2009 May 03 Sunday
On Obama's Attempt To Screw Creditors

Obama wants to give 55% of Chrysler to a UAW pension trust fund, 35% to Fiat, 8% to the US government, and 2% to the Canadian government. Obama wants to give only 30% of the face value of secured credit to the secured creditors. This amounts to putting politically favored junior creditors ahead of senior creditors.

The proposal to grant the UAW a large equity stake has stirred concerns among Chrysler's secured lenders. They question why the union should be given preferential treatment when bankruptcy law grants priority to the secured lenders.

Barack Obama the demagogue has decided to blame the secured creditors for the bankruptcy of Chrysler while he basically tries to screw them out of secured assets they rightfully own.

At the same time, in an echo of the tensions that have run high between Washington and Wall Street, the president and his aides blamed the filing squarely on about 20 smaller investment firms and hedge funds. This group voted against the government's last offer to eliminate $6.9 billion in debt owed them.

They "decided to hold out for the prospect of an unjustified, taxpayer-funded bailout," Mr. Obama charged. Rep. John Dingell, a Michigan Democrat, called the holdouts "rogue hedge funds" and "vultures" and said in a statement that they "will now be dealt with accordingly in court."

Obama decided to give the Chrysler UAW retirees a company to use to make money to pay their benefits. Obama's problem was that a large chunk of that company was assets pledged to back up loans. His solution: ignore bankruptcy law and property law and try to force thru his will. He managed to pull this off with those creditors who are banks regulated by governments. But pension funds, hedge funds, and other creditors who are less under Obama's thumb objected to this property steal. They are hoping a bankruptcy court judge will recognize their legal rights.

No one forced Chrysler to put up assets in exchange for loans. Had Chrysler not put up assets as collateral Chrysler either wouldn't have been able to get the loans or would have had to pay interest rates far too high for it to afford. Now Obama is trying to give the secured lenders the big shaft. This is highly unethical.

Megan Mcardle points out that Obama's tactics will make it harder for very unionized companies to raise money.

Which brings us to the real question, which is, when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line? Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.

No, leave that aside for the nonce, and let's pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions. What do you think this is going to do to the supply of credit for industries with powerful unions? My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit. Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit. Though it may well be the last time they get it, on anything other than usurious terms.

In the long run this will make unions smaller. Companies will flee from union areas and will resist unionization attempts even harder. Governments, utilities, and other organizations tied to the region they service will not escape from unions. But mobile companies will move factories and take other measures to make sure that unions do not block their access to credit markets.

The Chrysler episode shows most clearly how far to the left Obama stands. He's revealing more of his true nature.

Share |      By Randall Parker at 2009 May 03 12:16 PM  Cultural Wars Western


Comments
Aki_Izayoi said at May 3, 2009 1:22 PM:

Starting to become tempting by going long on protectionism.

Chrysler's equity isn't worth that much even that the threat of the bond holders liquidating everything is gone. I suppose it might become worth more if one reduces competition. Perhaps, that means more market share and the value of Chrysler's equity would rise because the perceived value of discounted cash flow is higher.

Mercer said at May 3, 2009 3:04 PM:

Someone is getting screwed - the US taxpayer. They are giving 14 billion dollars to Chrysler.

If Chrysler wasn't getting 14 billion from the government how much money do you think Chrysler's assets would be worth? I have not seen any estimates but I think a bunch of old rust belt factories wouldn't amount to much. This is a payoff to the UAW but if Obama wasn't helping his union friends all classes of creditors would get little in bankruptcy court. Since Obama is giving the money he decides who he wants to give money to.

The taxpayers in the process are getting part ownership of a worthless company for 14 billion.

Randall Parker said at May 3, 2009 4:42 PM:

Mercer,

It is funny. It didn't even seem worth remarking that, yes, the US taxpayer is getting screwed. I just assume we all know that is the case. What seems novel here is the brazen attempt to change the hierarchy of debt protection.

averros said at May 4, 2009 2:33 AM:

> Obama's tactics will make it harder for very unionized companies to raise money

Good. So these companies will be more likely to go bankrupt, and more and more of the union thug wannabees will get to taste what communism is really like when they get to live on government handouts. Limiting food is known to improve mentail function in afflicted with mental diseases (such as belief in socialism).

Anonymous said at May 5, 2009 8:03 PM:

Contract law? You mean that thing where a capitalist takes a victim's property and calls it a voluntary transaction? Oh, we have government to take care of things like that, comrade.

Snouck said at May 8, 2009 3:14 AM:

Randall,

something occurred to me when I was reading up on the collapse of Communism in Eastern Europe. This Bulgarian author (V.I. Ganev) argues that a mayor reason that the Bulgarian state weakened was that many members of the former nomenklatura used their connections to take up debt from state banks in the 90ies. They became `credit-millionares`. It then became necessary for this elite to weaken the ability of the state to monitor banking and debt. These former Communists seriously degraded the state and the network of institutions that give the state its strength. http://www.cornellpress.cornell.edu/cup_detail.taf?ti_id=4675

Perhaps something similar may be going on here. The Left thinks it is increasing State Power. The well-connected network of firms around the state that used to buy the debt of the state had an interest in the state paying the debt and serving the interest. But that relation has now inversed. The state is actually retreating while it thinks its advancing.

What do you say?

Regards,

Snouck

Randall Parker said at May 9, 2009 9:00 AM:

Snouck,

If the US government lends lots of money then it begins to favor lower inflation so that the money gets paid back in dollars that are worth as much. Of course, the US borrows far more than it lends. So in the short term it would benefit from hyperinflation.

You bring up an interesting subject: The interests of the firms that are outside of government are important to consider because the government often acts against the best interests of the government due to powerful external influences. So do the investment banks want the US government to cause inflation to ramp up? We should watch investment banks and see if they shift into TIPS and other inflation-protected debt and other inflation-protected financial instruments.


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