The Law of Unintended Consequences

This is what happens when the government gets too involved in the economy.

As noted in several places below, my employer is a large, unionized, trucking company (I work for the non-union, international unit, thank God). The company has been teetering on bankruptcy for several quarters. We renegotiated our credit facility with our consortium of banks in February, and signed on to a plan that required a profitable second quarter.

That was not to be. In April we continued losing money, as we have for over two years. It became clear in the last several weeks that we would not meet the stipulations in our credit agreement. Everyone was holding their breath and waiting for the first members of our banking group to start pulling out.

But late on Thursday our CEO announced that we would be asking for TARP funds from the government. And on Friday morning the banks announced they would renegotiate our banking facility and support us through another and longer period of loss making.

So here is the story. CEO threatens the banks with taking TARP money. Although he knows the chances of actually getting the money are slim to none, he also knows that by asking for them, he brings our situation to the attention of the government. 55,000 union jobs here. All the CEO needs to do is make the wheel squeak.

And the banks know that if the government gets involved, all bets are off. After the Chrysler deal, secured creditors apparently have no rights. Better to keep the government totally out of the deal, even if it means underwriting a highly risky and weak business.

The great irony of this is, of course, that by throwing bankruptcy law to the winds in the Chrysler deal, the Obama Administration has created an ugly precedent. Banks are now making risky bets based on the mere threat of government involvement. The ultimate result of that is a weakening of the banks, the opposite of what our great leaders in Washington say they want.

One hundred and fifty years of bankruptcy law has been significantly weakened by the Obama Administration. Unfortunately, the Law of Unintended Consequences is as strong as ever.

2 comments:

JP

9:00 PM

Hope and change, again!

Patrick Henry

11:44 AM

Good analysis Jake. I had not thought down that stream.