Middle East peace not such a long shot for Obama after GM, Chrysler

Anyone who doubts that Barack Obama, the US president, can be ruthless enough to broker a Middle East peace deal should consider how he boxed the giant car makers Chrysler and General Motors (GM) into bankruptcy proceedings. In late March, when GM failed to impress a team of White House aides with its "viability plan" for recovery, Mr Obama met the company's chairman and dangled the threat of draconian bankruptcy terms that would leave company bondholders with no more than 20 cents in the dollar. Later, when Chrysler's bond investors baulked at a plan that would have given them anything less than 80 per cent or so of the value of their notes, the White House and its allies in Congress went in hard. Reports circulated that the Treasury Department was leaning on unco-operative creditors, while prominent Democrat politicians such as John Dingell, a congressman from Michigan, the heart of the US car industry, called them "rogue hedge funds" best dealt with in court. Even Mr Obama sneeringly referred to Chrysler's bondholders as "speculators". The creditors, who as participants in the government's bank-bailout plan are particularly vulnerable to political pressure, buckled. Even then, the White House could not resist giving Chrysler's labour union a 55 per cent equity stake in the restructured company in defiance of abundant legal precedents that place bondholders' secured interests above those of unsecured ones, in this case the employees. This is what makes the public-private embrace so deadly. Organised labour contributed US$68 million (Dh249.6m) to the Democrats' war chest for the last election cycle, according to Business Report, and Mr Obama, having welshed on his campaign pledge to renegotiate the North American Free Trade Agreement on more worker-friendly terms, delivered for the unions by putting them in control of the country's third-largest car maker. GM bondholders were similarly treated. All in, according to analysts, they can expect an equity stake in the restructured car maker worth up to 15 per cent. The unions, meanwhile, will probably end up with as much as 20 per cent, plus $2.5 billion in cash payouts over the next eight years and $6.5bn in preferred stock, paying a 9 per cent dividend. Patronage is the linchpin of US democracy. But appeasing the nation's car unions at the expense of bondholders, who range from big fund managers to retail investors, is uncharacteristically inept for someone as famously understated as Mr Obama. It vindicates conservative fears that he would turn back the clock to the Big Labour era of the 1970s, when union bosses helped sabotage US manufacturing with extravagant demands that sent blue-collar jobs overseas. It also sets a damaging precedent: the prospect of government intervention in the credit markets adds risk at a time when bond investors are already nervous about the prospect of a major national default and a collapse of the dollar. As one decidedly un-roguish hedge fund manager told this column: "This is banana republic stuff. Obama didn't just jump the queue in giving pensioners' rights priority over the bondholders. He jumped the law." There is, finally, a whiff of moral hazard in Mr Obama's car sector bailout. For decades the industry has courted death through its own arrogance and myopia, only to cheat it with the help of a pliable Congress. Through its powerful lobby in Washington, the industry has over the years managed to thwart attempts to impose tougher fuel efficiency and safety standards. When Americans started buying cheaper and more reliable vehicles from Japan, politicians responded by demanding "voluntary restraints" on car imports. Nor is the car industry the macroeconomic engine it once was. Manufacturing accounts for only 11.5 per cent of the US GDP, down from 20 per cent in 1980. So why should the federal government inject more money, having already squandered billions in recent months, to "save" two companies that in a few years will be indistinguishable from their current form, assuming they survive at all? The answer, of course, is politics. With its headquarters in a vote-rich battleground on the US electoral map, the viability of GM and Chrysler was always about how many ballots it could deliver rather than its contribution to the country's long-term economic security. In this sense, Mr Obama's relationship with US car makers is similar to his stand-off with Israel in his pursuit of a sustainable Middle East peace. Like America's bankrupt car sector, Israel is a ward of the American taxpayer, having burned through a fortune in US aid on everything from military technology to Jewish settlements on Palestinian land. And like GM and Chrysler, it is a US liability, though of a strategic nature rather than an economic one, and it, too, compensates for this with the help of its friends in Washington. In his historic speech in Cairo last week, Mr Obama signalled he is prepared to assign a value for Palestinian aspirations equal to that of Israeli ones, something few of his predecessors ever had the courage or inclination to do. By turning the screws on Chrysler and GM creditors, he has demonstrated a measure of brute cunning that even Israelis can respect. sglain@thenational.ae