Hopes rise for fast GM bankruptcy exit

Hopes rise for fast GM bankruptcy exit

By John Reed in London, Bernard Simon in Detroit, Bertand Benoit in Berlin, and Daniel Schäfer in Frankfurt

General Motors’ hopes of finding a faster exit from bankruptcy rose on Thursday after some of its biggest bondholders agreed to a sweetened 11th hour offer from the troubled carmaker.

Under the terms of the deal, the holders of $27bn of unsecured bonds would get up to 25 per cent of the restructured company, much more than the 10 per cent stake previously proposed.

News of the offer comes as GM’s board meets on Friday – and possibly Saturday – to finalise the filing planned to take place in New York on Monday.

According to people involved, the US government would provide more than $30bn in additional financing to fund GM’s operations during its expected stay in Chapter 11, with several billion dollars more expected from the Canadian government.

A committee of bondholders said on Thursday that “when contrasted with the alternative – uncertain and costly bankruptcy court litigation – it represents the best alternative for bondholders in the current difficult and dire situation”.

The move paves the way for GM to spend a shorter period in bankruptcy, in a fast-track process similar to that being used by Chrysler, which filed for Chapter 11 protection on April 30.

Separately, GM’s plans to spin off its European Opel/Vauxhall business struck an unexpected hitch when talks led by German Chancellor Angela Merkel on emergency funding to keep the operations afloat broke up in unusually public acrimony.

Berlin accused GM and the US Treasury of an “ambush” after a last-minute revelation that Germany would be asked to come up with an extra $415m that Berlin had understood would be coming from Washington.

Speaking after eight hours of talks that lasted through Wednesday night into Thursday morning, Karl-Theodor zu Guttenberg, Germany’s economics minister, expressed shock at news of the funding shortfall.

“I would have liked to see a more serious and conciliatory approach from the American side,” Mr zu Guttenberg said. “What happened overnight borders on the absurd.”

Germany warned Opel would become insolvent if a deal was not struck by Friday night.

Officials in Berlin were also offended that the US Treasury had not dispatched a senior representative, saying that the group had to interrupt proceedings to talk to more senior officials via videoconference facilities. The US rejected the accusations.

A senior US administration official said negotiations had resumed yesterday in a “more positive frame of mind” but stressed: “US taxpayer money cannot go to support Opel.”

Obama Aims for Fast Private Sector Exit

LAURA MECKLER JONATHAN WEISMAN

WASHINGTON -- President Barack Obama said he wants to get the government out of the private sector as fast as possible -- but that as long as his administration is acting as a major shareholder for large sectors of American commerce, from cars to finance, he won't hesitate to shape decisions at those firms.

Reuters

President Barack Obama speaks during a news conference marking his 100th day in office in the East Room at the White House on Wednesday.

In his most extensive public comments to date on the principles guiding government-ownership stakes, Mr. Obama said at a news conference Wednesday that "I don't think that we should micromanage." But he added that, in the name of protecting taxpayer dollars, the government would help troubled companies make "tough decisions based on realistic assumptions."

"Like any investor, the American taxpayer has the right to scrutinize what's being proposed," he said at news conference marking his 100th day in office. "I don't know how to create [an] affordable, well-designed, plug-in hybrid, but I know that if the Japanese can...then doggone it, the American people should be able to do the same."

Initially, White House advisers derided the focus on this 100-day mark, but wound up embracing it with a town-hall meeting in Missouri followed by the prime-time questions and answers.

In addressing the government's role in the private sector, Mr. Obama said his administration had no choice but to step in as the financial and auto sectors were collapsing and that "our first role should be shareholders that are looking to get out."

"I don't want to run auto companies. I don't want to run banks. I've got two wars I've got to run already. I've got more than enough to do. So the sooner we can get out of that business, the better off we're going to be," he said. "I want to disabuse people of this notion that somehow we enjoy, you know, meddling in the private sector."

Obama's Opening Statement

3:02

President Obama urged common sense practices to stifle the spread of flu and discussed the government's economic recovery act, which created 50,000 jobs and provided a tax cut. Video courtesy of Fox News.

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The federal government currently controls insurance company American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac, and is likely to soon have a large stake in General Motors Corp. and Chrysler LLC. The U.S. may also soon hold stocks in various banks.

On the issue of torture, the president said he had read classified memos that former Vice President Dick Cheney said would prove that the "enhanced interrogation methods" had produced life-saving intelligence. But he said that those methods, which he labeled torture, were not justified even if that was true.

"We could have gotten this information in other ways -- in ways that were consistent with our values, in ways that were consistent with who we are," he said.

On immigration, Mr. Obama suggested that a comprehensive overhaul of the system wasn't likely this year, even though he said he would try to make progress toward that goal. He said his administration is working to better secure the border in hopes of building support for the broader changes. He said the administration also should crack down on employers who recruit undocumented workers and not just arrest the workers themselves.

