Category Archives: Politics

Who Will Really Own Chrysler? (Hint: Initials are “U.A.W.”)

Despite widespread reports that the United Auto Workers union will emerge as the controlling shareholder of a restructured Chrysler, that is not formally true. But a closer look suggests that UAW President Ron Gettelfinger’s recent comments that the UAW will not own a majority stake in Chrysler are not exactly right either.

The 55% stake that current Chrysler owners propose to issue will go to the Voluntary Employee Beneficiary Association, or VEBA, set up as a result of collective bargaining negotiations between the UAW and the Big Three in late 2007 and early 2008. To secure ratification of those dramatically concessionary deals, the UAW and Big Three promised auto workers their health care plans would be secure for “80 years” under the new off balance sheet VEBA. 

It turns out that may not be the case. Originally, the Big Three promised to put sufficient assets into the VEBA to pay health care obligations and to secure those assets from any risk of bankruptcy. But over the last year the companies got into further trouble and have now sought agreement with the union and its retired members to substitute equity for cash payments. Of course, that means the VEBA is directly linked to the financial health, or rather lack thereof, of the Big Three.

(By the way, to be clear, there is only one VEBA, for all three auto companies but it manages three separate health care plans with separate asset contributions owed in different amounts and structures from each of the auto companies.)

So who will be calling the shots at Chrysler with that huge 55% share – assuming a federal bankruptcy judge confirms the proposed deal (and that is far from certain)?

In theory it will be the board of trustees of the VEBA, also known as “the Committee” in public filings of the agreements behind the new structure. It is supposed to consist of 5 UAW representatives and 6 independent members.

But very little has been heard from this group. Despite their fiduciary obligation to protect retirees they do not seem to have objected to the very risky exchange of cash payments for equity in Chrysler. And the terms of the new Chrysler deal do not bode well either: despite owning more than half the company, apparently the VEBA will only get the right to appoint one board member out of nine.

In fact, it is a little unclear who really is on the VEBA board but one reliable source (Pension and Investments online magazine) lists the following individuals (since there are 6 listed here and none are UAW members this is likely the list of the so-called “independent” members):

Robert Naftaly, a former Blue Cross Blue Shield of Michigan executive, who will serve as the VEBA’s chairman.

Olena Berg-Lacey, a former assistant secretary of labor;

Marianne Udow-Phillips, director of the Center for Healthcare Quality and Transformation, Ann Arbor, Mich.;

Teresa Ghilarducci, a retirement policy guru at the New School for Social Research, New York;

David Baker Lewis, founder of Detroit-based law firm Lewis & Munday; and

Ed Welch, director of the Workers’ Compensation Center at Michigan State University’s School of Labor and Industrial Relations in East Lansing, Mich.

Of course, “independent” is a relative term. All six were presumably appointed with UAW President Ron Gettelfinger’s approval. They know that, he knows that. And the UAW controls the remaining five seats. In other words, the UAW only needs one vote from this group of six to completely control the VEBA itself and, in turn, Chrysler!

Now, how the supposedly independent Committee of 11 is supposed to defend the fiduciary interests of now and future auto worker retirees under such pressure is anybody’s guess.

Auto workers – meet the new boss, same as the old boss? We’ll see.

(You can read more here and here about the VEBA structure and the risks the UAW took with their retiree benefits.)

Fictitious capital and mark to market accounting

FASB, the accounting entity responsible for setting basic rules of the road for financial statements, bowed to political pressure today and in a 3-2 vote gave breathing room to the same bankers who caused the mess we are in.

Let me explain.

Currently, banks must “mark to market” their assets including now toxic loans they made to subprime borrowers. Thus, if the bank made 100 in loans and then found those borrowers defaulting or late in their payments the value of those loans would fall, as it has in some cases to, let’s say, 30.

Now if a sample Bank A had borrowed 60 and secured equity financing of 40 to make the original loans of 100 then if those same loans are valued according to their market price – the price a willing buyer would pay for them – that is, 30, then Bank A is insolvent, would have to file for bankruptcy (slightly different for banks than, let’s say, GM) or be taken over by the FDIC.

Then the bank would get new management and be resold over time to another bank or broken up and sold off in pieces. It happens every week in the US and has been going smoothly as in cases involving WaMu and IndyMac.

But with the new FASB rules, Bank A can do its own internal analysis and tell investors that voila the loans made at 100 are worth 70 because their own analysis suggests some time in the future those loans will get paid off with interest.

According to The New York Times: “One of the dissenters, Thomas J. Linsmeier, argued that accounting rules already allowed the ‘fiction all banks are well capitalized,’ adding that the changes would ‘make them seem better capitalized.'”

Now apparently the FASB rule which allows this form of fictitious capital to be created (from 30 to 70 despite what the market says) is balanced by better disclosure to the market of the content of the bank’s analysis. That means that outside lenders and shareholders of the bank can have greater transparency into the bank’s real financial condition.

In theory then the market could do its own mark to market accounting of the overall value of Bank A if it thought the internal analysis were overly optimistic.

