Traditional business response: "No, it wasn't right because the bondholders had a legal contract that by definition put it in a superior position in a bankruptcy. To allow the rewriting of the law would be setting a dangerous precedent that would undermine the trust in the US rule of law for businesses. Bondholders rely on this rule of law in order to have the confidence to loan, and if that confidence is shaken, loans won't be made."
Traditional liberal response: "Yes, it was right because employees are stakeholders too, just like bondholders and management, and if they aren't taken care of in this bankruptcy, then they are going to go on welfare and get Federal assistance anyway. So let's take care of them now."
Almost everyone at Fight Club gave a variation of the traditional business response. But because it was Fight Club, and not Yes Club, I disagreed. I thought it was acceptable for the Government to give the unions preferential treatment in this particular case. But my reason for saying this is NOT what you might expect. My belief is the Smarter business response.
Enlightened business response: "Yes, it was acceptable for the Government to advance the union over bondholders, because the bondholders, when they loaned the money, did not assign enough risk to GM's viability precisely because it has a really big union workforce. If they did assign the correct risk of lending to a too-big-to-fail company with a strong union, then GM might never have been able to raise the capital over the years, and would have had to break itself up into smaller companies to survive. Hopefully with this Government action, bondholders will learn an important lesson, and will avoid lending to unionized, too-big-to-fail companies.
Imagine a world where GM was forced to raise money at much higher interest rates. They might have failed earlier than 2009, instead of being artificially sustained by capital markets for more than a decade. It would have been better all the stakeholders if they were unable to raise the capital at reasonable rates sometime in the last dozen years, and instead of taking the capital in to sustain their too-large size, they would have downsized earlier, and possibly broken up into more competitive sub-companies.
I believe this Government action, while somewhat undermining the rule-of-law, ultimately will produce a positive result because it will signal to capital markets not to lend to really large companies that have really strong unions. Either these companies need to shake off the union power, or they need to break apart into smaller, more nimble companies. I'd rather see the free-market forces break apart a struggling behemoth like GM earlier, than a Government orchestrated breakup later.
