Did Your Pension Fund Invest in Chrysler? Hope you can live on 29% of that investment.
By LisaB on May 11, 2009 at 7:05 PM in Current Affairs
The National Post has an article today by David Frum about what he sees as outlines of the Obama financial future. One thing he is concerned about is how the Chrysler bankruptcy is being handled. He’s got a point.
The powers that the Obama administration claimed in order to arrest the financial crisis and mitigate the recession are being used and abused in ways that are underming the legal and financial stability of the United States. Investors: You are warned.
The first warning was the attempt to snatch Chrysler’s assets away from their rightful owners to pay off administration friends and supporters.
The Obama plan to save Chrysler would have sold Chrysler’s most valuable assets into a new company co-owned by the U. S. and Canadian governments, Fiat and the United Auto Workers (UAW) — with the UAW getting the biggest piece, 55%.
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For a failing company to shuffle assets so as to favor some creditors over others with a stronger claim (bondholders) is a very serious wrong, potentially even a crime. There’s a sound economic reason for this rule of law: Bondholders accept lower returns in good times in exchange for greater security in bad times. Protecting bondholders in bad times ensures that future borrowers will be able to borrow in good times.
The bondholders squawked. Well — not all the bondholders. Bondholders who had previously taken government bailouts for themselves, via the Troubled Asset Relief Program (TARP), kept quiet. That’s bad enough. It means that these major lenders were breaching their fiduciary duty to their shareholders in order to placate their new masters in Washington.But what happened to the non-TARP bondholders was even worse. When they squawked, the administration tried to muscle them. Lawyers for the bondholders contend that senior representatives of the Obama administration threatened them. Michael Barone, the ultra-knowledgeable (and normally unflappable) editor of the Almanac of American Politics called it “gangster government.”
The Obama administration denies it threatened anyone. And yet over the past week, one by one, formerly protesting bondholders have abruptly gone silent.
CBSnews covered this as well, back on the 7th of May.
Our story begins with the slow downfall of Chrysler, which succumbed to bankruptcy after experiencing a steep sales decline of 48 percent in one year. During its slide, Chrysler borrowed money from lenders and in return signed a contract promising that as so-called senior creditors, they’d get paid before anyone else if the company went under.
These creditors, by the way, represent something of a cross-section of America: the University of Kentucky, Kraft Foods’ retirement fund, the Bill and Melinda Gates Foundation, pension funds, teachers’ credit unions, and so on.
A normal bankruptcy filing would be straightforward. Senior creditors get paid 100 cents on the dollar. Everyone else gets in line.
But President Obama and his allies don’t want that to happen. So they interfered on behalf of unions (the junior creditors) and publicly upbraided the senior creditors who were asserting their contractual rights and threatening to head to bankruptcy court.
Last week Mr. Obama lambasted them as “a small group of speculators” who “endanger Chrysler’s future by refusing to sacrifice like everyone else.”
CBS connected the dots and stated this:
It must be a coincidence that the United Auto Workers has handed $25.4 million to federal politicians over the last two decades, with 99 percent of that cash going to Democrats. And that Mr. Obama’s final campaign stop on Election Day was a UAW phone bank.
——————-A document that the non-TARP creditors filed with the bankruptcy judge about the proposed sale to Fiat says: “The sale is far from an arm’s length transaction, but rather, is the result of a tainted sales process dominated by the United States government… It is a sale that was orchestrated entirely by the Treasury and foisted upon (Chrysler)… Well before the filing, (Chrysler) had ceased to function as an independent company and had become an instrumentality of the government.”
So if you’re keeping score, you have a bankrupt company depending on the government for money negotiating with some TARP-funded creditors depending on the government for money and still more creditors who may hold insurance policies with AIG, which depends on the government for money. And we’re already hearing similar allegations about General Motors and political interference.
One disturbing report came from a well-respected attorney representing the dissident Chrysler creditors. Thomas Lauria, the head of White & Case’s bankruptcy practice, says that he was threatened by Steven Rattner, the White House’s auto task force chief. (A White House spokesman denies making any threats.)
“I represent one less [sic] investor today than I represented yesterday,” Lauria said on a Detroit radio show. “One of my clients 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. That’s how hard it is to stand on this side of the fence.” Lauria said that his clients were willing to compromise on 50 cents on the dollar, but the government offered them only 29 cents.
Another blogger, professorbainbridge, contributed to the discussion today. He references a WSJ article about this (the WSJ article is pay-for-view only).
The WSJ’s “USA Inc” series continues today with detail on how the US got secured lenders to abandon their fight to get paid more than 30% of their claims, as against giving more than half the company to unsecured workers. Which prompts this zinger from Larry Ribstein:
As the government takes over more of the economy, these pressures on formerly free markets will intensify. The problem for government is that it is running out taxpayer money for buying the economy. The sources of private money will long remember what happened to Chrysler’s lenders.
In fact, professorbainbridge suggests anyone buying a car buy a Ford instead.
All of which creates a potential win-win. Ford is finally producing some cars that even a gearhead like me might want to buy. The Fusion hybrid gets better gas mileage than the Toyota Camry hybrid. The Focus has gotten a ton of positive reviews. The new Taurus is impressive and the 2010 Taurus SHO should give sports sedan enthusiasts soemthing to seriously consider. In sum, if I were in the market for a car, I’d probably get a Ford. It’d be a good car for me, it’d reward Ford for staying out of Obama’s clutches, and it’d spank everybody associated with the CM and Chrysler debacles.
However one may feel about how to deal with investors, certainly non-TARP bondholders who invested in Chrysler, accepting lower returns in order to be made whole in the event of a bankruptcy, don’t deserve to be labeled “greedy.” I’m not a fan of Bill Gates, but I understand the Gates Foundation does good work. I also seriously doubt the Univ. of KY was planning to pay outrageous bonus money to professors.
Ok, so times are bad. Still, $.29 on the dollar for foundations and pension funds?
But an even bigger question is this. What good will all this do, ultimately, for the UAW? Or is the purpose of the UAW here to get as much out of the company as possible before it implodes rather than preserve the jobs it says is the aim of the organization?
Kind of reminds me of the old lottery question. If you won, would you rather have a lump sum payment or payments for life? Would the UAW rather have lump sums here or jobs for the forseeable future?
I guess it depends on who gets that money, doesn’t it???
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