“The enormous pressure and machinery of the US government” — that’s the phrase that Thomas Lauria, a lawyer representing some of Chrysler’s “secured” bondholders, used in explaining why an unofficial group of Chrysler’s creditors decided to withdraw from a court case contesting the terms Chrysler’s reorganization.
It sounds — complicated, doesn’t it? Bankruptcy. Secured vs. Unsecured creditors. TARP. The whole alphabet soup of financial wheeling, dealing, and — as it happens — stealing.
Stealing? Michael Barone cut to the chase in his reflections on what’s happening in the case of Chrysler:
“The White House, presumably car czar Steven Rattner and deputy Ron Bloom, is seeking to transfer the property of one group of people to another group that is politically favored. In the process, it is setting aside basic property rights in favor of rewarding the United Auto Workers for the support the union has given the Democratic Party.”
This, as Barone colorfully but not inaccurately put it, is an example of “gangster government” in action. As The Washington Examiner noted, what just happened to Chrysler’s secured creditors is something “right out of Juan Peron’s playbook.”
“Like the Argentinian strong man, Obama muscled the owners and creditors out of a productive private company and gave it to union leaders, who will then fill his campaign coffers in gratitude for his generosity.”
Yes, that’s right. Barack Obama and his henchmen just handed the United Auto Workers 55 percent of Chrysler’s stock. One of the biggest contributors to the Democratic Party now controls the company they bankrupted. And what about the “secured” bondholders — the investors who accepted lower returns in exchange for the security of knowing they would be first in line to be paid back if something bad happened? The last time I checked, they were offered 29 cents on the dollar.
Why would the bondholders agree to this exercise in “spreading the wealth around”? This is where the “enormous pressure and machinery of the US government” comes in. It began with Barack Obama’s public criticism of the secured bond holders who, he said, were “speculators” unwilling to make sacrifices others had to make. Imagine that: a President singling out specific firms for public criticism.
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33 Comments
1. Ritchie Emmons:No shortage of outrage from me. I’m extremely nervous about what’s going to happen to this country on Obama’s watch. And what’s going to be done that can’t be undone.
May 10, 2009 - 11:02 am 2. David Thomson:“Where’s the outrage at an administration that….”
Many so-called elites believe that the government should stick it good and hard to the capitalist. They are not outraged—but down right thrilled. On top of that, the majority of Obama supporters are marginally to functionally illiterate. These individuals are unlikely able to read the sports pages of their local newspaper. To be blunt, they are dumb as doornail. They also invariably believe that the “capitalist pigs” are ripping them off. Whether we like to admit it or not, class warfare is alive and well in the United States of 2009. That leaves the Republicans—and they may not even represent half of the overall American population.
May 10, 2009 - 11:23 am 3. lc:There are, among other things, two biggies, two essential qualities for a well-functioning democracy: 1. respect for the rule of law 2. respect for private property. (both ideas inherited in this country from the “imperialist” Great Britain; actually, I bet they could be traced back even farther, perhaps to Ancient Greece (but I am not at all a classicist.) Obama’s “New Foundation” is chilling in its implications, not the least being what it (all implied of course) does to these concepts. The glib and reasonable delivery is a thin cover for the brazenness and shear chutzpa of the political class in this country (all parties) in shredding these fundamental ideas. “Where’s the outrage” is spot on. I am nervous, too, about what is going on in this country.
OT: I come to this blog via the Belmont Club. I enjoy what you write Mr. Kimble. Part of the chill I feel from the O is the intimation that blogs like this, or the Belmont Club, will be choked off, some how.
May 10, 2009 - 3:42 pm 4. CD:How many of you actually have followed bankruptcy cases where pre bankruptcy equity holders receive equity in new co. Strictly speaking this violates the absolute priority claim, but is done to facilitate the company exiting from bankruptcy. In other words giving equity someting even though strictly speaking they are not entitled to anything happens more than you think. Secondly, there is a difference between banks who actually lent money to Chrysler vs. bondholders who purchased claims in the scondary market. Bondholders who purhcased claims at cents on the dollar have a claim for the full face amount, but there is a reason why this debt was trading at distressed levels. The reason was obviously that it was unlikely that Chrylser bondholders were going to receive anything near full recovery. The only one lending to Chrylser was the government and like it or not, the govt. does not take the same view that a financial player will take. Bondholders knew this when they PURCHASED claims, and if they didn’t they were stupid. Basically, they expected the govt to either increase the amount of compensation/loan in the pool because the government wanted to avoid a bankruptcy. The government called their bluff and they lost. For claims regarding threats made by the administration, Lauria should be specific. Who threatened his clients and when. It’s not enough just to throw out allegations. So in summary, in a number of bankruptcies the absolute priority rule is not kept. Secondly, there was no other lender out there out than the govt. Third, govt serve other groups than just lenders. Fourth, financial players who purchased claims went in there with their eyes wide open.
