Obama White House Bullies Chrysler Lenders

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http://foxforum.blogs.foxnews.com/2009/05/04/peek_liz_obama/

By Liz Peek
Financial Columnist

Who knew that a bunch of hedge funds could become the champion of the little guy? As Chrysler bondholders faced down the Obama administration last week, insisting on due process, they emerged as my personal pick for civil rights champion of the week. Not everyone, of course, will see it this way. And, especially, not those courting Big Labor.

On Saturday The New York Times ran a story with this headline: “Union Takes Rare Front Seat in Chrysler Deal.” The piece, which ran over onto page three and in all occupied thirty inches of print — in other words a “Big Story” –- related in a “gee whiz” fashion how the UAW had been surprisingly well treated in the negotiations which led to Chrysler’s bankruptcy. Nowhere in the two-plus feet of copy was there a mention that the UAW had contributed $5 million to President Obama’s 2008 election campaign. That strikes me as pretty lame reporting.

Instead, we read “The government, in assessing what was needed to make Chrysler viable, decided it needed to support workers…” Forgetting the forgettable wording, we also read “In contrast, other companies often use bankruptcy as a way to gain leverage over labor, so they can lower their costs.” Really? What a novel concept.

Here’s news: the effort by the Obama administration to protect the UAW will likely leave Chrysler permanently uncompetitive. As The Times points out “Chrysler’s most senior workers, like those at Ford, still have healthy wages and benefits; bountiful healthcare coverage, at least until it is adjusted, and subsidies to help bolster unemployment benefits…”

In other words, this bankruptcy proceeding will proceed with only marginal savings of labor costs. Meanwhile, the lenders who dared to oppose the deal, undoubtedly considering that the bargaining had been too one-sided, were excoriated by the president as “speculators” for raining on his parade. Over the weekend it emerged that would-be auto czar Steve Rattner threatened to sic the White House press corps on bondholder Perella Weinberg if they continued to oppose the deal on the table. (The White House denies the story.) If true, this is a truly shabby development. It mirrors the notion that the large banks that have received TARP support have been told in no uncertain terms to play ball with Obama’s team. As the Committee of Chrysler Non-TARP Lenders has said, the TARP group is “an obviously conflicted intermediary.”

Why do we care about this proceeding? Because, as taxpayers, we stand to lose billions if the restructurings of GM and Chrysler are not handled properly. These companies will continue to bleed and, given the administration’s coziness with the UAW, taxpayers will be asked to provide emergency dressings again, and again. The UAW will likely emerge with a majority ownership of Chrysler, much like the employees of United Airlines in 1995 — a move that was expected to align interests and set the course for significant wage and benefit reductions. What happened? United had to file for Chapter 11 in 2002.

Moreover, the efforts of the Obama team to strong arm lenders to make unusual concessions follows a pattern of ignoring legal precedent in favor of a policy agenda not so friendly to those who provide credit and capital to facilitate the nation’s industry, homeowners, consumers and Treasury. As the Non-TARP Committee wrote: “the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades.” Really, is it any wonder that credit is still gummed up?

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Apparently abuse of power is part of the change we can believe in.

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http://www.poligazette.com/2009/05/04/report-obama-threatened-chrysler-investors-with-public-humiliation/

[opebo]

I certainly hope that every dollar that's spent will be used to shore up the Democratic Party. 

Also why should we pay any attention to bond-holders?  Just nationalize Chrysler and give those bastards a 100% loss.

[Mint]

Not surprising.  It's been made abundantly clear that behind all the rainbows and press love is a shady Chicago career politician.  Hopefully the media smokescreen will fade once more of these stories begin to surface from objective reporters who are good at their jobs.  Any president can only pull the wool over our eyes for so long, this one's just really good at it.  Possibly better than Clinton, which is scary.

Agreed. But it's not just the reporters, people need to take to the street and pressure washington again. Even if some of the tea partiers were crazy racists they clearly had the right idea.

[Zarn]

Not surprising.  It's been made abundantly clear that behind all the rainbows and press love is a shady Chicago career politician.  Hopefully the media smokescreen will fade once more of these stories begin to surface from objective reporters who are good at their jobs.  Any president can only pull the wool over our eyes for so long, this one's just really good at it.  Possibly better than Clinton, which is scary.

Agreed. But it's not just the reporters, people need to take to the street and pressure washington again. Even if some of the tea partiers were crazy racists they clearly had the right idea.