Asked about abortion, Mr. Obama reaffirmed his position in support of legal abortion and also spoke of his interest in reducing the number of abortions. But he said the Freedom of Choice Act, which he strongly endorsed while running for president, "is not my highest legislative priority." The bill would codify Roe v. Wade's protections handed down by the Supreme Court.

On swine flu, Mr. Obama said public-health officials have assured him that closing the border with Mexico is not advisable. "It would be akin to closing the barn door after the horses are out, because we already have cases here in the United States," he said.

In rare praise for his predecessor, Mr. Obama said the systems put into place under the Bush administration appeared to be working well.

The president also took the opportunity on three occasions Wednesday to deliver a public-health message, as a kind of doctor-in-chief. "So wash your hands when you shake hands," he said at his news conference, "cover your mouth when you cough. I know it sounds trivial, but it makes a huge difference."

Mr. Obama acknowledged that government attorneys had continued to press the Bush administration's aggressive national security theories in court, but said that inheriting cases in midstream, the new team didn't "have time to effectively think through…an overarching reform," he said.

He seemed to agree with a federal appeals court in San Francisco, which on Tuesday rejected the government's effort to dismiss on "state secrets" grounds a lawsuit filed by former detainees alleging torture.

The administration is "searching for ways to redact, to carve out certain cases…so that a judge in chambers can review information without it being in open court," Mr. Obama said. The appeals ruling said that the government cannot shut down the suit on a blanket national security claim, but rather must show why any particular evidence qualifies as a state secret.

Fast Food You Can Feel Good About

Fast Forward to the NEP

by Mark Sunwall

Soviet poster (1921) reads,

"From the NEP Russia will come the socialist Russia."

The sane maxim that the government doesn't control reality, or even the economy, is actually a slight overstatement. The government can prevent market forces from operating by channeling resources into artificial channels.

Broad intervention — for example, flooding the market with public funds while adding new and onerous restrictions on firms — is, like pressing down on a car's accelerator and brake pedals simultaneously, and is guaranteed to make the economy stall. So the answer to everyone's question, how long is this downturn going to last? remains within the control of the government, although not in the sense intended by Keynesian theorists.

President Obama is constitutionally empowered to say "no" at any point along this precipitous decline.

Recently, a series of econometric criteria have been suggested as standards for the success of the bailouts and spending programs.[1] But it would be more realistic, in light of the history of interventionism, to set criteria marking failure: gauges of the level of pain inflicted on the body politic that would act as a tripwire for the reevaluation — and reversal — of economic policy. Indeed, by any reasonably compassionate standard, that threshold has long since been reached. Yet Mr. Obama is throwing away his chance to reverse the Bush era's policy of "war consumerism" and is continuing down the same well-trodden road, when instead he should be executing a 180 degree turn and implementing a "new economic policy."

NEP?

If the phrase "new economic policy" has a familiar ring to it, that is because it was coined nearly ninety years ago in the aftermath of World War I and the Bolshevik revolution. This New Economic Policy (hereafter, NEP) was Lenin's response to the disasters ensuing from war communism. After the period of outright requisitioning and collectivization carried out by the Bolsheviks during and after the First World War, private property in land and small enterprises was recognized after March 21, 1921. This saved the Soviet Union by allowing the GNP to stabilize so that the Soviets could staunch the flight of manpower and resources out of Russia and fend off internal and external enemies.

Just how liberal the Soviet Union got during that decade is a subject of ongoing debate.[2] While I propose no novel insights on the period as a historical subject, I do find the contrast between the policy options that were open to the Bolsheviks and those that are presently being exercised by the American government illustrative of the failure of government to foresee, let alone make a prudent response to, the ineluctable outcome of events

Postbellum Blues

In certain regards, the United States is as socialized today as Russia was at the end of WWI, albeit this has occurred through analogous, rather than identical, historical causes. War always wrecks havoc with the distribution of economic resources, making an end run around the supply and demand functions of civil society. But whereas Russia entered the 1920s under the banner of "war communism," what might be termed America's "war consumerism" has grown insidiously and without fanfare for the last two decades under both Democratic and Republican administrations.

An opportunity was lost to return to the status quo ante bellum at the end of the Cold War, when President Clinton failed to curb military Keynesianism, and the Republican Congress failed to curb civil Keynesianism. This process accelerated under the Bush administration, and Obama shows no inclination to brake its inertial velocity.

However, Lenin, in his audacity, resembled Obama the candidate more than what we have seen so far of Obama the president. Surrounded by collectivist dreamers, some of them almost as dangerous as he was, Lenin embarked on what was, for the times, a rather ambitious program to restore free markets. In this he was motivated not by any insight into the connection between private property and human dignity, but by political expediency, yet this motive was sufficient to spare the lives and fortunes of millions — at least until the NEP was revoked by Stalin in 1928.