May 10, 2009 - 6:11 pm 5. David Thomson:“Third, govt serve other groups than just lenders.”
That is why we have such a mess. There is no logical reason for the unions to benefit. They are not owners. Their money was not invested in the company. The standard bankruptcy process would have most assuredly rejected this approach.
“Fourth, financial players who purchased claims went in there with their eyes wide open.”
How does that old saw go? Fool me once—and shame on you. Fool me twice—and shame on me!” The government will find it very difficult in the future to find new suckers.
May 10, 2009 - 7:19 pm 6. gordon:Thank you CD, that is exactly right. This column and most of the comments are ignorant. First of all, the UAW gets no money: the 55% equity interest that everyone is talking about is held by the VEBA–not the UAW. It is the fund to pay retirees the health care which they are owed by the company. Basically the retirees have been given stock in a risky enterprise in lieu of the company’s obligations to them. And even the VEBA will not control 55% of the company–their stock is structured so it does not give them voting control of the company. So the whole line that the UAW now “owns” or controls chrysler is false.
Now its true that the secured creditors have to go along with this deal, and don’t paid their full securitized amount owed to them. But the reason for this is not conspiracy or political intrigue. Its because for the secured creditors to be paid in full would have meant liquidation. The bankruptcy plan being enacted is an effort to save the company. That is a legitimate goal of chapter 11 of the bankruptcy code. As CD says, it happens all the time, and when the debtor is one of three U.S car manufacturers it takes a jaw dropping lack of patriotism to argue for the speculators right to liquidate the company, which would be (and may soon be) devastating for our country and economy.
May 10, 2009 - 8:20 pm 7. Instapundit » Blog Archive » THE CHRYSLER DEAL: An Offer They Couldn’t Refuse. Related thoughts from Rich Galen. “If the Oba…:[...] THE CHRYSLER DEAL: An Offer They Couldn’t Refuse. [...]
May 11, 2009 - 4:23 am 8. mndasher:The only good thing about having the UAW with an ownership position in Chrysler, the company will be out of business for good in a very short time. And maybe the UAW will be gone too.
May 11, 2009 - 4:37 am 9. JD:@ Gordon:
May 11, 2009 - 4:44 am 10. SDN:Now it’s unpatriotic to to be concerned about the POTUS demonizing private companies (who “speculated” with U.S. citizens money, just not the citizens Obama wants to favor) that have broken no laws?
It’s attitudes like this that are going to turn us into Venezuela, or at least as close as it’s possible for a country as great as ours to get to that.
I’m astounded that otherwise rational people can’t see what kind of person Obama is at this point.
And Gordon and cd arrive from ACORN..
The bondholders DID NOT know what they were getting into because the Congress passed no law amending the Bankruptcy Code. What just happened is called ex post facto law, forbidden by the Constitution that O! never taught.
What will be devastating for our country and economy is when investors start treating us like the third world banana republic that O! has made us and refuse to spend money here. I notice the latest bond sale didn’t go so well. Unlike liberals, investors have brains….
May 11, 2009 - 4:55 am 11. TexasDude:Who will be running Chrysler?
Fiat, correct?
Not exactly American, don’t you think?
May 11, 2009 - 5:06 am 12. oMan:It is casuistry to call this anything but theft. And as Roger Kim ball and others point out, theft drives out investors. Obama sold what was left of his credibility, for a fistful of dollars to pay off his friends. We are soon going to be Venezuela or Zimbabwe, only bigger and not yet quite so desperate.
May 11, 2009 - 5:13 am 13. Andrew:CD and Gordon can parse this issue and nuance it to whatever point they wish.
May 11, 2009 - 5:17 am 14. Is the U.S. becoming Argentina? « The Political Inquirer:The issue hear that strikes at the core is the abuse of executive power.
A chill should run through each and everyone of us when we think of the aspect of the power of the government coming down on our collective heads. A phone call threatening retribution for a contractual standing is reprehensible no matter what administration employs it.
[...] Peron’ in the Doe-eyed treatment the press is giving Michelle Obama at every turn.
May 11, 2009 - 5:20 am 15. Person of Choler:Let’s see, Chrysler will be owned 10% by the US Government, milked by da union, and run by the Italians.