But notice what happens here: whereas under the current mark to market rules Bank A would be insolvent and the managers of that Bank would likely lose their jobs, under the new rules the managers get to stay in place!

FASB has just rewarded the very people responsible for getting us into this mess in the first place! And along the way the banks now lose their incentive to sell off the now inflated toxic assets to private firms as proposed by Secretary Geithner.

Does the right hand know what the left hand is doing here?

Geithner plan is a wasteful delaying action – nationalization inevitable

I made an attempt to explain to my international finance students today why the Geithner plan won’t work, relying heavily and gratefully on the wonderful analysis of Salman Khan of the YouTube based KhanAcademy.

Turns out Khan is thinking along the same wave length as Nobel prize winning economist Joe Stiglitz who wrote a devastating critique in the New York Times today indicating that the Geithner plan is nothing more than a “Rube Goldberg” machine that “has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.”

What is at the heart of the Khan/Stiglitz argument? That the banks are sitting on assets that have a market price that is far less than the money those banks owe to their lenders and shareholders. If they can’t sell those assets at a much higher price they are effectively insolvent.

So the Government is proposing to buy those assets for more than they are worth with the US taxpayer putting up 93 percent of the purchase price and the so-called private “partners” putting up only 7%. That amounts to a huge subsidy to current creditors and equity holders of the banks that caused the problem in the first place. Oh, and probably allows their top managers to keep their jobs.

But wait there’s more.  If the assets turn out to be worth more than that juiced up price paid by the new Public-Private Partnerships in the Geithner reworking of the old Paulson TARP plan then the US Government gets only 50% of the upside, since most of the money put in by the Government is in the form of a loan not equity. The other 50% goes to the private partner, including big financial groups like PIMCO and BlackRock.

And the loan to the partnership from the Government is a non-recourse loan which means if the entity loses money the Government has no ability to go after the assets of the private partner, even though they will have managed the business into a loss!

No wonder groups like PIMCO and BlackRock said they would participate and no wonder Wall Street rallied on the announcement of the plan. It’s a win-win for the banks and for the private partners. The real risk is taken by the US taxpayer.

The AIG Scandal – An Insurance Company that wants to be paid? Surprise, surprise…

I was interviewed on Oakland-based KTVU about the AIG scandal. You can watch it here.

A key point I was not able to work into the discussion: we need to keep in mind the larger picture here.

First, according to a must read profile of the AIG Financial Products unit in Rolling Stone, its 400 employees were paid some 3.5 billion dollars in salary and BONUSES over the last seven years, including $280 million to the group’s founder Joe Cassanno, a veteran of the junk bond fraud run by disgraced financier and now ex-con Michael Milken. And yet the US Treasury – led by Neel Kashkari – thought it essential to hand them $40 billion in new money last fall and only limit the bonuses paid to the top executives of the holding company, AIG parent, not AIG Financial Products!

Second, what value have these financial geniuses brought the US public for our $40 billion (followed by another $100 billion or so since, including a $30 billion line of credit a few weeks ago)? Instead of negotiating with their counter parties to whom they sold the Credit Default Swaps that were at the heart of the AIG-FP business model, they apparently just paid them off at 100 cents on the dollar!

Now, that’s the kind of insurance company I want.

“There Will Be Blood”

images-1I have not been a fan of popularizers like historian Niall Ferguson, but one has to admit that he puts his finger on the depth and complexity of the current crisis in this interview with a Canadian newspaper. He points out that the US is in a relatively privileged position because its currency and economy remain the central pillars of the world economy. But the crisis represents the end of globalization as we have known it since the end of the Cold War.

Ferguson states:

“There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable. The question is whether the general destabilization, the return of, if you like, political risk, ultimately leads to something really big in the realm of geopolitics. That seems a less certain outcome.”

We’ll see.

Will the real Che Guevara please stand up?

mv5bmti2mzi3mzu2ml5bml5banbnxkftztcwntc2ndkxmg_v1_sx94_sy140_1In light of the new movie about Che Guevara, I am reposting something I originally blogged on in 2004 when Motorcycle Diaries came out:

The hundreds of thousands of people who will see the film version of Che Guevara’s Motorcycle Diaries can be forgiven for thinking that “Che” was the embodiment of compassion for the downtrodden of Latin America.

The movie is without a doubt a strikingly beautiful film and tells a moving story. And if you compare the young Che with his contemporaries in the United States – Jack Kerouac and Neal Cassidy in On the Road, for example – he certainly comes out ahead. But the Diaries have little to do with the real Che Guevara, at least not with Che as an adult.

That movie has yet to be made.

While we wait, it might help to consider Che’s published views of the labor movement. In my Ph.D. dissertation on Nicararagua’s Sandinista revolution, I wrote a chapter which I link here that considered the ideas of Che about the role of workers and trade unions in a revolution and beyond and the influence those ideas had on Nicaragua’s fledgling Sandinista regime.

