“We have just seen an episode of Gangster Government. It is likely to be part of a continuing series.”
Those words were written by well-respected reporter and commentator Michael Barone at the end of a concise and well written explanation of the Obama Administration’s Chrysler/Union deal. After expressing sadness at seeing the demise of Chrysler in his hometown of Detroit, Barone repeats an accusation that you may have already heard (since you obviously read blogs). This is a big deal:
But my sadness turned to anger later when I heard what bankruptcy lawyer Tom Lauria said on a WJR talk show that morning. “One of my clients,” Lauria told host Frank Beckmann, “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.”
When I was growing up, there was a name for this sort of thing: “Nixonian”. The “Office of the President” strong arming people with real and/or veiled threats. It was that whole impression and national mood that had America turn to a veritable Sheriff Andy Taylor, putting Carter into office simply because he seemed the “anti-Nixon”. But I am getting off track. I submit that whether you agree with the results of this Chrysler deal or not, this “Nixonian” behavior is wrong no matter who is doing it. Bear with me here because the more problematic issue here is bigger than the claim that the administration used threats.
Barone goes to to describe deal that the secured investors were being forced into:
Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.
This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors — those who lended money only on the contractual promise that if the debt was unpaid they’d get specific property back — get paid off in full before unsecured creditors get anything. Perella Weinberg withdrew its objection to the settlement, but other bondholders did not, which triggered the bankruptcy filing.
So let’s look at this for a moment. The Obama administration proposed a deal where the secured creditors would receive 33 cents on the dollar for their debts while the unsecured UAW debt is paid at 50 cents on the dollar. It is left to the reader to decide whether this is a quid quo pro payoff to the unions for their support, but the fact is that the law states that secured creditors, those who signed a contract that included collateral, get paid off before unsecured creditors. That is why it is called secured credit. But some of the creditors balked at this and the company was forced into bankruptcy.
After that came a denunciation of the objecting bondholders as “speculators” by Barack Obama in his news conference last Thursday. And then death threats to bondholders from parties unknown.
The White House denied that it strong-armed Perella Weinberg. The firm issued a statement saying it decided to accept the settlement, but it pointedly did not deny that it had been threatened by the White House. Which is to say, the threat worked.
Nixonian, right? Pointing out that Lauria is a “reputable lawyer and a contributor to Democratic candidates”, Barone argues that the administration is unconcerned with the rule of law while 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.”
Please go read the entire Michael Barone article, White House puts UAW ahead of property rights, because he writes a lot better than I do, but I will give you his last paragraph with the money quote that titles this post:
The Chrysler negotiations will not be the last occasion for this administration to engage in bailout favoritism and crony capitalism. There’s a May 31 deadline to come up with a settlement for General Motors. And there will be others. In the meantime, who is going to buy bonds from unionized companies if the government is going to take their money away and give it to the union? We have just seen an episode of Gangster Government. It is likely to be part of a continuing series.