The Binary Circumstance

According to CNBC, the U.A.W. will own a majority stake in Chrysler when and if it emerges from bankruptcy, and a big stake in the restructured General Motors.

According to restructuring plans proposed this week, the union will have more than half the stock in Chrysler and a third of General Motors, meaning it will have tremendous influence, with the government, in determining the future of the companies.

Chrysler filed for Chapter 11 Bankruptcy protection today.

The goal is for the whole process to happen quickly, Obama said, perhaps within a couple months.

The president said that Chrysler has been responsible for helping to build the American middle class, but over the years also had been weakened by “papering over tough problems and avoiding hard choices.”

“For too long,” Obama said at the White House, “Chrysler moved too slowly to adapt to the future, designing and building cars that were less popular, less reliable and less fuel efficient than foreign competitors.”

The Obama administration had long hoped to stave off bankruptcy for Chrysler but it became clear that a holdout group of creditors wouldn’t budge on proposals to reduce Chrysler’s $6.9 billion in secured debt.

Bondholders are not happy with the deal because they were only offered cash at a fraction of what they were actually owed.

“We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another,” a group of G.M. bondholders said in a statement this week.

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The U.A.W. members at both automakers stand to lose some of their pay and benefits, but the cuts are not as deep as those faced by airline and steel workers when their companies went bankrupt. Under proposed deals devised by the Treasury Department, U.A.W. pensions and retiree health care benefits would largely be protected.

The U.A.W. has derived its leverage in part from the support of a Democratic president and Congress. But it also results from a long-term strategy to build support in Washington that stretches back more than 60 years.

The enormous power that unions have had over the automobile manufacturers is one of the factors that has destroyed the U.S. auto industry, along with exceptionally poor management. 60 years of a cozy relationship of automakers with the government has brought the automakers to the brink of total failure. They would have failed if the taxpayers hadn’t been forced to bail them out repeatedly.

Who will want to loan money to the revamped car companies, now that they know that their debts will be last on the list to be repaid? (Bondholders are usually paid before stockholders.) Will the unions with their clout in Washington, DC be able to get themselves paid first in the event of more problems down the road? Aren’t problems down the road guaranteed since the generous benefits of former workers will be largely left untouched? If they can’t meet those burdens now, how will a restructured company make them, especially when it is run by employees who have a long history of giving themselves sweetheart deals?

What’s next? Will American’s be forced to buy American cars after being forced to bailout the auto giants? How else will they pay themselves back?

Banks and other lenders like Fannie Mae and Freddie Mac are now sending out delinquency notices and foreclosing on properties faster than ever before, now that temporary restrictions on foreclosures are expiring.

Default notices surged 80 percnet from 75,230 for the prior quarter to 135,431 notices in Q1 2009. That’s also up 19 percent from the first quarter of 2008. This is a new all-time high for any quarter in DataQuick’s statistics, which go back to 1992.

Now you may say, well, these are default notices, not foreclosures, and we’ve got that great Making Homes Affordable adminstration plan all ready to help all these folks. I’m wondering just how they’re going to handle these folks, let alone help them. According to DataQuick, the bulk of the loans were originated in late 2006, at the very height and most desperate frenzy of the housing boom, when lenders were trying to get everyone and their brother into a new loan. I wonder how many of those loans are now so far underwater, given the huge home price declines in California, that no modification is going to help.

Personally, I’ve never been a supporter of government efforts to prop up real estate values, and the moratorium on foreclosures was nothing more than that, a effort to keep prices artificially high by preventing more foreclosed properties from hitting the market and further decreasing prices which put more people underwater and leads to more foreclosures.

The problem is that without a free market in real estate, it’s impossible for anybody to know what the real market value of real estate is. People are waiting for a bottom but the government is trying to prevent the market from reaching a bottom because they fear it is much lower than current prices.

But all the the foreclosures that have been on hold will soon start hitting the market now, all at once. With so much property hitting the market at once, that can only depress prices even further, leading to more foreclosures. Temporarily preventing foreclosures may be a politically popular idea but it doesn’t seem to have done anything to prevent the actual number of foreclosures and the inevitable decline in prices that goes with it.

In markets where prices were allowed to collapse, sales are brisk but at much lower prices. In a recent TV news story I saw that a house in Florida that previously sold for $275,000, just sold for $75,000. While such huge drops in prices are bad for people who currently own real estate and for banks, they’re great for people who have saved but never been able to buy a home. Now they can suddenly afford one, often for less than what they’re paying in rent. That’s the positive side of the foreclosure “crisis.”

This morning brought news that unemployment was up, existing-home sales were down. As long as unemployment increases it will very difficult for housing to put in a bottom.

Susan Boyle, the 47-year-old unemployed spinster from Scotland who stunned audiences around the world with her spectacular singing of “I Dreamed a Dream” on Britain’s Got Talent 2009, sang “Cry Me A River” on a charity CD that was released in 1999.

Somebody on YouTube put that track to still images taken from her audition for Britain’s Got Talent.

She not only is a great singer, she picks the right songs. How could it have taken more than 10 years for people to figure this out?