Considering the fact that the Bolshevik party platform was to the left of the Mensheviks, and the Mensheviks were roughly equivalent to the far left wing of the US Democratic party, Lenin's NEP was a bold stroke indeed. This is not to say that Lenin had any intention of restoring capitalism. As Nikolay Nenovsky, working within the framework of Austrian monetary theory has noted, the reforms were so partial that they ultimately thwarted the evolution of true market institutions.[3] Nonetheless, the system of commodity payments was abolished and prices were established for agricultural commodities, while private property, that is, property outside of medium and large firms, was tolerated.

Most surprising of all, in the hindsight of post–New Deal economic history, hard currency was introduced and continued to circulate up until the eve of the Second World War. In fact, as Nenovsky explains, currencies were allowed to compete for a short period during the early NEP. This period saw the introduction of the chervonetz, a gold coin originally left to rise to its own value against other media, and later established (to its detriment) as an official state currency.

In other words, the NEP was, at its monetary core, the kind of policy experiment that only the most radical advocates of the free market would urge on the American government today. It would seem that the cynical Marxists surrounding Lenin could boldly rush in where the angels (fallen or otherwise) of the Obama administration fear to tread. One can only wonder at the source of this policy rigidity among purported advocates of a mixed economy. At least the Russian Bolsheviks were willing to tack in the direction of market principles, albeit in the faith that, once the economy had recovered, this would provide a reserve of capital subject to state control or expropriation.

In contrast, present American policy constitutes a unidirectional slide towards state stewardship of the economy. Is there some rational explanation for the relative flexibility of Lenin in contrast with the knee-jerk Keynesianism of today's social-democratic Democrats? The answer to the query, will you fast-forward to an NEP, Mr. President? is thus far a firm "no" — but the ensuing matter of why not is one that merits speculation. Anyone who believes in the efficacy of government actions and also favores liberalization would probably default to that portmanteau phrase "a failure of political will," but a brief analysis into secular and psychological obstacles to the NEP might prove rewarding. In both spheres, the manifest differences between the USSR in 1921 and the US of A in 2009 are unquestionable, but whether these differences add up to an explanation of the "non-NEP-ability of America" is not so apparent.

Ominous Parallels and Less Obvious Perpendiculars

The secular differences between the American situation of today and the Soviets' nearly ninety years ago can be summarized in three points:

1. Russia had reached the end of its economic lifeline and America has yet to do so.

2. The suffering caused by war communism was transparent, while the suffering caused by war consumerism has been, until very recently, opaque.

3. Soviet policies — both war communism and the NEP — were conducted under a program of naked class struggle, while America's policy has been framed within the context of national, and even international, social contractarianism.

In the first instance, the deterioration of the American economy in this winter of 2009 has not yet run its full course. There are still reputable people who think that the nation can afford more guns and more butter through an expansion of public debt and the money supply. Moreover, these people are demanding an infinite series of second chances to prove their theories right. However, since nature abhors linear infinities, sooner or later this war consumerism (i.e., military and civil Keynesianism) is bound to be superseded by either liberalization or a command economy.

Now the problem with a command economy is not that people aren't willing to work for the common good. As Ludwig von Mises pointed out in his book Socialism, people don't work for the common good in capitalism either. Rather, the difficulty is that there is no mechanism to determine what is or is not a productive use of labor or capital. The early Soviet economy was saved in part by Lenin's pragmatic attitude towards collectivization, but more importantly by the fact that, during the NEP, Russia had a window on the rest of the world in the form of commodity prices conducted in real currency. These prices, in turn, allowed domestic planners to mimic the price system of the global economy.

Today, America is an integral part of a world economy that is embedded in an increasingly rigorous network of economic treaties and central banking, a world in which there is no longer an "outside." To the extent that this global economy is subjected, by insidious degrees, to arbitrary decision making, then it also becomes increasingly susceptible to the kind of collapse that the Soviet Union narrowly avoided in the 1920s.

In all probability, one harbinger of this is the current volatility of markets, which are not so much starved for capital (as the Keynesians claim) as they are starved for objective information to help them make decisions about profits and losses.

So, apart from global economic collapse, what possibilities are there? The first would be the emergence of an "outside" from some region or regions imperfectly integrated into the global economy. This disengagement and emergence of an external economy might save even the rump of the global market, but at the price of making the latter into a kind of ghetto politburo dancing to the tune of an increasingly robust capitalism elsewhere in the world. However, if New York ceases to be the economic capital of the United States, forgoing any hope of remaining that of the world, nobody should expect "the world to dress in sackcloth, now that you have forsaken cake and ale." No, there will be other financial centers willing to take up the slack, in terms of distributing capital and talent.

