A dangerous precedent, in more ways than one
The FT comments on the Chrysler issue we discussed the other day, observing that the political deal-cutting of the Obama administration flies in the face of maintaining the confidence of investors in the laws governing the capital markets:
the Chrysler saga sets a dangerous precedent for US capital markets…the law is unambiguous: senior secured creditors should be paid before junior unsecured creditors and employees (the words “senior” and “junior” are a bit of a give-away on this point). By turning legal wisdom on its head –- and vilifying investors that opposed the move -– the administration is signalling the principle is no longer sacred…
Fund managers and hedge funds are already reluctant to participate in the authorities’ plans to rid banks of toxic assets for fear of government retribution on pay. The Chrysler “cram-down” of lenders is hardly going to fill them with confidence.
After this week’s completion of “stress tests”, holders of preferred securities in some banks will be asked to exchange them into equity to recapitalise those cash-strapped institutions. How can they be sure the terms will be fair? And how safe will senior debt holders in, say, Citigroup or Bank of America, feel after what happened to their Chrysler counterparts?
The government has a real problem here. Call it the “paradox of the official bailer-outer”: the authorities’ position as rescuer-in-chief forces them to take an active role in the private sector, yet their goals (saving jobs, getting re-elected etc) conflict with the smooth running of the very markets they are trying to preserve.
The FT is perhaps too kind to the administration. The lawyer for the secured creditors said that one of his clients was “directly threatened by the White House” (audio here):
I represent one less investor today than I represented yesterday. One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the threat that the full force of the White House Press Corps would destroy its reputation if it continued to fight.
A couple of points bear mentioning: (a) notice that the lawyer, Tom Lauria of White & Case, understood that the “White House press corps” would act on behalf of the White House, not as a check on the White House, a disturbing thought in itself; and (b) if you listen carefully to the President’s words, Obama’s fundamental objection to the secured creditors was that the rate of return on their investment would be too high — the creditors had already agreed to treat 50% of their position as unsecured, but they were still going to get too high an ROI in Obama’s opinion, and that apparently was sufficient cause for the administration to threaten to “destroy the reputation” of private individuals in the United States, if Lauria’s account is to be believed.
If the President’s name were Nixon, not Obama, what would the White House press corps be demanding at this point? (HT: Powerline)
May 4th, 2009 at 4:54 am
Indeed. It is disconcerting to see the Press morph from Government watch dog to Government attack dog. Most of us on the Right could see this coming. Still, it is startling to see the brazenous of the threat. As for Obama wanting to disperse bankruptcy assets based on ‘fairness’ instead of the rule of law, well, if it comes to pass, perhaps investors should start looking at other countries for investment oppotunities?
May 4th, 2009 at 7:50 am
This is a tempest in a small, cracked Republican teapot. I notice that the blog that started this “thuggery” accusation has now stopped allowing comments. It based its accusation on the words of an interested party — Perella Whineberg’s lawyer — without ever noting the party’s interest, and without ever even bothering to examine how bankruptcy law is structured and applied.
The issue here is Perella Whineberg’s desire to be paid 50 cents on the dollar for its bonds, rather than 29 cents on the dollar offered by the Treasury. The reason Treasury is involved is because Chrysler can’t obtain private “debtor in possession” financing for its bankruptcy. Treasury is playing that role, and he who provides DIP financing always has a big role in bankruptcy proceedings.
Virtually every bankruptcy features some fighting among creditors over pieces of a pie that, by definition, isn’t big enough to give everyone a full slice. The biggest fights are often between different classes of creditors, and in those fights you will often see “senior” creditors howling over not being paid as much as they think they deserve relative to “junior” creditors.
That was the case here. In addition to Perella Whineberg, two other senior creditors (Oppenheimer and Stairstep) were so-called “holdouts” from a settlement agreed to be scores of other creditors. In bankruptcies, holdouts usually don’t do very well. The judge sometimes tosses them an extra crust of bread, but not always.
