10/16/2005

10-16-05 - 1

10-16-05

Sit back children, and let me tell you the tales of two acts of corporate malfeasance, in which executives get stinking rich, workers suffer, and the taxpayer inadvertently pays for the corporate profits.

A story from the past : In 1999 GM spun off Delphi, its auto parts manufacturing division, as you are surely aware. At that time, the GM executives must surely have known that Delphi was bound for bankruptcy. In the spin-off they put most of the health care and pension and wage liability of its large work force. As usual, the SEC and the government and large financial institutions were silent in this questionable shunting of responsibility. Basically GM was allowed to drop a multi- billion dollar poison pill off their balance sheet. (Imagine if I could take out a billion dollar loan from the bank, keep the billion dollars for myself and spin off a seperate company which owned the loan obligation). Now that Delphi has gone bankrupt as it inevitably had to, GM is only responsible for a part of their large liabilities, and the government pension insurance will pick up most, as well as federal unemployment and health care, etc. which GM would have been required to cover. The billions of dollars the Delphi owes will be written off to the taxpayers in the bankruptcy. Now, off course Delphi and ridiculous Republicans will scream that it's the union's fault. That's of course nonsense. High union pay and benefits may have in fact hastened the fall of Delphi, but they did not cause it - doing manufacturing like that in the U.S. is simply not a profitable business, and unprofitable business will fail. You can't compete with 3rd world wages; in order to come even close you'd have to pay your workers well below poverty levels, and skilled labor will simply not accept that wage, they'll find other jobs. ( more )

A story for the future : Countrywide is the nation's most profitable mortgage company, and they've done fantastically well with the recent housing boom. Their outsize success, at its core, is through giving very large mortgages on expensive houses to people who can barely afford them, largely at very low interest rates, often with interest-only and other dangerous loans (if you only made safe loans to good risks, you wouldn't have nearly so much growth). These loans are very profitable, but are risky and could lead to major losses if the market goes down in the next few years. Fortunately for Countrywide, they don't carry that risk. Instead, they sell their mortgages to Fanny Mae and Freddie Mac. The two FMs now carry the risk of these mortgages, and the FMs are semi-government organizations which would surely be bailed out by the taxpayers if anything bad happens. Basically Countrywide is able to make very risky financial investments with the government (taxpayers) covering the loss if/when it goes bad (very similar to the S&L scandal in the 80's). (Note that I'm not even counting the direct subsidy of taxpayers to the FMs, which is indirectly then transferred to people like Countrywide, more )

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old rants