The grand majority weren't racist, anyway. I haven't even seen a photo or video image of one.

They are right, though. This is way out of hand. Massive spending. Company takeovers. The use of economic fear as propaganda. What's next?

[Sam Spade]

This will look like child's play compared to what is going on (and will go on) GM.

The theory is still the same - government threatens to pay bondholders pennies on the dollar.  Bondholders that receive conduits through the government for funneling money say yes, other bondholders say no.  Government goes into Chapter 11 to try and ram plan down dissenting bondholders throat.  The IRS thingy is not surprising either, but predictable.  Bondholders that received conduits through the government (hi JP Morgan) also have CDS that they get paid off on.  If there is a judge out there who's not a complete crook like Levy was, he stalls the government from pushing through a 363 sale to screw bondholders.

I wish I had time to make a complicated post on GM, but I don't.  If you read what is going on today, first off, don't be anywhere near GM stock and hope you bought June puts or something. 

Moreover, with these types of tactics, it's almost time to start shorting the phonebook (I give it about another week or so).  Actions like this will completely destroy corporate finance in this country, and with good reason.

[Sam Spade]

I can't help myself:

http://finance.yahoo.com/news/GM-plans-1for100-reverse-apf-15143150.html?sec=topStories&pos=3&asset=&ccode=

SEC filing:

http://edgar.sec.gov/Archives/edgar/data/40730/000119312509100053/dpre14c.htm

What does this do in English...

1) Increases the number of authorized shares to 62 billion.
2) Reduces the par value of the common stock to one cent.
3) Effects a 100:1 reverse split for the existing shareholders.
4) Restructures the debt so that the debtholders effectively get 10 cents on the dollar

Oh, and what does UAW get - 50% in cash and 50% in the newly issued stock - which means they don't lose anything unless the stock declines in value (it will, but that's another point)

Anyway, with this plan, the existing common shareholders $1.85 stock becomes $0.02.

And if they don't get this - they'll go into bankruptcy and get it from the judge.

Now - this is nothing more than wholesale thievery from the government, clearly, and if you own GM stock or own GM debt (without a CDS hedge like the banks do), you're ****ed.

BUT THIS IS THE MOST IMPORTANT POINT!

What do you think happens when a senior debtholder gets the idea that any company that's taken "government rescues", not to mention any company that might need government rescues or for that matter, any company that might ever want to sell debt might end up like GM?  I do.

[opebo]

What do you think happens when a senior debtholder gets the idea that any company that's taken "government rescues", not to mention any company that might need government rescues or for that matter, any company that might ever want to sell debt might end up like GM?  I do.

I agree it would have been better for 'confidence' to simply print the money to pay off these fatcats.

[memphis]

It's not the government's fault people invested in insolvent institutions. 

[Sam Spade]

It's not the government's fault people invested in insolvent institutions. 

Yes, but in order to have functioning financial institutions in this country, those who are senior lenders must recover in front of junior lenders.  With some notable exceptions in bankruptcy not applicable here, by changing the priorities willy-nilly or by allowing outside parties to take the assets at bargain prices, you risk blowing this structure up.  You don't want to know what happens if that structure falls apart.

These actions actually connect in a certain way to today's bond market results.

[Beet]

It's not the government's fault people invested in insolvent institutions. 

Yes, but in order to have functioning financial institutions in this country, those who are senior lenders must recover in front of junior lenders.  With some notable exceptions in bankruptcy not applicable here, by changing the priorities willy-nilly or by allowing outside parties to take the assets at bargain prices, you risk blowing this structure up.  You don't want to know what happens if that structure falls apart.

These actions actually connect in a certain way to today's bond market results.

How it that? What I'm seeing is that a statement by a Chinese official last night that the Fed's policies were in danger of being inflationary is what (helped) set this off. The spread between the 10 year and the TIPS yield is the highest in months.

Also, junk bond ETFs are moving in the opposite direction of Treasuries. If the Chrysler move was harming the entire bond market, you would have been the opposite behavior, would you not? Investors would be running away from corporate and junk bonds and into Treasuries. In the short term, jmfcst's explanation from the other thread seems to make more sense, even though I disagree with him about the relative urgency of addressing structural imbalances.

The bigger threat to the (private) bond market right now is rising default rates. If default rates continues to rise, eventually there will be some sort of flight back into Treasuries.