Special Report

Three Cheers for Chrysler’s Dissident Creditors

Bankruptcy court beats Obama nationalization any business day.

By 5.8.09

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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."

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About the Author
John Berlau is Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute and blogs at OpenMarket.org.