As the DIP financing provider, the Treasury wants Chrysler to remain an ongoing entity. Its interest is to produce agreement among the creditors so there won’t be a prolonged court fight that might endanger the entity’s ability to repay the DIP financing. So, it wants to corral the holdouts.
Perella Whineberg was corralled last Friday; it issued a press release to that effect. But it also trotted out its lawyer to claim that the White House had forced it into agreement by threatening to ruin the firm’s reputation. The White House categorically denied that version, something that the blog you quoted never mentioned before abruptly closing its comment section on Sunday morning.
We don’t know what was said by the White House to Perella Whineberg. It’s unlikely that anyone threatened Whineberg with the White House press corps, but it’s not beyond imagining that the White House pointed to President Obama’s statements and told Whineberg that they were only the beginning of what they’d face if the holdouts continued to hold out and jeopardized the ongoing operations of Chrysler. After all, the taxpayers are now on the hook for $4 billion in DIP financing, and it’s the government’s job to protect that investment against greedy graspers like Whineberg.
In any case, the idea that “the rule of law” was ignored is outrageous. The Chrysler bankruptcy, and the recent machinations, is par for the course. Perella Whineberg was trying to get a better deal, and failed. What really sticks out here is Perella Whineberg’s utter lack of class and professionalism. They are the personification of the kind of sore losers and manipulative squirrels that the Republican Party has become.
May 4th, 2009 at 8:49 am
I agree with the post. The following is meant on behalf of two points. First, nobody involved in the Chrysler bankruptcy is a vestal innocent. Second, highhanded behavior by our political elite has been going on for a long time. (Which means there will be quite a shock when they are overruled, most likely by overseas pressure.)
1. Not surprisingly, the White House has denied threatening creditor Perella Weinberg with press-corps obloquy. IMHO Perella looks worse to its client base by (apparently) caving than it would have by sticking to its guns.
2. Other creditors have not caved to date. Is there an alternative interpretation of Perella’s behavior?
Just sayin’…
3. Mr. Lauria represented Appaloosa Management, a hedge fund that bought shares of Delphi after that company’s bankruptcy and claimed a voice in the restructuring, but:
Unintended and inadvertent. Uh huh.
4. Iirc during the post-9/11 anthrax scare, the government threatened to seize the patent on an anti-anthrax drug if the right price wasn’t forthcoming.
5. Jimmy Carter blathered about oil companies ‘windfall profits’. JFK jawboned steel companies into rescinding a price increase. Truman tried to seize the steel industry.
6. Finally, heeere’s Johnny:
Consider what McCain, with his self-righteousness and temper, might have done in the current situation. I don’t believe that his erratic behavior when the crisis hit was uncharacteristic.
May 4th, 2009 at 11:34 am
I wonder if the markets will react to this heavy “fairness” hand. The press corp has been on board with this agenda for a couple of years now.
May 5th, 2009 at 12:25 am
Smart money will factor this into their investment decisions. Look for a slow recovery, if we get one at all.
May 5th, 2009 at 4:21 am
Please read this…
http://www.finemrespice.com/node/56
May 5th, 2009 at 5:55 am
I saw it Canucklehead. Finemrespice is reporting that at least two bondholders were threatened with visits from the SEC and IRS if they did not cave to administration wishes.
May 5th, 2009 at 7:26 am
Okay, Canucklehead, I read it: the opening, with a fictionalized Al Capone and the paraphrased, unreferenced quote attributed to Rattner; and the gibe at the young Rahm Emanuel’s interest in dance. It’s not a bad rant, but IMHO it’s not much more than that. More’s the pity, because, as Jack and others credibly warn, there is plausible cause for misgivings. More’s the pity, because the author obviously is capable of much better.
Maybe I have outrage fatigue.
I don’t entirely buy this op-ed:
Still, it’s closer to my attitude than the piece you linked.