BG 04052009
LET THEM EAT CAKE
Ever fight over that last piece of cake with a sibling at the dinner table? Well now we’re all fighting – not just for a piece – but the whole cake and it doesn’t look like we’ll get a bite.
By Neil George
Many around the nation might enjoy re-reading an old classic from Tom Wolfe – The Bonfire of the Vanities. It told the story of the last major
Included in the plot line was the tale of one of the masters of the universe – a bond trader that ran into a few sags to say the least.
One of my favorite passages that I’ll paraphrase is when the master of the universe’s job is being described to one of his progeny. And it goes kind of like this.
Daddy gets a big cake and cuts it into pieces and passes them around for others to share. And along the way – he collects the crumbs that fall by the wayside.
None too pleased with the trivialized description – the master of the universe’s retort is that some of those crumbs are pretty darn big.
Right now – the cake is much greater than just a single bond issue. In fact, the cake can be thought of as the entire economy of the
And we’re all working on the cake. Some are baking it as well as coming up with the design and all of the trimmings as investors and business leaders. And others are eagerly awaiting their slice – even if they had little to do with any of the baking – much like so many of the entitled classes of voters.
And over the past several days – it’s those that have been doing the baking that are being left with not just their slices – but crumbs – if anything at all. And it’s the entitled – that are being served up ever larger slices.
The folks over inside the West Wing of the White House led by the current president have been quite busy recently. Take for example how much time and attention that they’ve been devoting to the Chrysler Corporation.
We all know that there has to be a reckoning of this failed company. The debts are way too large to be serviced by revenues and can’t be justified against assets. And embedded costs of operation – including plenty of entitlements for those both on and off the assembly line just make it near impossible to run it as a profitable operating company.
Most in this situation would simply liquidate the whole thing, selling off production and other assets and start afresh with more competitive costs of production.
We know that the US continues to be a viable – if not still successful place for domestic automakers as companies such as Honda continue to assemble vehicles by the thousands in Ohio, while Toyota pops their out of their factories in Tennessee and everyone from Porsche to Mercedes-Benz, BMW and even Hyundai are still expanding their facilities while Volkswagen is preparing to re-enter US production again.
And Chrysler has a bidder for some of its facilities – in Fiat of all companies.
So, it should’ve been a done deal.
But the West Wing guys didn’t like how Chrysler was being sliced up. Bond holders getting their due while those of the entitled class got little to none.
That’s the way of course that it’s supposed to work. Bond holders and senior creditors are first on the list to be paid back their capital. They control the process. While stockholders and workers get whatever might be left over.
But that wouldn’t be fair now – would it?
So, the West Wing rolled out their criticism of bond holders – trying to vilify them as the bad guys holding up the whole deal.
Using charged labels – such as Hedge Funds and the like – the West Wing guys thought that they could shame investors into surrendering their due from what’s left of the Chrysler cake.
Now, let’s forget that many of the investors in Chrysler bonds are actually everyday folks. Owning the bonds inside countless mutual funds and pension accounts – they’re not the fat cats as being portrayed by the West Wing.
And now, even as the creditors and investors of Chrysler are trying to hold on to what’s legally should be theirs – General Motors is now in the sights of the West Wing.
Like Chrysler – GM needs to be liquidated and the assets liberated for more successful management less encumbered by past concessions to the entitled class.
But the rather than letting creditor laws work their course in favor of bond holders and bank lenders – the West Wing is trying to again steal the cake.
What they’re pushing is that unions with subordinated claims against GM should be bumped up to the top with not just a slice of what might be left of GM – but the lions share – dwarfing by multiple fold what senior creditors and bondholders would get.
This might play well with the entitled class – but it won’t play well with the bond and credit markets.
Right now – it’s not about jobs or handouts – but rather fixing the banks and the rest of the credit markets – including the bond market. We need credit to flow – and not just by and or through Uncle Sam – but by those in the real world credit market.
If creditors – ranging from banks to bond market masters of the universe – to just everyday individual investors like you and me begin to recognize that Uncle Sam can just on a whim – take away their rights without due process and without compensation – then what’s the incentive to lend and invest?
The credit market cake then would begin to shrink and no amount of stimulus cash would be enough to bake it back up.
The same can be said of the rest of the economy – beyond just the credit markets.
Right now, the West Wing is getting ready to rollout one of the most massive of tax increases ever experienced in the
He deal being proposed by the West Wing would be to tax US corporations just like individual taxpayers. Meaning that corporations – like individuals would be taxed on worldwide income – and not just income repatriated back to the
The results this year alone could amount to an additional tax bill for companies like General Electric in the amount of 27 billion. And that’s just one of several companies adding up to that 700 billion dollar tax hike.
Now, I’m all in favor of tax equality – but really, during one of the worst downturns – should Uncle Sam be looking for a bigger slice of an ever smaller cake right about now?
Meanwhile, while Uncle Sam is trying to rob bondholders while sticking others with bigger tax bills – the spending plans of Capitol Hill are now set to blow up the deficit to just a few billion or so of a trillion dollars – the highest ever for the Federal budget deficit in a post World War II world. And that’s set to expand the debt of Uncle same to more than 54 percent of what’s left of the US GDP.
So, no wonder that the West Wing is looking for all the cash that it can dig up.
But this brings up another story involving cake – this time with an anecdotal recount that I read with great interest in the Financial Times this morning of a a discussion of former UK Prime Minister – Margaret Thatcher.
Thatcher noted that a bigger cake means bigger slices for everybody. But what government needs to understand is that you have to allow and encourage the creation of wealth to make for that bigger cake.
Perhaps somebody ought to send over some of Margaret’s papers and her memoir up to Capitol Hill and down to
One man that didn’t need any tutoring on Thatcher – or the benefits of lower tax rates for improving tax revenues died at a mere 73 years.
Sure, you might laud Jack Kemp for his AFL Championship victories with the Bills – but for me – it was his working with and for the Gipper back when the West Wing was run a little differently.
Neil George is editor By George.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