With the return of Che as an icon and the apparent staying power of the Sandinistas themselves (they recently won a huge victory in local elections in Nicaragua) this is not simply an historical or nostalgic exercise. (Note that the text was written in the early 90s which explains some of the grammar and references.)

Although I have not seen the new del Toro version of Che yet,  from all accounts it is no closer to the real Che than Motorcycle Diaries was.

Will The Real Che Guevara Please Stand Up?

D.C. to Detroit: "Drop Dead"

For Wall Street, $7 trillion, no questions asked. For Main Street, bupkus. 
Believe it or not this suggests to me that private capital still pins its hopes on globalization: the major source of opposition to the rescue came from southern Republicans like Bob Corker of Tennessee. 
These are politicians with foreign transplants in their home districts who stand to benefit from more problems in Detroit.
But in an odd way the Big Three win, too. Now they have all the excuse they need to shut down high wage good benefits jobs in Detroit and shift production to China and Mexico where police goons keep the unions at bay.
The world is flat, indeed.

Rescue Bid for Detroit Collapses in Senate – WSJ.com

A Way Out for the Auto Industry


It’s not about competition – it’s about our standard of living

Opponents of the government loans to the Big Three Auto companies contend that if American companies cannot compete they should be allowed to go bankrupt. Thus, the Big Three executives received a cold shoulder when they showed up in Washington, D.C., this week, even after giving up their private jets.

But this misstates the problem. The real problem is not figuring out how to “compete” with organized labor’s brothers and sisters in Asia and Europe.

Instead, it is about all workers – here in the United States and around the world – fighting to maintain their basic standard of living in the midst of catastrophic financial crisis.

This crisis is about all workers not just autoworkers.

Big Three Management has failed its social responsibility

The key to defending and improving workers’ standard of living is the availability of good jobs for all producing socially useful products for all.

The current management of the Big Three has failed that basic social responsibility. And the leadership of the United Auto Workers has been unwilling to challenge the Big Three for their failure, choosing instead to “go along in order to get along.”

Instead, the UAW should draw on its finest traditions as more than just a narrow bread and butter labor union – when, for example during the civil rights era, it backed a broader concept of the public good.  

It should argue now for a restructured transportation industry. If the union does not step forward now, bankruptcy and union busting, much like that underway at Delphi, the auto parts supplier, will consume the entire auto industry. 

Time for a new transportation industry

The valuable physical plant and skilled workforce of current workers and recent retirees of the Big Three can be the basis of a new transportation industry that manufactures a wide range of products for both mass and individual transportation that are environmentally responsible. This new industry can be the basis for a revival of economic growth.

But such a solution cannot be entrusted to the titans of Wall Street, of hedge funds and private equity funds. The collapse this year of major investment banks makes clear that Wall Street no longer knows how to manage workers savings responsibly.

From the Big Three to a Public Trust Company

A new public trust company, or PTC, should be established immediately. The PTC will be managed transparently by trustees who will be elected by autoworkers and members of the communities in which the auto plants are located.

The PTC should be provided a government guarantee to issue long-term bonds at low interest rates that would be held by major pension funds and mutual funds. The cash raised should then be used to purchase the assets of the Big Three auto companies that will then be folded into the PTC.

The PTC will create a new national transportation plan that will be part of an effort to revitalize our cities and move to an environmentally and socially responsible economy managed democratically and transparently in the public interest.

Auto Rescue: Enough Rope to Support a Hanging Man

A deal appears to be in the works to keep the Big Three on life support.

Bloomberg.com:
Worldwide

Is UAW Violating Rights Owed to Retirees?

The UAW continues its descent into obsolescence today with an announcement that it will offer more concessions to help the Big Three bosses secure a safe and happy retirement. 
At the heart of the latest offer, however, appears to be a violation of the fiduciary obligations owed to retired auto workers. 
Last year, the UAW allowed the Big Three to shift retiree health care off its balance sheets into a new entity called a Voluntary Employee Beneficiary Association, or VEBA. The companies were obligated to fund the VEBA’s with billions in cash, securities and other obligations. Some of the money made it in before the current crisis. 
But now the New York Times is reporting that the UAW, without any right to do so, is offering to allow the Big Three to delay the much needed future financial flows to the VEBA’s. These are the same VEBA’s that were sold as “secure for 80 years” by the UAW when it wanted rank and file ratification of the most recent collective bargaining agreements.
In theory, the VEBA’s are independent trusts, controlled by a board of trustees that owes a fiduciary duty to the beneficiaries of the trust, current and future UAW retirees. 
The fiduciary obligations of a trustee are the strongest known in American law. In the landmark case of Meinhard v. Salmon in 1928, then Judge Cardozo described this solemn obligation thus:
“Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate.”
There is no evidence that the trustees of the Big Three VEBA’s have met this long established obligation in the unilateral decision by UAW President Gettelfinger to announce delays of funding to the VEBA’s. Current and future retirees should be outraged.
If this is the way in which the private sector deals with retiree health care at our most important corporations, what chance is there for a genuine national solution to the health care crisis?

Auto Union Says It Would Consider Reopening Contract – NYTimes.com