The Lessons Of Chrysler

The bankruptcy judge in the Chrysler case basically told the hedge fund babies to quit their bitchin'.

The judge overseeing the bankruptcy of Chrysler on Tuesday took a significant step toward allowing the sale of most of the automaker to Fiat, approving the bidding procedures advocated by the company and backed by the Obama administration.

The decision by the federal bankruptcy judge, Arthur J. Gonzalez, is a setback for a group of Chrysler creditors who have argued that liquidation of the company or some other transaction could yield greater value. These lenders, primarily investment firms, have said that the plan for the Fiat transaction ran afoul of bankruptcy law and would chill efforts by others to produce competing, potentially higher bids.

But Judge Gonzalez disagreed, saying, “The court concludes that the bidding procedures are appropriate and necessary.” [...]

Judge Gonzalez earlier ordered the disclosure of identities of the Chrysler creditors, who had said making them public could lead to retaliation. A lawyer representing them claimed that the creditors had been harassed, and some had even received death threats.

Judge Gonzalez, said that their lawyers had not presented enough evidence of risk and gave the creditors until Wednesday morning to reveal their identities. The primary evidence cited by their lawyers was a set of anonymous comments on The Washington Post Web site.

These "death threats" that keep popping up every time a big-time financial company gets challenged never made sense to me. Now that I see they come from random Internet commenters named "jerkhoff" and it all becomes clear - they use whatever they can find to gather sympathy and chill dissent.

Meanwhile, as the deal moves forward, a couple lessons from how Chrysler dealt with its insolvency can be gleaned. First of all, Chrysler's road to profitability comes from importing the technology and management, not outsourcing the labor.

This big story was so easily missed because it runs against one of the main myths that our elites have cultivated about the US economy: that the country has a "comparative advantage" in highly skilled labor. In this story, the United States will continue to lose manufacturing and other "less-skilled" jobs as its economy becomes more concentrated in highly skilled sectors.

While this story of the US becoming a high skills center in the world economy may have been comforting to the elites, and was widely promoted by economists and the news media, there was never much truth to it. Highly skilled professionals did well in recent decades not because they succeeded in international competition, but rather because they were largely sheltered from it [...]

The end result of this protectionism for those at the top is a bloated overpaid sector of top managers, which is what we saw at Chrysler. If we compare wages for assembly-line workers in Europe and the United States, there would not be much difference between the pay of UAW members and their counterparts in Europe. However, there would be a very large difference between the multi-million dollar pay packages of the top executives at the US companies and their European counterparts. The pay gaps persist among the more highly paid engineers and management personnel.

Therefore, it was only logical that a bailout of Chrysler would seek to take advantage of the lower cost management and design skills available at a European car company like Fiat. In Chrysler, as in other companies, the high pay packages for these people are like an anchor dragging them down in international competition. If the US is to be competitive in the 21st century, we must either bring the pay of those at the top back down to earth or we should look to follow the lead of Chrysler and contract out for these services.

If only the bank executives competed on a level playing field with top talent abroad, most of whom get less in compensation and bonuses. And if only this perspective on restructuring and reducing in size were applied to the banks as well.

In return for its major loans to floundering auto companies too big and strategic to be allowed to go under, the Treasury opted for a structured bankruptcy, converting its loans to shares, ousting top executives, shrinking the companies. In return for its mega-loans to floundering banks that were also too big and strategic to fail, the Treasury has not opted for structured bankruptcy, has not converted its loans into shares, has not forced out top executives, has not moved to make banks smaller (save in its proposal to limit leverage). Indeed, its bailout of AIG rewarded bondholders such as Goldman Sachs to the detriment of everyone else.

Why the difference? Why compel the restructuring of one crucial industry and leave another, whose mismanagement all but brought down the world economy, basically untouched? Could it be that the leaders and folkways of American banking are familiar to the men who run the Treasury, while the leaders and folkways of the American auto industry are not -- meaning that they can assess Detroit more dispassionately than they can Wall Street? In short, where is the Treasury's Ron Bloom for banking?

If the Chrysler bailout turns out properly, maybe the Administration could take the hint.