrates be laboring men; and therefore should we be magistrates.”

If not magistrates, then at least it is “laboring men [and women]” who should run their own unions. I said that.

(Apologies to Bob Dylan.)

GM Bankruptcy and Labor: From Sit Down Strikes to Credit Default Swaps

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w-1937-overpassThe United Auto Workers gave organized labor a beachhead in the American economy with the great sit down strikes of 1937. Some seven decades later organized capital is looking to expel what remains of the UAW from GM and at the same time complete the isolation of the trade union to low wage immigrant labor based segments of the economy and the public sector. A labor movement that does not have leverage in the most productive center of an economy cannot hope to influence national social policy or progressive politics.

Unlike the bloody Battle of the Overpass pictured above, however, today’s attack on labor is being wielded with complex financial instruments, instruments of fictitious capital.  At GM, bond holders who hold credit default swaps have disrupted the ordinary incentive structure in a corporation entering the so-called “zone of bankruptcy”.

Traditionally, holders of bonds were deserving of protection as the company approached bankruptcy because insiders could be tempted to use their control over corporate resources to loot the firm and leave less for those who had a higher priority for repayment in bankruptcy.  Thus, courts have held recently that as a company like GM looked more likely to need the protection of bankruptcy its board of directors would have a legal obligation to shift its ordinary fiduciary duty to protect shareholders to the bond holders.

But the emergence of derivative instruments like credit default swaps (CDS) has twisted our ordinary understanding of incentives in corporate governance. Credit default swaps are speculative instruments created to offer a way for investors to bet on the value of bonds that ordinarily would not be open for speculation.  The purchaser of credit default swap “protection” pays an annual premium that amounts to several percentage points of the value of the underlying bond (perhaps 2% on a $10 million investment which translates into $200,000 in annual premiums to the “seller” of the protection).  If a “default” event were to occur on the bond – such as the failure by the issuer of the bond to make an interest payment or in extreme circumstances outright default on the bond – then the seller of the CDS protection must pay the buyer of the protection a certain amount (typically the difference between the par value and the current (depressed) market value of the bond). 

Hence, the term CDS: the credit is the original bond, the default is the event that triggers payoff, and the swap refers to the fact that by putting a CDS in place, the risk of owning the bond has shifted from the bondholder to the seller of protection.  One huge seller of protection on bonds was AIG and it sold a huge amount of CDS protection on sub prime mortgage bonds that have now turned out to be worthless. That has obligated AIG to make good on its promises – which they are doing with taxpayer money.

At GM, it turns out that one default event that will trigger repayment to bondholders is the filing of bankruptcy itself. So investors who bought GM bonds at par, e.g., valued at 100 cents on the dollar now hold bonds that are valued at far less, perhaps 20 cents on the dollar. If GM files for bankruptcy then the seller of CDS protection to a GM bondholder would owe the bondholder at least 80 cents on the dollar, if not more as the bond fell in price. So on $10 mn of GM bonds the payoff would be $8 mn plus the $2 mn that the bondholder could get by selling the bonds. If the bonds fell to zero in price, the holders could get the full $10 mn.

That is just a simple example and there are lots of complexities in this situation. In fact, for example, GM bonds are trading at a different price points – somewhere between 6 and 12 cents on the dollar. There is a net exposure for sellers of CDS protection of about 2.4 billion dollars on a total of 34 billion dollars of outstanding CDS positions (sellers of CDS protection sometimes buy CDS protection themselves to hedge against events such as this, but unlike regulated insurers they do not have to have any actual cash reserves to use to pay off in case of such a catastrophic event.) CDS protection also requires an upfront payment that increases as the bond falls in value, so at GM it costs $5 mn a year to protect $10 mn in bonds today (4.5 mn upfront and then a payment of 5% a year or $500,000).  Of course, that makes the bonds illiquid today or at least uninsurable.

But here is the key point: GM under US government pressure has offered current bond holders the “opportunity” to exchange their current bonds for common stock in a restructured GM. The bond holders would end up with 10 percent of the equity with the government owning 50% and the UAW’s VEBA owning 39%. Current shareholders would end up with one percent.  Apparently, though, bond holders with CDS protection believe that their CDS payoff if GM files for bankruptcy is worth more than the eventual value of the 10 percent common stock position. 

Now look at this deal from the viewpoint of current GM managers. If the bond holders turn down the exchange offer, GM files for bankruptcy which leaves the managers in control (they become in bankruptcy parlance a “debtor in possession”) and they get several months to put together a plan of reorganization. That may lead to the wipe out of the bond holders anyway but they won’t care because they will have received their CDS payout!  But here is the magic: the payout to bond holders is not made by GM or GM managers – it will be made by the sellers of the CDS protection, perhaps AIG or JPMorgan, and perhaps with taxpayer dollars! Thus, GM is freed of its bond obligations paid off with “other people’s money” and they remain in control of the company now free to use the power of a federal judge to tear up the UAW contract and their remaining obligations to pay billions into the healthcare VEBA.

And once they have cleared their books of the bonds, the VEBA and the UAW, they are free to ramp up offshore production to India and China, as they have been planning for several years.

By the way, GM bondholders were warned of bankruptcy risk at GM when they bought their bonds. They got the benefits of mandatory disclosure of risk factors affecting GM when the bonds were first issued. But the rank and file members of the UAW who “bought” the proposed multi-billion dollar VEBA to manage their health care plan were told by UAW President Ron Gettelfinger that their health care would be safe from GM bankuptcy “for 80 years.” So no CDS protection was purchased by the UAW to protect its payment obligations from GM.

The Financial Times has more on this issue here.  There is some interesting discussion of the issue on the blog Naked Capitalism here. And here is a video of an investor explaining how CDS protection is wreaking havoc in another bankrupt company.

Obama 3.5; Labor .5 – Biden Picks Jared Berstein as Economic Adviser

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In a telling sign that American workers will be sitting at the back of the bus in the Obama administration, the first pro-labor appointment to the new Administration was made by VICE President Joe Biden. 
Economist Jared Bernstein has served for years as a pro-AFL-CIO economist at the Washington D.C. based Economic Policy Institute. Given the tensions between Biden and Obama on various issues during the campaign, including battles over the influence of the race-based politics of the Bill Ayers led group in the Obama camp, this appointment will reinforce the awareness of organized labor of their relative weakness in the Administration. Bernstein was not on the stage when the big guns of the President’s economic team were named last week. 
The A-team includes Paul Volcker (a notorious anti-labor figure from the Carter/Reagan era), Larry Summers (a free trader and de-regulator from the Clinton era) and Tim Geithner (a friend of Wall Street and acolyte of Summers).

Biden Picks Jared Berstein as Economic Adviser washingtonpost.com