Chrysler ... and next?
What worries me about the Chrysler deal is not so much that the Obama administration is slicing up the rancid cake into pieces and handing it out ... that much was necessary, but more the fact that the government is messing around with contractual obligations. That is, when you are a secured debt holder, you are first in line for whatever gets generated by asset liquidation in the event of a bankruptcy. Sure, there are some fine legal distinctions as to who is first in line based on priority etc., but that is the rule.
BUT the Obama administration wants to spread the wealth a bit more .... Does this sound familiar? Various bond holders of Chrysler initially wanted something like 70 cents on the dollar for their junk. Obama offered them 29 cents. Then the bond holders (Goldman, JP Morgan Chase, Citigroup, Morgan Stanley et. al. who hold approximately 70% of the debt) went to 50 cents. No dice: Obama -- maybe Rahm E -- felt that this was not enough. So with enough juice to squeeze the testicles of the bonus pools in the affected institutions, all the TARP recipients caved and the government got their way -- a vastly lower payout than would otherwise be contractually required. Non TARP players were not so easy to coerce, but given pressure, they too caved. Except for Parella Weinberg, a boutique investment bank and their Xerion Fund. They held out until Thursday afternoon, well past the Wednesday deadline, then they too gave in to the pressure from Washington. It begs the question: what threats, dirty laundry and skeletons were dug up to induce independent and non-indebted institutions to just waive their contractual rights to recover their investments, albeit at reduced recoveries?
Two things bug me about this: (1) the interference with contractual rights: if you are a first lien debt holder, then you should stand first in line, TARP or no TARP -- it is not up to the government to decide that the wealth should be spread further, and to do so is to enter the sphere of a "managed economy" -- that is socialism writ large; and (2) the blatant threat (as reported by a White & Case lawyer, Lauria, who is part of this mess) by the White House to use their press corps to destroy the reputation of Parella Weinberg. That threat is not all that different from the use of the courts by the Russians to disenfranchise anyone that stands in the way of official planning. In both cases, you are effectively ruined.
If true, it is also an example of the extraordinary hubris of the Obama government: imagine the uproar if a Republican / conservative government had done this? This is an official Obama statement of "what's yours is yours ... until we want it, in which case it is no longer yours, but mine." Holy crap!!
Obama complained in a press conference that certain participants weren't playing ball: "While many stakeholders made sacrifices and worked constructively, I have to tell you some did not," the president said. "In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none." Hmmm. Nice political rhetoric about fairness, making us taxpayers out to be those that would be hurt, but the facts belie the show: Parella/Lauria's clients are pensions plans, college endowments, credit unions and others willing to accept low yields for the sake of security of the investment. The beneficiaries are, therefore ... taxpayers. So it becomes the distinction of Obama dictating which taxpayers will receive and which will pay, completely outside the process of law.
Importantly, Obama's behavior constitutes a "taking" without due process and is as a consequence unconstitutional. Yet another example where the rule of law in our country can be abused by the Left because it suits their purposes. I don't mind the government arranging the bankruptcy, but we NEED to make a distinction about its ability to act in equity as opposed to law. Equity-based decisions are a very slippery slope, and I don't like it.
BUT the Obama administration wants to spread the wealth a bit more .... Does this sound familiar? Various bond holders of Chrysler initially wanted something like 70 cents on the dollar for their junk. Obama offered them 29 cents. Then the bond holders (Goldman, JP Morgan Chase, Citigroup, Morgan Stanley et. al. who hold approximately 70% of the debt) went to 50 cents. No dice: Obama -- maybe Rahm E -- felt that this was not enough. So with enough juice to squeeze the testicles of the bonus pools in the affected institutions, all the TARP recipients caved and the government got their way -- a vastly lower payout than would otherwise be contractually required. Non TARP players were not so easy to coerce, but given pressure, they too caved. Except for Parella Weinberg, a boutique investment bank and their Xerion Fund. They held out until Thursday afternoon, well past the Wednesday deadline, then they too gave in to the pressure from Washington. It begs the question: what threats, dirty laundry and skeletons were dug up to induce independent and non-indebted institutions to just waive their contractual rights to recover their investments, albeit at reduced recoveries?
Two things bug me about this: (1) the interference with contractual rights: if you are a first lien debt holder, then you should stand first in line, TARP or no TARP -- it is not up to the government to decide that the wealth should be spread further, and to do so is to enter the sphere of a "managed economy" -- that is socialism writ large; and (2) the blatant threat (as reported by a White & Case lawyer, Lauria, who is part of this mess) by the White House to use their press corps to destroy the reputation of Parella Weinberg. That threat is not all that different from the use of the courts by the Russians to disenfranchise anyone that stands in the way of official planning. In both cases, you are effectively ruined.
If true, it is also an example of the extraordinary hubris of the Obama government: imagine the uproar if a Republican / conservative government had done this? This is an official Obama statement of "what's yours is yours ... until we want it, in which case it is no longer yours, but mine." Holy crap!!
Obama complained in a press conference that certain participants weren't playing ball: "While many stakeholders made sacrifices and worked constructively, I have to tell you some did not," the president said. "In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none." Hmmm. Nice political rhetoric about fairness, making us taxpayers out to be those that would be hurt, but the facts belie the show: Parella/Lauria's clients are pensions plans, college endowments, credit unions and others willing to accept low yields for the sake of security of the investment. The beneficiaries are, therefore ... taxpayers. So it becomes the distinction of Obama dictating which taxpayers will receive and which will pay, completely outside the process of law.
Importantly, Obama's behavior constitutes a "taking" without due process and is as a consequence unconstitutional. Yet another example where the rule of law in our country can be abused by the Left because it suits their purposes. I don't mind the government arranging the bankruptcy, but we NEED to make a distinction about its ability to act in equity as opposed to law. Equity-based decisions are a very slippery slope, and I don't like it.
posted by Zaphod at Monday, May 04, 2009
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