What could possibly go wrong with that?
May 11, 2009 - 5:25 am 16. Vinny Vidivici:” . . . jaw-dropping lack of patriotism . . . speculators . . . devastating for our country and economy.”
Gordon, your mask is slipping and your agit-prop is showing.
What’s next? Capitalist high-roader? Enemy of the people? Splitist?
Why should I bother taking seriously someone who seeks to delegitimize those who disagree in such a crude fashion?
May 11, 2009 - 5:30 am 17. kcom:Government behavior like this is an existential threat to our democracy and future prosperity. I am shocked (beyond what I can even put in words) at the turn of events and extremely disappointed that the creditors haven’t offered us a profile in courage and stood their ground (as hard as that might have been). We needed this sort of thing to be tested and tested now. I don’t know much about legal niceties but I don’t see how they could have lost in court since the law was entirely on their side. If they had won, the principle would have been established and Barack Obama would have been smacked down. And if they had lost, we would have learned a valuable lesson in how far gone our country already is. As it stands, the opportunity for a test case now seems to have passed and we’ll all pay the price in the future.
Two additional points – 1) The 2010 elections are super-critical now. Doing a 1994 and throwing the Democrats out of control of Congress is our only serious hope of derailing this train wreck (hmmm, that metaphor might need a little work). 2) For those inclined to take this lightly, look at what’s happened since Argentina pulled that crap back in the ’40s. They’ve been a second-tier, also-ran, hyper-inflationary, punching-below-their-weight country ever since. Is that really what we want here? President Obama really ought to have someone explain to him the cautionary concept of “cutting off your nose to spite your face.”
May 11, 2009 - 5:45 am 18. Concerned Citizen:CD and Gordon are missing the bigger point — the unintended consequence of this theft. Sure, the bondholders will likc their wounds and yes, investors do go in with their eyes open. What they don’t seem to be saying (at least out loud) is “these people were rich hedge funds and deserved to get hosed.
Serious investors I know have just moved 20 pct. of it into their mattress for the next four years. Gold, an unproductive asset is looking even better and they are considering moving money offshore before it gets “nationalized” via confiscatory tax schemes. Even the communists in China have a more attractive investing climate than that being created by our own communists in the USA.
It clearly isn’t safe investing in energy, healthcare, transportation or banking because you never know how the government is going to change the rules after the fact to cheat the people who actually put up the money. That Lauria and others went on the record about the Obama administrations speaks volumes about the way Obama plays – this took real guts and you can be sure they are now on the “enemies of the state list”.
May 11, 2009 - 5:47 am 19. jaafar:Good Lord, Chrysler has been getting bailed out for decades now, and making crummy cars as well. Doesn’t anybody have the guts to just take Chrysler around back and put it out of its misery?
May 11, 2009 - 6:05 am 20. Dana H.:This is yet another example of what Peter Schwartz describes in “Mob Rule Comes to Washington” here: http://www.capmag.com/article.asp?ID=5487
Another instance is “the offer they couldn’t refuse” that Paulson made to the bankers to get them to accept TARP. Note that this happened under Bush, so we can’t count on either Republicans or Democrats to make a principled stand for the rule of law.
May 11, 2009 - 6:21 am 21. Lee Moore:I don’t think the Obama administration is trying to stiff the Chrysler bondholders for the sake of it. I think they made what they regarded as a fair offer, and only when it was rejected, did they start the game of “who’s got the bigger dick ?” To which the only possible answer is “You, Mr President.” The amount of money being argued about is tiny compared to the vast sea of red ink in the federal budget, so the only motivation for provoking a stand up fight with the bondholders is to get over the message – “what we say goes.” I think the message has got across, and bondholders in future bankruptcies sponsored by the Obama administration will be better behaved. The problem, as Roger Kimball points out, is having successfully got that message across to the markets, how are they planning to entice people to become bondholders in future ? As an exercise in “getting the credit markets working” it looks a bit like shooting yourself in the foot.
May 11, 2009 - 6:39 am 22. Bill:“the 55% equity interest that everyone is talking about is held by the VEBA–not the UAW. ”
Do you really think we’re that gullible? Like the claim that Mussolini’s IRI wasn’t part of the Government. Yeah, right.
Next: as the UAW runs Fiatler into the ground, and the administration forces Government Motors to discontinue most of its bestselling models in favor of unsalable econoboxes, the Japanese and Ford will eat their market lunch.
