War On Investors: The Chrysler Arm Twist
The Chrysler arm-twisting story continues in full force this week. It’s being kicked up a notch by the left wing blogosphere and their response to the Perella Weinberg story. And that’s a very good thing, because from the business and economic perspective, this story is every bit as important as anything else that’s been reported so far in this eventful year. It deserves as much attention as can be given.
The President of the United States has already traveled around the world, apologizing for what he characterizes as the abusive behavior of his predecessors toward people whose interests differ from those of the United States. And he’s promised, in his smooth, utterly convincing way, to play nice in the sandbox with the world’s tyrants, megalomaniacs, and ideologues from now on.
I read this to mean, among other things, that Obama has committed himself quite explicitly not to wage war on any of the countries and foreign-based entities that have declared themselves to be our mortal enemies.
So what does this man, whose political career was formed and marinated in the gangland-style thuggery of Chicago politics, do when he needs to act out?
He declares war on American citizens.
If you don’t like me saying that, well, I can’t help you. There’s just no other way to characterize the actions of the US President in regard to the financial investors in Chrysler LLC.
The big flap on the left is over allegations which surfaced late last week in respect to the New York-based boutique investment firm Perella Weinberg. Tom Lauria, one of Weinerella’s attorneys, said in a radio interview last Friday that Steve Rattner, Obama’s car czar, directly threatened his client.
What was the investment firm guilty of? They were apparently among a group of Chrysler secured creditors who collectively have lent the firm about $6 billion. (More precisely, they acquired bonds totaling that amount in par value from the bankers who originally lent money to Chrysler. Of interest to finance geeks, but not to anyone else, is the unanswered question, whether the debt in question was originally part of the leveraged buyout of Chrysler LLC by Cerberus Capital Management back in 2003.)
Chrysler is unquestionably insolvent. They were forced to accept $4 billion from the Treasury’s TARP fund late last December, in return for what amounts to an unsecured note and a promise to submit a “viable” restructuring plan, to an entity which turned out to be … Steven Rattner.
Perella Weinberg and others hold secured notes. In liquidation, they have an explicit and incontrovertible claim on certain assets of the firm. That puts them in a senior position to the rest of the debtholders, which include the US government, and also the UAW (which holds a contractual obligation by Chrysler to pay a certain amount of cash into their retiree healthcare fund).
Why does a company ever hypothecate its assets to an investor as part of borrowing money? Simple. To get a lower interest rate. In extreme cases (which describes Chrysler quite well), there may not be any capital available at any price, without secured collateral.
Why does an investor require collateral before they will lend money at a particular rate of interest? For the same reason that your bank requires collateral when they lend you money to buy a house or a car: because they need to ensure that they’ll be paid back. Default on your mortgage or your car loan, and a foreclosure or repossession is in your future.
What’s wrong with this? Nothing. It’s the only rational way to run a privately-financed credit-based economy. Not only is the principle of priority for secured creditors enshrined in law and precedent, it’s also been the basis on which people have lent each other money ever since our ancestors lived in trees.
Until Barack Obama became President of the United States, that is.
What the secured Chrysler creditors did a week ago was to tell the President’s negotiators that they wanted a little better than the approximately 38 cents on the dollar they were being offered for their debt. What would you say in such a position?
Well, if you’re a secured creditor, you say: “Look, Mr. President. We have a senior claim on the assets of this company. We’re perfectly happy to petition a judge to force a Chapter 7 liquidation in order to satisfy our claim. But of course that means you get nothing on your $4 billion TARP note. So if you don’t like that idea, why don’t you make us a more acceptable offer?”
Instead, the President went ballistic. He broke off the negotiations, and went on national television the next day (April 29) to publicly take sides in the matter, announcing his own version of a settlement. The UAW would get 55% percent of Chrysler. Italy’s Fiat would get 20% in return for NO CASH, but rather some unspecified small-car technology. And Chrysler would receive an additional $8 billion in taxpayer money.
Meanwhile, the President went out of his way to single out the investor group, angrily denouncing them as people looking to profit unreasonably from the situation (since when is losing 62% of your investment a profit?). And he said, ominously, that he “does not stand with them.”
The United States is, famously, a country of laws. What if Chrysler’s secured creditors were to seek due process of law, in order to obtain a just resolution of their claims? Well, of course, they could have their day in court.
And in the meantime, they’d be subject to every kind of delay the government’s lawyers could imagine, to say nothing of being tortured endlessly by financial regulators and the IRS? Oh, and by the way, to be vilified in the national press, probably to the point that their executives would receive threats of death by piano wire, and bus tours to their private homes organized by left-wing groups, as did the executives of AIG Insurance.
Now, given that prospect, just how badly do you want to press your claims in court? In the event, Perella Weinberg changed their negotiating position, and accepted the government’s offer. In a press release, they pointedly reminded everyone that their fiduciary duty is to maximize the value of their limited partners’s investment, not to go on a hopeless political crusade.
This in a nutshell is the villainy that Barack Obama has perpetrated on the American people: possessed of the overwhelmingly powerful instruments of government, he chose to use them to intimidate one side in a private negotiation. In the process, he overturned centuries of settled law and practice. He used his power to force an outcome of his choosing, and knowing no one would act to stop him.
What made this easy for Obama, in his calculation, was that in today’s political environment, Wall Street financiers are held in low repute by the people. He picked what he thought was an easy target. And of course he could count on a supine White House press corps to spin the story just as he wanted.
To members of the mainstream media, getting close to the crown is what they spend their whole lives trying to do. That goes double in the case of a President that the media are deeply and personally invested in. If anyone on this planet thinks that any member of the White House press corps (which now includes bloggers from plainly left-wing activist organizations) is going to take the side of a bunch of investors against the US President, I very much would like to find out what that person’s brain is made of.
So what are the left-wing blogs all exercised about this week? They’re mad as hell that anyone could have the gall to suggest that there could be something to the accusation that Rattner threatened to vilify the investors through the national press.
As far as they’re concerned, the White House denied it: end of story. But an unctuous credulity is the first step toward the acceptance of tyranny. No matter what you think of Wall Street investors, you could be next on the list. A President who isn’t afraid to act like a common thug against his own citizens is signaling that he thinks of us not as citizens but as subjects. Americans of a past age once waged a revolution to free themselves from such arbitrary and antagonistic deployment of government power, unfettered by principles of justice and law and a proper respect for the rights of the citizens.
Keep your eyes on the news. GM is next.