Roger’s Rules

An Offer They Couldn't Refuse

The enormous pressure and machinery of the US government” — that’s the phrase that Thomas Lauria, a lawyer representing some of Chrysler’s “secured” bondholders, used in explaining why an unofficial group of Chrysler’s creditors decided to withdraw from a court case contesting the terms Chrysler’s reorganization.

It sounds — complicated, doesn’t it? Bankruptcy. Secured vs. Unsecured creditors. TARP. The whole alphabet soup of financial wheeling, dealing, and — as it happens — stealing.

Stealing? Michael Barone cut to the chase in his reflections on what’s happening in the case of Chrysler:

“The White House, presumably car czar Steven Rattner and deputy Ron Bloom, is seeking to transfer the property of one group of people to another group that is politically favored. In the process, it is setting aside basic property rights in favor of rewarding the United Auto Workers for the support the union has given the Democratic Party.”

This, as Barone colorfully but not inaccurately put it, is an example of “gangster government” in action. As The Washington Examiner noted, what just happened to Chrysler’s secured creditors is something “right out of Juan Peron’s playbook.”

“Like the Argentinian strong man, Obama muscled the owners and creditors out of a productive private company and gave it to union leaders, who will then fill his campaign coffers in gratitude for his generosity.”

Yes, that’s right. Barack Obama and his henchmen just handed the United Auto Workers 55 percent of Chrysler’s stock. One of the biggest contributors to the Democratic Party now controls the company they bankrupted. And what about the “secured” bondholders — the investors who accepted lower returns in exchange for the security of knowing they would be first in line to be paid back if something bad happened? The last time I checked, they were offered 29 cents on the dollar.

Why would the bondholders agree to this exercise in “spreading the wealth around”? This is where the “enormous pressure and machinery of the US government” comes in. It began with Barack Obama’s public criticism of the secured bond holders who, he said, were “speculators” unwilling to make sacrifices others had to make. Imagine that: a President singling out specific firms for public criticism.


The criticism didn’t stop there, however. According to Thomas Lauria, the lawyer representing the secured creditors, the President’s car czar, Steve Rattner, then went into Godfather mode, threatening to sick the IRS and SEC on those firms holding Chrysler debt that did not want to accept the government’s offer. The White House denies this. Well, they would, wouldn’t they? “Left-wing bloggers,” Barone noted, “have been saying that the White House’s denial of making threats should be taken at face value and that Lauria’s statement is not evidence to the contrary. But that’s ridiculous. Lauria is a reputable lawyer and a contributor to Democratic candidates. He has no motive to lie. The White House does.”

Many people, I’ve noticed, find it difficult to wrap their minds around what just happened to, and at, Chrysler. It all seems so abstract, so far away, and at a moment when the U.S. government can announce in one month that it is spending $700 billion to purchase bad debt and then, a few months later, that is appropriating another $700 billion to “stimulate” the economy, should we really be that excited about Chrysler’s $6.5 billion debt?

Yes we should. In the first place, there is the matter of principle — several matters of principle, in fact, e.g., the integrity of private property, which has just been egregiously violated by the U.S. government, and the rule of law, specifically the provisions of bankruptcy law, which specify which creditors get paid first in the case of a company’s failing. A few days ago, I quoted from a letter by Clifford S. Asness, founder of a fund called AQR Capital, taking issue with President Obama’s attack on firms that initially rejected the government’s invitation to transform themselves into sacrificial lambs. Here’s a bit that that I didn’t quote but that is relevant to the President’s call for sacrifice:

“[I]t is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the ‘sacrifice,’ they are stealing.”

Which brings me to one of the many prudential or pragmatic reasons to be alarmed by the large-scale bureaucratic theft that has just been conducted by the United States government. Now that potential investors have been given an object lesson in how the Obama administration treats those creditors formerly known as “secured,” will they be eager to risk their capital in other U.S. companies? Capital, as a canny friend recently observed to me, tends to go where it’s wanted. It also shuns situations where it is at risk.

In its handling of the Chrysler bankruptcy, the Obama administration has publicly demonstrated 1) its cavalier disregard for the rule of law, 2) its contempt for private property, 3) its willingness to favor large contributors to the Democratic party while penalizing others, 4) its abandonment of that elementary prudence and reliability without which a free market cannot long remain free. What message does this item in the annals of redistributive animus send to investors around the world who invest in government securities and corporate debt on the assumption that we are a country of laws where legal outcomes are predictable? Will they be so eager to invest here knowing that their willingness to invest will have them demonized as “speculators”?

Back in 1996, poor Bob Dole ran a campaign almost as bad as the one John McCain just oversaw. But he asked the best question of the entire election cycle: “Where’s the outrage?” It’s a question that’s even more pertinent now than it was then. Mr. Dole never got an answer to his plaintive query. Can we hope that concerned citizens will keep pressing the question now? Where’s the outrage at an administration that ostentatiously defrauded one group of citizens in order to reward its ideological allies and financial supporters?