So it will be time for another kneecapping in order to keep Obama’s union constituency afloat. I predict a massive Ford strike, with USLRB forcing brutally uncompetitive terms on the company; and Card Check to force UAW control of the Japanese auto plants, with perhaps some targeted tax penalties thrown in.
This is fascism in action, folks: hang on for a very rough ride.
May 11, 2009 - 7:30 am 23. Chester White:It’s time for ALL of us to put our capital on strike until Washington gets the point.
Pay off your debts, don’t expand your business, lay off people (Obama voters first).
Scout the tax code and take every tax deduction to which you are entitled. Sell all assets you can for capital losses.
We can hold out longer than they can.
It’s time for economic warfare.
May 11, 2009 - 7:46 am 24. mwl:Don’t buy the cars. Let the UAW go down in flames with the company they’ve stolen.
If you want to be patriotic, buy Fords.
May 11, 2009 - 7:58 am 25. Al Reasin:IMO, without investment in the economy unemployment will continue to rise, and since that will most likely impact the 2010 election, one could easily expect the administration to attempt to stimulate the economy even more. They would undoubtedly print more money as it has done recently, thus increasing the likelihood of high inflation, more federal debt and further eroding the confidence of foreign and domestic investors. If the government increases its investment in the financial sector, it is only natural that government control of the economy and financial institutions will also increase. Because of the flooding of the economy with unsecured currency, inflation could reach or exceed the levels seen in March of 1980 when it was of 14.7%. If that occurs, the variable interest rates of ARMs and especially home equity lines of credit (HELOC) would skyrocket as would foreclosures. Also with the government controlling more financial institutions and ignoring the rule of law when it wants, what is to prevent this administration from arbitrarily raising your mortgage interest rates even if your mortgage is supposed at a fixed rate. Points to ponder.
Our country’s, as well as the world’s economy, operates on a principle of trust and the rule of law. Once those underpinnings are destroyed, our economy and social structure become an anarchists dream. Thus when government becomes so large and powerful that it controls you, rather than you controlling it, the foundations of our country and the basis of our Constitution are threatened.
May 11, 2009 - 8:10 am 26. Jim,MtnViewCA,USA:On another post it was pointed out that hours after Obama called out those bondholders, they started receiving death threats.
May 11, 2009 - 8:22 am 27. David Block:Who even knew the names of these people and how to reach them? Think about the implications of that.
Scratch a liberal, find a fascist.
May 11, 2009 - 10:12 am 28. Paddy:The well established axiom, follow the money, most certainly applies to just about every initiative taken by the Obama administration. The focus should be on determining when, where and how George Soros and his cabal profits. I speculate that Soros has a large interest in Fiat. The pandering (plundering) to benefit unions is needed to keep this major special interest loyal to Obama.
We are in deep caca, folks.
May 11, 2009 - 10:55 am 29. Melvin Winter:Check out this Onion-style parody of the Chrysler deal:
http://optoons.blogspot.com/2009/05/obama-gives-uaw-55-control-over.html
May 11, 2009 - 11:26 am 30. Concerned Citizen:Paddy, you’re right on the follow the money. It will lead to the scene(s) of the theft, but I’m not sure you’ll find Soros’ fingerprints on a car.
Soros is playing a much bigger game. He wouldn’t want to touch a crappy Italian car company — there is a lot more to be gained by betting on the demise of the dollar. Using derivatives and leverage, this trade is going to make the $1 billion shorting the British pound look like chicken feed and he’ll be crowing about the killing he made at our expense.
If you are an investor, you are betting against Team Obama, who are massively short the U.S. economy and markets. Play at your own risk.
May 11, 2009 - 12:07 pm 31. Roger’s Rules » The Meaning of Obama, Part I, with a Lesson from Trollope and an admonitory afterword from Santayana:[...] of America.” His actions since taking office — think only of what just happened to the supposedly “secured” bondholders of Chrysler Corporation (R.I.P.) — suggest that he was not making an idle boast. He really is [...]
May 13, 2009 - 6:21 am 32. Roger’s Rules » A spoke in the news cycle: slow down and join a freedom brigade near you:[...] communication breifly attracted a lot of attention. I wrote about it myself twice: here and here. That was only a week or two ago, but already it seems ages ago: as Samuel Goldwyn is said to have [...]
May 24, 2009 - 9:29 am 33. Roger’s Rules » The Way it Was: Is Rockefeller Obsolete?:[...] the rule of political expediency, edged with virtuous-sounding rhetoric to sweeten the pill. “Secured bond holders“? They’re just “speculators” according to the President, folks whose rights [...]
Jun 25, 2009 - 5:42 am