Modica: Will State & Muni Bondholders Get Crushed to Benefit Unions?

During an appearance on Fox Business Network on Tuesday, NLPC Associate Fellow (and GM bondholder) Mark Modica warned that the GM bankruptcy may provide a model for insolvent states and localities to crush bondholders and taxpayers to protect politically-connected unions. “Follow the Money” host is Eric Bolling. Here’s a transcript:

Eric Bolling: GM’s creative approach to bankruptcy involved a lot of politics and back scratching and it might be just the playbook the states need, who are in financial trouble. Mark Modica, former GM bondholder himself who got hammered by the GM bailout has been all over this. Ok, sir, go ahead, we talked a lot about the GM bankruptcy and what happened. Tell us what happened to the bond holders.

Mark Modica: Hi Eric. Yeah. There was obviously favoritism as politically favored groups like the UAW did very well. I like to call it a wealth redistribution scheme. This money came from old GM shareholders, GM bondholders and taxpayers and it went to the politically powerful UAW and investment banks are making money and bankruptcy attorneys and advisors are making money. But all in all it just sets a very bad precedent going forward.

Eric Bolling: And take it one step further. The precedent being what if states were to do the same thing? What would happen to the people who hold all those municipal bonds?

Mark Modica: Right. I had a piece on the National Legal and Policy Center website that referenced a Times piece that said they are think about the states filing and there are some opinions out there that would be devastating. A Wall Street Journal piece states that you then have the possibility of unions again being favored over bondholders. Now municipal bonds have been known to be safe haven. People are investing their money getting only one percent because it is tax free and it is deemed to be safe. That would no longer be the case it the government allows bankruptcy at a federal level.

Eric Bolling: And that is really at the heart of the essence of it is that bond holders were supposed to be the first in line when there was any sort of bankruptcy or liquidation right?

Mark Modica: Oh, yes. Absolutely.

Eric Bolling: But you guys, the GM bondholders got put behind the unions. If that were to happen on the state level, it would be very, very difficult to make a case for loaning money to a town for water or sewers is that right?

Mark Modica: Yeah. The Treasurer actually for California, Bill Lockyer actually stated that this would be devastating. He called it a wrecking ball. If you set this precedent, taxpayers are going to get hit again and once again the unions will be favored. They will be taken care of and taxpayers are going to have trouble raising money. Muni bonds are going to be a disaster. A lot of people in the know, like the Treasurers, like the California Treasurer are just dead set against this.

Eric Bolling: Mark, before we lose you, before we let you go, why do you think the UAW was put in front of you and other GM bondholders?

Mark Modica: Oh, it is so obviously that it was political favoritism. They pay money and they helped elect Obama President. They obviously contribute a lot to the Democratic Party. Democrats were in power. The bond holders were not a politically powerful group. We did not have representation, particularly the little guy. Institutions, the big investment houses, they get taken care of. But the little guy, no one was really looking out for us and the UAW had the government behind them because that paid to get him in power basically.

Eric Bolling: All right Mark, we are going to leave it there. We are looking out for you. We are.

Mark Modica: You are. Thank you.

Eric Bolling: Mark Modica, thank you for doing this today.

Mark Modica: Thank you.