Be careful what you wish for

The cost of capital (for you liberal arts majors, that's the cost of borrowing money or issuing stock) just got more expensive for unionized companies.

Why?

Because bond and shareholders can't be assured they won't be sold out to union interests in a meltdown.

The Atlantic with an analysis.....

As General Motors teeters towards bankruptcy, with a looming deadline of midnight tonight for bondholders to agree to a stock swap, Reuters reports that the talks don't look promising. The Wall Street Journal got the scoop regarding how the unions will shake out in all of this: very similarly to how they did with Chrysler. This seemingly good news for unions might actually turn out to harm them.

According to the WSJ, unions will end up owning 17.5% of the company's common stock, along with $6.5 billion in preferred stock (which includes a whopping 9% annual dividend).

The agreement largely mirrors concessions the union granted to Chrysler LLC last month, including a suspension of cost-of-living allowances, bonuses and some holidays, people familiar with the agreement said. It also includes a provision for job buyouts, as well as to forbid strikes until 2015, these people said. Wages are expected to remain unchanged.

And, of course, one should expect the GM bankruptcy proceedings to go exactly like the Chrysler proceedings: very well for the unions and very badly for bondholders. Hedge fund manager George Schultze was on CNBC earlier arguing that bond investors are going to be very wary about funding unionized firms, given GM will likely shake out just like Chrysler did. That led me to this gem from Bloomberg last week. In it, Schultze is quoted about lessons learned by bondholders though the automaker bankruptcies:

The obvious one is: Don't lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.

Don't forget this one either. Remember Republic Windows and Doors? They were the company who went out of business and the bank (Bank of America) was forced to issue funds on an expired line of credit to pay workers for unused vacation and severance; thus putting the bank in the spot of eating even more money on their deal.

If you don't believe this discussion isn't going on in every credit committee meeting in every bank, you're kidding yourself.

In the future, banks and bond holders will "Just Say No".