Google+ Consumer Psyche: Obama vs Capitalism


Wednesday, April 29, 2009

Obama vs Capitalism

I'm not going to get into what's fair. That's for individual bondholders to decide," explained new GM CEO (and former CFO) Fritz Henderson. Fair? There's nothing fair about doing business with the government or the unions.

Few people, especially in government and big business, seem to remember one of the founding principles of Western civilization and capitalism: private property. If you borrow someone's private property, you have to pay it back. It's not optional. GM has borrowed $27 billion from its bondholders - and Fritz Henderson was the person who arranged nearly all of these loans while he was CFO. Fritz promised lenders they would be repaid. If GM cannot repay these debts on time with interest, then according to all the laws of this country and 1,000 years of common-law tradition, GM's assets are legally transferred from the company's equity investors to the bondholders through bankruptcy. Them's the rules. But apparently, OBAMA! has other ideas about how things should work.

OBAMA! is demanding a 50% equity stake in the restructured GM. That's not a misprint. The government wants half of the new company. For what? Yes, the government has put $15 billion into the company - but it did so only after GM should have filed for bankruptcy. In other words, without the government's "help," the bondholders would have gotten 100% of the new company. Now, even though they're still owed $27 billion (almost twice what the government is owed), they're being asked to accept only 10% of the equity in the new GM. Where's the rest of the equity going to be "spread around"? The union expects a 39% stake. And Fritz even plans to give existing shareholders a 1% stake. Everyone, it seems, is going to get a large stake in the new GM - except for the company's legitimate creditors.

Memo to OBAMA!: Capitalism doesn't work when debts aren't repaid. Capitalism doesn't work when legitimate creditors are put last in line - behind the union. If you think the way to restart the financial system is to allow the government to steal 50% of GM's assets and give the rest to the union, you're nuts. Nobody can afford to make a loan if they're forced to figure out the odds that OBAMA! will steal their collateral.

--- Porter Stansberry

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