From the NY Times
ISTM that the administration is subverting the legal process, in using political pressure to essentially extort/steal money from those legally entitled to it, on behalf of more politically favored groups (i.e. the UAW). This seems very similar to the type of quasi-legal procedings that take place in Russia these days (Khodorkovsky et al). But I don’t recall this happening in the US until now. Have I missed it? And do people think this is justified?
That is the definition of politics and it has occured in the US before.
Barry O is just letting everyone that the bankruptcy of the automakers is not his fault. Greedy speculators has been the scapegoat for every bad financial occurence for hundreds of years. As long as the feds do not meddle with the bankruptcy judge, this is all CYA which is SOP.
You’re talking about him publicly blaming these guys. I’m talking about the fact that he demanded that they take less money than they should have gotten, and used political leverage, including pressure on other creditors who took TARP money, to force this.
The whole point of bankruptcy is that everyone is entitled to money, and no one will get 100% of what they’re entitled to. If Oppenheimer and the other funds had agreed to the same terms as the other bondholders (as I understand it, about 1/3 the value of the debt) everyone would have taken a roughly equal hit. Chrysler might have been able to reorganize without going to Chapter 11, or gone through it much more simply, and the business would would continue with much less disruption.
Instead, Oppenheimer and the other funds are using their (absolutely legal) right to appeal to the bankruptcy court to recognize their ranking in the bankruptcy pecking order to recover as much of their investment as possible, even if it means shutting down Chrysler and selling off whatever assets it has left.
In essence it boils down to what form of capitalism you favor. Is it better to let the scenario play out so that some get out relatively unscathed while others lose everything, or is it better for everyone to take a hit and hope the business survives long enough for them to recover their debt/recoup their investment?
Either way, I think terming Obama’s remarks “extort/steal” is too harsh. Using exactly the same logic, one could accuse Oppenheimer and the other funds of using the bankruptcy laws to extort/steal money from the other debt owners who agreed to cancel some of their debt in exchange for getting some of it back. After all, they’re “legally entitled” to their money, too.
Because in one case (the administration) they are pressuring the creditors to waive their legal rights, while in the other case (the funds) they are going to court to try to enforce their legal right.
I don’t see how you can ignore this distinction.
The law is that secured creditors come before the unions. The administration is saying “take a lot less than the unions or else”. And the hammer that they hold is that the creditors that took TARP funds are afraid of crossing them, and once these creditors (who are the majority) agree to the administration proposals, the others have little power in court.
That seems like Putin-style extortion and manipulation of the legal system to me.
If the financiers in question aren’t in jail, then I’d say calling it Putin-style extortion is pretty over the top.
The full evidence you seem to mention in your OP of “extortion” is Obama referring saying he disagrees with them in a press conference. He doesn’t even refer to them by name.
TARP itself (and let’s not forget, it was a Bush program, not an Obama program) seemed pretty manipulative to me.
And EVERY reorganization program involves negotiations and agreements that mean someone will take less than they may be entitled to.
What you refer to as “pressuring the creditors to waive their legal rights” I interpret as “pressuring the creditors to make a deal that may help keep the company from collapsing and putting 30,000 employees, and their suppiers, out of work.”
From my point of view, it’s the holdouts who are practicing extortion by saying “yeah, I know you agreed to rengeotiate your legally binding agreements, but I don’t agree to renegotiate my legally binding agreements. I expect to be paid in full, and I don’t care if it means liquidating then entire business and you get nothing.”
It was Theodore Roosevelt who described the presidency as a “bully pulpit.” If you choose to interpret the president speaking out on business issues as “extortion” you have more than a century of public pronouncements to vent about before we even get to Chrysler. After all, whatever his eloquence, the President of the United States can not order a bankruptcy judge to do anything.
I question whether your objection is really thinly disguised union-bashing.
In fact, the unions had legally binding contracts that they agreed to modify. Other creditors (suppliers, not just financial instutions who had accepted TARP funds) had legally binding contracts and have agreed to modify those terms.