The other possibility would be for the United States to tear a hole in its own governmental hegemony over commerce, allowing entrepreneurs to resume control over the allocation of capital, thus creating a domestic window against which everybody, including the newly chastised public sector, could judge the rationality of their decision making. That is not to say that a hypothetical Obama NEP would, or should, look anything like that of Lenin.

Although the introduction of hard currency, even under the auspices of nationally chartered banks, would certainly help restore rational calculation to the fuzzy and volatile quasi markets of today, there are many other aspects of the Soviet experience in the 1920s which would best be avoided. Possibly the most egregious of these was the emergence of a special class of state-created traders dubbed "the NEPmen." These people emerged at the intersection of the tightly controlled Soviet urban markets and the newly privatized hinterland of Russia and its outliers. Their monopolistic stranglehold over the exchange of agricultural and industrial commodities, albeit an exchange conducted in cash, became so noxious that eventually the Old Bolshevik factions were able to press forward with their case for total collectivization.

Unfortunately the present program of bailouts, subsidies, and bonuses has already become instrumental in creating America's own class of NEPmen, that is to say, people operating at the interface of the public and private sectors and skimming off of both. Just as in Russia, in the long run the American public won't stand for a parastatal class of private managers subsidized and privileged by the US Treasury. Without any market to check avarice, in its stead, regulatory measures will be tightened by insidious degrees, until either the managerial and official classes have merged, or there is a general revulsion at the trend.

A far better basis for any hypothetical NEP would be to legalize the failure of large firms and the success of small ones. This would entail cutting down on government expenditure in general, eliminating not only bailouts but large-scale contracts (both military and civil) to the privileged partners of government. It would involve reversing the growth of taxation and regulation, burdens that fall disproportionately on small businesses. And in an echo of Soviet peasants' liberation during the NEP, it would involve the selling (as opposed to the current acquisition) of public lands and curtailing eminent domain.

Even these measures might not be enough. Still, it is remarkable that the tepid capitalism of the NEP managed to save the Soviet Union, such that, by the later 1920s, its GNP had recovered to the level of Russia in 1913.

The Irrelevance of Good, or Even Bad, Intentions

Beneath the overarching secular trends of history, there is an irreducible human factor, and I realize it is rather unfair to compare our new president to someone as historically questionable Vladimir Lenin. It is said that President Obama prefers the moral council of Reinhold Niebuhr to that of Karl Marx, and his inaugural address certainly gave homage to root American and Western values. Nonetheless, President Obama is probably less inclined towards an NEP today than Lenin was in 1921.

He is also in a more disadvantageous position for turning to liberalization. First of all, it is far easier for a scoundrel to change his tune for the sake of self-preservation than for a stubborn idealist to renounce a fond theory. The mind of Barrack Obama seems to operate more along the lines of a Woodrow Wilson than any Bolshevik, but this is scant comfort. For while the coercive impact of war communism revealed a transparent tyranny, it could not appeal to the kind of passive acquiescence that occurs when a revolution is carried out "within the form" of a preexisting social contract, as was done under Wilson, and later FDR.

"A far better basis for any hypothetical NEP would be to legalize the failure of large firms and the success of small ones."

Now, recapturing the level of prosperity of Russia in 1913 is probably not a very inspiring thought for either Barrack Obama or any other American, but the point is not one of inspiration but of comparison. We have already had our fill of inspired rhetoric, and the time has come for prudent policy. Prudence is a virtue that transcends ideology and theology. It even transcends the gap between men and women who, as perhaps Lenin did, operate out of ill will, and those who, as I presume our president does, operate out of good. As he himself has acknowledged, it is a matter of averting catastrophe.

Finally, although I have been crediting Lenin with the merit of expediency and cunning foresight, perhaps even this isn't exactly true. Historically, it would seem that Lenin waited until the last possible minute to save the Soviet economy, when sailors were already in revolt in Kronstadt. No matter how cunningly Machiavellian the man at the helm, the state can only react to crises, not prevent them.

"When everybody is hiking in the wrong direction, it is the first person to turn back who is making the most progress."

Unfortunately, this administration's Keynesian advisors are likely to be just as loath to give up the illusions of omniscience and control. They would do better to remember the old proverb that when everybody is hiking in the wrong direction, it is the first person to turn back who is making the most progress. The sooner interventionism is abandoned, the more likely it is that economic disruptions can be contained. But, more likely, the state's leaders will wait until it is a choice between a new economic policy or national ruin. Thus, it's up to free-market economists to set rigorous standards for the failure of intervention, so the market can be restored at the first possible opportunity. And that's the kind of change we can believe in.