Gangster Government and the Chrysler Fix
The Obama administration runs roughshod over bankruptcy law and bullies investors.
In an extraordinary abuse of government power, the Obama administration has run roughshod over bankruptcy law, bullied Chrysler investors, and orchestrated a takeover of the Auburn Hills-based automaker by the United Auto Workers union, a key Democratic party constituency that gave $5 million to the Obama campaign in 2008.
As a result, Chrysler is poised "to emerge from the process as early as next month," reports the Wall Street Journal, on schedule with Obama's predicted two-month bankruptcy. The power play has secured Chrysler's short-run viability, but it begs the long-term question: What future investor will commit money to a UAW-run automaker knowing the federal government can rewrite the rules whenever it wants?
In crafting Chrysler's surrender to the UAW, Obama's Auto Task Force, led by New York Times-reporter-turned-Wall Street-investor Steve Rattner and investment banker-turned-union henchman Ron Bloom, first gave Fiat up to a 35 percent stake in the company in return for . . . nothing. Committing only its expertise in making small cars to a company that built its reputation on minivans and trucks, Fiat jumped at the deal.
The task force then revealed that the UAW--which for months resisted contract concessions to Chrysler management--agreed to make "sacrifices." The details of these sacrifices, however, have not been disclosed, despite administration promises of transparency and $8 billion in taxpayer loans.
With the Fiat and UAW deals in hand, the White House then turned up the heat on the remaining parties: the debtholders.
Most were pushovers. About 70 percent of Chrysler's debt is held by big banks, like J.P. Morgan, which are already dependent on Washington bailout money. When Treasury demanded that they take a measly 29 cents on their dollar of investment, these institutions were in no position to refuse. But other secured debtholders, offering a compromise of 50 cents on the dollar, resisted.
The holdout debtholders sought the refuge of the courts, where decades of bankruptcy law promised that secured lenders would receive just compensation for their investment. But then Obama called in his fixers.
In his April 30 news conference, Obama singled out Chrysler's self-described "non TARP lenders" as "speculators" who sought to imperil Chrysler's future for their own benefit. "I do not stand with them," Obama thundered. "I stand with Chrysler's employees and their families and communities. . . . (not) those who held out when everybody else is making sacrifices." Michigan Democratic allies like Sen. Debbie Stabenow and Rep. John Dingell piled on, calling the lenders "vultures."
Then, on Detroit radio host Frank Beckmann's show May 1, a lawyer for the lenders, Tom Lauria, chillingly revealed how "one of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight."
Lauria later confirmed the threats came from Rattner and that the target was Perella Weinberg, which had suddenly withdrawn its opposition after the president's April 30 press conference.
The White House denied the threats, but Business Insider subsequently reported that "sources familiar with the matter say that other firms felt they were threatened as well. None of the sources would agree to speak except on the condition of anonymity, citing fear of political repercussions."
"The sources, who represent creditors to Chrysler," continued the Insider story, "say they were taken aback by the hardball tactics that the Obama administration employed to cajole them into acquiescing to plans to restructure Chrysler. One person described the administration as the most shocking 'end justifies the means' group they have ever encountered. . . . Both were voters for Obama in the last election."
The idea of the White House--with the IRS and SEC at its disposal--threatening investment firms should have sent off alarm bells in America's newsrooms. Inexcusably, the media establishment largely ignored the hardball tactics. This is the same media that has doggedly reported on President Bush's U.S. attorney firings and the post-9/11 interrogations of terrorist suspects.
Nevertheless, the administration's bullying tactics reverberated through the investment world. Cliff Asness, a managing partner at AQR Capital Management, wrote in a memo that "Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power."
On May 8, Obama's tactics got their desired result. After two more institutions, OppenheimerFunds and Stairway Capital, withdrew under political duress, the remaining debtholders dropped their opposition.
"Chrysler's non-TARP lenders concluded they just don't have the critical mass to withstand the enormous pressure and machinery of the U.S. government," lawyer Lauria said.
The Obama administration's scorched-earth tactics have won the UAW its prize, but at what cost?
"When the rules are changed in the middle of the game, the degree of risk changes, burning lenders who relied on the old rules," says bankruptcy expert Michael E. Levine at the NYU School of Law. "If this were a one-time game, you could just decide who you want to burn. The problem emerges when you ask suppliers of capital to step up for the next round."
The administration's drop-dead message to investors will complicate Chrysler's challenge to survive under new Italian and UAW ownership.
Henry Payne is a writer and editorial cartoonist for The Detroit News, and Richard Burr is associate editor of the editorial page for The News.