But that’s not what is happening. None of these secured creditors are asking to “be paid in full”. My understanding is that they are asking for 60% recovery. The administration is saying that they, the secured creditors who by law come first, should get about 30% return, while the UAW, by law an unsecured creditor, should get about 55%. Cite #1 Cite #2 Cite #3
And why is this? From the NY Times
Simplico there were separate criminal and civil procedings against Khodorovsky - the latter are what transferred his fortune to “friendly hands” and what I’m comparing here. Re your second point, the verbal attacks are a relatively minor part of it, the more important issue is that he apparently used his TARP leverage to force the majority lenders to concede.
The UAW and CAW already agreed to significant concessions in their labor agreements.
THat’s true, but those were inevitable for the company to survive going forward. And without those concessions, the company could terminate the labor agreements in BK court without union consent.
Who is entitled to what share of the assets is a separate legal matter.
[BTW, and FTR, I was surprised to learn that a company’s pensions are unsecured creditors, and if I was making the laws, the company pension funds would be sacred and come before everyone else. But now that the law is what it is, it shouldn’t be brushed aside in order to favor some politically connected group.]
Not sure why you keep characterizing this as someone brushing aside the law. No one is making that claim, not even the creditors.
Say I owe you $1,000 and tell you there is no way in hell I can pay that. If you try to force me I will declare bankruptcy. So I ask you to accept $300. You tell me you want $600. I tell you no way I can afford that…$300 or nothing. You say fine, see you in bankruptcy court.
That is all very normal business dealings. No one is sweeping your legal rights away. You are free to accept or reject my offer as you like. You are free to argue your case before a bankruptcy judge and hope for the best. Which is exactly what is happening here.
Tossing in that the UAW would get $500 is unfair because they are “behind” you in getting paid off does not matter one whit. I am free to negotiate with various parties as I see fit. I can offer the UAW $500 and you $300. You can tell me that is unfair, piss off, see you in court.
It’s all well and good. If the administration told the creditors to go screw themselves, they will take $300 and like it, end of story, then you’d have a point but that is not what is happening.
And remember that while the UAW is getting $500, seemingly more than you think fair since you are “first”, they agreed to other concessions to save me money so I stay in business. Maybe it is robbing Peter to pay Paul…I dunno but it is worth noting that the UAW is not just skating off with an undue share here. Everyone is being asked to take a bite of the shit sandwich…the creditors feel they should not be made to take such a big bite. Difference of opinion.
ETA: I agree that pensions should be at the very front of the line in all cases and have always been stunned that they get as screwed as they do. But the law is what it is for now and guess that is how it goes.
But that whole analysis leaves out the TARP issue completely.
In ordinary circumstances, anyone can offer anything they want, and if they don’t like it they can enforce their rights in court. So if you are trying to do something unfair, you can’t get away with it - that’s what the courts are for.
The problem in this case is that the bankruptcy courts are going to be hard-pressed to dismiss a deal that holders of 70% of the secured debt agree to, which is the case here. It’s for this reason that the other secured creditors are thought to have an uphill battle in court, from what I’ve read. The problem is that the reason the major secured creditors agree to the deal is because they are beholden to the government over TARP related issues (see the third quote of the OP).
So the government is in effect using TARP money not just to take money from the TARP recipients (which I object to in its own right, but which might be par for the course in politics, if on the shadier side of the political spectrum) but to leverage this in order to force a disadvantageous deal on non-TARP recipients. And this in order to bestow it on a more politically favored constituency (per the quote & link in Post #8).
So what if he did? Many investment banks were screwed, and the government saved their asses. Do you think it’s wrong for the government to now ask for a favor in return?
I suppose the answer depends on whether the government’s goal (the Chrysler bankruptcy and deal with Fiat) is seen as a plum to a special interest (autoworkers and organized labor) or a national interest (manufacturing jobs contributing to the economy and GDP).
