It was the biggest bankruptcy of an American automaker, as well
as one of the biggest bankruptcies in U.S. history. Yet the stock
market barely moved when Chrysler’s expected bankruptcy was
announced early last Thursday morning and moved significantly
upward on Friday after the Chapter 11 bankruptcy filing. And
since then it’s just
kept climbing.
There are many factors that move markets, but the Chrysler
bankruptcy has been a dominant financial news story of late last
week, so the simple fact that it hasn’t dragged the market
downward is significant. So what does the market reaction tell
us? That while there is concern about the effects of a Chrysler
bankruptcy, many investors viewed the moving of Chrysler’s
supervision to a federal bankruptcy court as the company’s last
best hope to escape from President Obama’s planned
nationalization with government and union ownership.
Despite Obama’s chest-thumping about the bankruptcy process being
“quick,” “efficient” and a basic ratification of the
administration’s plan, nothing can be done now without the
express approval of Judge Arthur Gonzalez of the federal
bankruptcy court in New York’s Southern District. And — given
the complexity and size of the case — it probably won’t be
quick. It will take many months, perhaps years. But whatever the
courts decide can’t much worse than Obama’s own plans for
Chrysler and the treatment of its creditors that would have
far-reaching negative effects on job and business growth.
Obama’s grand design for U.S. automakers is the perfect
opportunity to show where his moderate rhetoric varies from his
big-government actions. He has said he doesn’t want the
government to be a permanent owner of big companies, arguing —
in part correctly — that he inherited the bailouts and partial
nationalizations from the Bush administration. But Obama’s plans
for Chrysler and General Motors belie his claims that he doesn’t
want the government to dig in further. His actions show that he
isn’t shy about using the powers he inherited to favor political
allies such as Big Labor at the expense of millions of Americans
with savings vehicles invested in auto company debt securities.
The government-union ownership structure — in which the United
Auto Workers retiree health care fund would own 55 percent, Fiat
would own 20 percent, the U.S. government would own 8 percent,
and even the Canadian government would own 2 percent
(Canada is “home to several large Chrysler facilities,” according
to the Wall Street Journal) — also has little to do
with repaying taxpayers.
As a Wall Street Journal editorial just before the
bankruptcy announcement put it: “Taxpayer-shareholders are likely
to be far better off with a smaller stake in a truly private
company that is better insulated from political meddling. Private
owners are more likely than the Treasury or the unions to try to
run the company for profit, and so increase its equity value over
time.”
The first Chrysler bailout approved under Jimmy Carter in 1980
(and managed under Ronald Reagan’s administration) — while a bad
precedent for government saving industries in trouble — ended up
with taxpayers being paid back without the government or unions
taking any ownership stake in the company.
But the justification for government ownership is just one
example of the Obama administration’s doublespeak on Chrysler.
Obama’s speech castigating the approximately 20 creditors who
refused to accept the government’s terms offers a textbook case
of anti-market rhetoric, with some sentences saying the exact
opposite of what was true.
Of the creditors, Obama said, “I don’t stand with those who held
out while everybody else made sacrifices.”
Yet it is those secured creditors who were asked to make the
brunt of the sacrifices and agreed to many of them. According to
their statement,
the holdout lenders said they were willing to take 40 percent
haircuts on their loans, while other groups “lower down in the
legal priority chain” for bankruptcy — such as unions and auto
suppliers — “were being given recoveries of up to 50 percent or
more and being allowed to take out billions of dollars” from the
company’s assets.
Yet this wasn’t enough of a “haircut” for the Obama
administration, which insisted that lenders take a cut of more
than 65 percent of what they were owed and get a paltry 33 cents
on the dollar. What particularly outraged these lenders, and made
them think that they could get a better deal in the bankruptcy
courts, was that the lending contracts they and Chrysler signed
specifically state that they will get paid 100 cents on the
dollar before anyone else is paid out if Chrysler were to
liquidate.
As Tom Lauria, an attorney representing some of the creditors,
said in an interview on Detroit radio station WJR (transcribed by
the Media Research Center’s Newsbusters.org): “My clients bought
a position in the Chrysler capital structure that entitles them
to be paid ‘first dollars out.’ That is, they’re to be paid 100
cents of what they’re owed before any junior creditors get a
penny.”
But forget these contracts, Obama says, because these creditors
were “a group of investment firms and hedge funds” and “I stand
with Chrysler’s employees and their families and communities.
But even if it is now permissible in Obama’s America to ignore
valid contracts if they only benefit rich folks, the president’s
logic still fails in this situation, because many of these
investment firms and hedge funds manage money on behalf of other
ordinary “families and communities.” As Financial Times
columnist John Gapper explains, “some of these ‘speculators’
inconveniently manage money on behalf of pension plans and
endowments, rather than rapacious rich people.”
Indeed, one of the holdout creditors is Colorado-based
Oppenheimer Funds, which manages 401(k)s, IRAs, and colleges
savings vehicles such as 529 plans. In a
statement, Oppenheimer explains that it “rejected the
Government’s offers because they unfairly asked our fund
shareholders to make financial sacrifices greater than those
being made by unsecured creditors.”
Finally, the President claims that — careful guardian of
taxpayer dollars that he is — he just couldn’t give in to
creditors who would “hold out for the prospect of an unjustified
taxpayer-funded bailout.”
Another rhetorical slight of hand. According to the Wall
Street Journal (in its news section, not its editorials),
“The most compliant of Chrysler’s big creditors — among them
J.P. Morgan & Co. and Citigroup — have received hundreds of
billions of dollars in TARP aid.” For these big banks, the auto
bailout is just a game of Whack-a-Mole in which they cave to the
Obama administration here, but make up for it by getting second
helpings at the bank bailout trough.
Most of the other creditors, by contrast, have taken no bailout
money. That’s why some of them call themselves the “Committee of
Chrysler Non-Tarp Lenders.” “None of us has taken a dime in
TARP money,” their statement says.
If Chrysler’s lenders can’t get their contracts respected, other
lenders will notice, and will be much less likely to fund big or
small U.S. businesses, knowing that contracts can be so easily
ripped apart by politicians. As an editorial in USA Today, a
newspaper not known as a bastion of conservative or libertarian
though, puts it, Chrysler’s creditors fighting the Obama
administration “are not only defending their own interests, they
are standing up for the principles vital to functioning credit
markets.”
