House Committee on Education and Labor
U.S. House of Representatives

Republicans
Rep. Howard P. “Buck” McKeon
Ranking Member

Fiscally responsible reforms for students, workers and retirees.

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NEWSROOM

Dear Colleague

FOR IMMEDIATE RELEASE
May 21, 2009

Wall Street Journal, Washington Post Editorials Warn Against Government Pitting Retiree vs. Retiree

Dear Colleague:

As the White House Auto Task Force decides the fate of General Motors, its employees, and the individuals and organizations that have invested in this iconic American company, I strongly urge you to read the attached editorials from the Wall Street Journal and the Washington Post.

Today’s WSJ contains a cautionary tale of how federal interference in the bankruptcy process for Chrysler has pitted retiree vs. retiree. The government’s involvement has left police and teacher pension funds – among many others – at a severe loss, while union workers’ pension funds received a far better deal.

Rather than picking winners and losers among retirees who are equally concerned about their pension and financial future, the Auto Task Force should pursue a fair deal for all involved.

The Washington Post editorialized on the dangers of such federal favoritism last week, writing: “The government's intervention in GM's financial affairs tilts the scales so dramatically in the company's (read: government's) favor that it risks shutting out the legitimate interests of some creditors in favor of politically connected players who are owed much less and have less of a claim to the company's money. GM bondholders, for example, are being pushed to accept a 10 percent equity stake in repayment of their $27 billion in loans to the company. The United Auto Workers, on the other hand, is being offered a 35 percent equity stake in exchange for its claim of roughly $10 billion -- a claim that would typically be wiped out in bankruptcy.”

I urge you to read the enclosed editorials and consider the plight of retirees – all of them – as the Auto Task Force decides the future of General Motors.

Sincerely,

/s/

Howard P. “Buck” McKeon (R-CA)
Senior Republican
Committee on Education and Labor

 

WSJ: About Those 'Speculators' . . .
Pension funds also got whacked by Uncle Sam.

Remember how President Obama blamed Chrysler's bankruptcy filing last month on "a small group of speculators" who turned down Treasury's $2 billion final offer for their $6.9 billion in debt? Well, it turns out that hedge funds and other short sellers weren't the only secured creditors who got a raw deal from Uncle Sam.

Indiana Treasurer Richard Mourdock revealed this week that his state's police and teacher pension funds have lost millions of dollars in the Chrysler "restructuring." Indiana's State Police Fund and Major Moves Construction Fund, which finances roads and bridges, together lost more than $1 million. And the Teacher's Retirement Fund "suffered, at a minimum, a loss of $4.6 million due to the action of the Federal government," reports Mr. Mourdock.

Far from being speculators, these funds represent retired public employees, including cops and teachers. The funds paid a premium to buy "secured" status, only to discover that they were politically outranked by the United Auto Workers in the White House hierarchy.

"In the past, to be 'secured' meant an investor was 'first in line' in the event of a bankruptcy and 'non-secured' creditors would receive value after secured-creditors were paid," Mr. Mourdock says. "In the Chrysler bankruptcy, however, secured creditors received $.29 on the dollar even as non-secured creditors received higher values and ended up with a 55% ownership of the new company, which is fundamentally wrong and a dangerous precedent to the capital markets."

We've worried that the Chrysler sandbagging would discourage bond investment. And, sure enough, Mr. Mourdock says that from now on no funds under his control will invest in the secured debt of "General Motors, other manufacturing companies, or those insurance companies who have or will be receiving bailout funds." Given the recent actions by the feds, he adds, "the risk is too great for any prudent investor to accept."

This isn't political grandstanding. Public investment officials like Mr. Mourdock have a fiduciary duty to seek maximum returns for retirees. The question for all public officials responsible for investing pension money is whether they too should conclude that investing in U.S.-aided companies now carries so much political risk that it violates their legal obligations. Such are the wages of White House disdain for legal contracts.

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Washington Post: Road Hazards Ahead
President Obama may call them 'speculators,' but the economy needs private investors.

Thursday, May 14, 2009

DESPITE a massive infusion of government cash, General Motors is slowly and almost assuredly limping toward bankruptcy. The company's stock has been hovering just above the $1 mark for the past few days, and chief executive Fritz Henderson has signaled that bankruptcy court may be the best -- or perhaps only -- venue in which the company can come to terms with its creditors. GM -- and its partner, the U.S. government, which could get as much as a 50 percent equity stake in the company -- have set themselves a deadline at the end of this month to decide what to do.

And therein lies the potential danger. The government's intervention in GM's financial affairs tilts the scales so dramatically in the company's (read: government's) favor that it risks shutting out the legitimate interests of some creditors in favor of politically connected players who are owed much less and have less of a claim to the company's money. GM bondholders, for example, are being pushed to accept a 10 percent equity stake in repayment of their $27 billion in loans to the company. The United Auto Workers, on the other hand, is being offered a 35 percent equity stake in exchange for its claim of roughly $10 billion -- a claim that would typically be wiped out in bankruptcy. It is hard to blame bondholders for refusing to cave in to the government's pressure, especially because some of them bought insurance against a possible GM bankruptcy; that insurance would pay them more than $2 billion in cold, hard cash -- instead of in potentially worthless stock should the company file for Chapter 11 protection.

There is reason for GM creditors to be uneasy, especially after the government's hardball tactics in the recent Chrysler bankruptcy. In that case, hedge fund investors who refused to accept the government's low-ball offers were demeaned by the president as "speculators" and all but blamed for driving the automaker into insolvency. Once in bankruptcy court, these creditors fared no better, in large part because the government's decision to provide operating funds for Chrysler gives it an outsized power to shape the reorganization. While the hedge funds are likely to receive less than 30 cents on the dollar, a health-care fund controlled by the UAW is being handed a 55 percent ownership stake in Chrysler. If bankruptcy rules had been strictly followed, the union would have been entitled to little, if any, return.

Extraordinary times call for extraordinary measures, and it was with this thought in mind that we endorsed the federal government's decision to pump billions of dollars into the automakers. But the spectacle of creditors being stripped of their legal rights in favor of a labor union with which the president is politically aligned does little to attract private capital at a time when the government and many companies need these investors the most. Investors' fears will only be compounded if the administration follows a similar blueprint with GM.