Yes, I think it’s wrong for the government to change the conditions of a deal after it is made, especially in matters that are not actually related to this particular deal. In addition, many of the firms that took the money were not “screwed” and took the deal because both they and the government wanted them to lend more money, them so as to make more profits and the government so as to ease up the credit crisis. Many of these institutions are now desperate to give back the money since congress changed the terms retroactively, but the government won’t let them do it without keeping the warrants. (I would speculate that this is part of the reason the big lenders are afraid of the government.)
But this is actually ancillary to the more important point which is that I’ve noted repeatedly that my primary concern is over the smaller lenders that were not TARP recipients and are being pressured by the fact that the government expects to prevail in court by having the TARP lenders override the non-TARP lenders.
I honestly do not know all the legal ins-and-outs of all this, it can get very complex.
I will say on a gut level that I see no problem with TARP lenders overriding non-TARP lenders. The government tossed $20 billion at the auto industry (not sure how much of that Chrysler got…several billion at least). Had the government not done that the company would be belly up and creditors might be looking at being lucky to get $0.10 on the dollar.
Now there is billions injected into the company and a guarantee from the Fed to not let the company go down the tubes. That substantially adds to the company’s value and these creditors now figure they can get a bigger piece of the pie essentially bilking you and me, as taxpayers, to soften their losses.
As such I do not have a lot of sympathy for them.
I don’t know where that’s coming from. Why do you assume that?
I don’t see any reason to assume that the creditors are getting any more money as a result of the US loans. If anything there might be getting less now, because had the company gone BK a few months ago there would have been several billion less of losses.
How can injecting billions and granting Federal guarantees that the company will not be allowed to fail and Federal guarantees to buyers that warranties will be covered and so on make the company worth less?
“Injecting billions” makes the company worth more if the injector is not going to ask for the money back. If the injector becomes one more creditor, it’s neutral on the balance sheet.
I don’t see how the guarantee that the company will not be allowed to fail helps other creditors.
Meanwhile, the company bled a lot money over the months since it was originally propped up, all of which made that much less available for creditors.
Certainly your 10% number seems to have been pulled out of the air, and has no apparent basis.
Right now the secured creditors think they can get 65% in bankruptcy from liquidation of assets (presumably absent pressure from the feds).
Thanks for the cites. The third one, in particular, is quite informative.
But if I’m reading it correctly, what you keep referring to as “the UAW” is actually the UAW’s health benefits fund – in other words, it’s the health insurance program for Chrysler’s union employees and retirees.
(Side note: I know it isn’t unique to Chrysler or the automotive industry for the union to administer benefits programs instead of the employer – in fact, many employers use a 3rd party to administer benefits.)
So, in effect, the holders of secured debt are being asked to accept less so that the employee health insurance fund can get a little more. And even with that, the majority of the employee’s health insurance will be backed by stock (and stockholders are at the bottom of the list in terms of any bankruptcy proceedings.)
Does this mean that you’re advocating that the bond-holders who lent to a company that was already struggling, that already had been gutted, failed to merge with Nissan, failed to merge with Ford, got taken to the cleaners by Daimler, etc. – that those bondholders should get a higher priority than employee compensation, particularly when those negotated compensation contracts have already been renegotiated?
Chrysler employees (both union and non-union) have seen their cohorts laid off, their “Guaranteed” pensions have become 401K plans, and the employer contributions to those have been reduced; employees who weren’t laid off have been made to take unpaid furloughs, accepted less-inclusive health plans, etc. And retirees have gotten an even worse deal.
In the meantime, Chrysler has managed (with the help of federal loans) to continue to pay the interest on their bonds, and hasn’t yet (to my knowledge) defaulted on any redemptions.
When it comes to people getting less than they were entitled to, I think it’s time for the bondholders to shut up and get in line.
Propping up the company keeps the stock from imploding. It encourages the likes of the UAW to negotiate with the belief that there will be jobs for its employess thus keeping Chrysler potentially viable in the future. Keeps Chrysler out of likely Chapter 11 liquidation if the government just stood back and let it fail spectacularly.
Yes I made up 10% as an example…I have no freaking clue how much it’d really be but in Chapter 11 I wonder how much those creditors would expect to get? Betting it wouldn’t be near 60% which was my point.