Submitted by Tyler Durden, publisher of Zero Hedge
In an interview of momentous importance, WJR’s Frank Beckmann interviews Tom Lauria, the Head of Restructuring at law firm White & Case, in which the lawyer, who represents Chrysler hold-out hedge funds Stairway Capital and Oppenheimer Funds, discusses on the record the amazing treatment by the White House of Perella Weinberg, which initially had been a transaction hold out but after threats by the White House (not my words) was forced to drop their objection and go with the administration. Says Lauria:
“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 was Perella Weinberg.”
In the clip below, fast forward to the two minute mark, where the Obama administration’s negotiating tactics become very, very clear.
What is very odd is that Perella Weinberg could possibly have veered away from the administration’s path in the first place: Zero Hedge readers know that P-W is the very firm advising the rapidly sinking FDIC “on transactions and strategies to stabilize the banking system, and also on the proper way to dispose failed institutions and how to handle delinquent securities assumed from banks, as well as the creation of the aggregator bank.”
This leads to the conclusion that this was really the work of one Dan Arbess, who runs the recently acquired by P-W, Xerion Capital, but nonetheless does not explain the lack of strategic integration at this most critical of advisors to Sheila Bair, and by implication the U.S. administration. How it is possible that one’s core advisor would go against its client, even if offset by a Chinese Wall, is likely the big story here, and speaks volumes about the chaos behind the scenes currently occurring with regard to Wall Street’s sentiment for the ruling administration.
Incidentally, Zero Hedge is considering launching a FOIA to Ms. Sheila Bair to disclose the compensation structure for Perella Weinberg as it continues to advise the FDIC on the “proper” shuttering and liquidation of bank after bank. After all, we have already seen 31 bank failures for 2009, a number that will likely hit the 100s, and it is every taxpayer’s right to understand the motivations behind Perella-Weinberg’s recommendations to the FDIC and to the White House, especially ahead of next week, when the stress test results could potentially lead to the closure of some of the “too big to fail” systematically important financial institutions.
The full interview with Tom Lauria below is a must hear for everyone as it discloses not only the administration’s strong arming tactics in black and white, but also discloses some other critical facts that the president on his regular TV appearances has failed to mention such as:
– First lien holders were willing to accept a 50% discount on their positions, however the 71% demanded by the administration was seen as too much.
– The cash going to Junior claims (creditors below the first liens) will be between $10 and $20 billion, a number which in practice should satisfy a par recovery for the 1st liens if the Absolute Priority Rule was actually withheld.
– Among the creditors are not just vulturous hedge funds but “pensioners, teachers, credit unions, college endowments, retirement plans, and personal retirement accounts.”
In conclusion, Lauria summarizes the developing Chryslerf#%k best:
“The President is trying to abrogate contractual rights; if he will attack that contractual right, what right will he not attack?”
Hat Tip Steve
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Great post tyler.
Yves, it’s beyond me how any of your readers can complain about the quality of guest posts at NC.
But businesses abrogate contractual rights all the time. Look at what bankruptcy does to employee contracts.
I refuse to see what the big deal is. Investors have no guarantee of return if a company goes bankrupt. Why should this have any more effect on investor confidence than what we have already experienced?
It looks more and more like the sanctity of contracts is becoming the new last refuge of scoundrels.
The system under which those contracts were written has failed. The only reason that there is anything there for these hedge funds to loot is because the government has been propping up companies like Chrysler. If we had let Chrysler go kerblooey, those bondholders would be left with plants and equipment that they couldn’t give away.
And while these funds are so earnest about contract law, I wonder if they have the same dedication to criminal law, as in fraud. Open up these funds to audit using real evaluations, instead of these creative writing approaches under which assets are written up and debts are written down, and these guys would be found to be A) bankrupt themselves and B) engaged in a massive fraud against their clients.
Tyler,
Really great post. I’m stunned. It would seem that we have the Divine Right of Barack Obama running our country.
I’d love to know the results of your FOIA request.
Walker,
Businesses do not abrogate contractual rights. They renegotiate a deal that has gone bad. They play hardball, but they do so according to the law and in a court in front of a judge. Thus the rights of contracts are upheld. If you don’t have any rights under law, with what will you negotiate in the courts?
Perella Weinberg is entitled to receive 100% of their investment capital back. But in the spirit of renegotiating a deal gone bad, they offered to accept 50%.
The Obama Administration threatened to [use] “… the full force of the White House press corps would destroy its reputation if it continued to fight..”
That’s called Extortion. In my view, it is grounds for Impeachment and prosecution under the law.
Tim in Sugar Hill
“Perella Weinberg is entitled to receive 100% of their investment capital back.”
And if wishes were horses beggars would ride. They are entitled to 100% of their share of whatever is there. The last I saw 100% of nothing was still nothing.
What had made the U.S. a cool place to live was how we collectively treated others.
Contract law – enforcement of promises made to others.
Tort law – punishment for harm made to others.
Countries like Russia don’t have this… it’s every man for himself.
Bankruptcy is a different issue. Bankruptcy is when you have no chance of fulfilling all the promises you have made, so a judge has to split the baby.
You know, when you don’t have the law and you don’t have the facts on your side, all a lawyer has left is to pound the table and faux anger. That was Obama on TV the other day. For an advocate, I think what he’s doing is fine. For someone who’s role is to uphold the law, it is disturbing.
Uh, what’s the point being made here? Are we supposed to be outraged at the Obama Admin? Because I’m having a real hard time figuring out why.
Sure, the senior creditors have an absolute preference on liquidation. But this is a negotiated restructuring, with now the next step being a judicially supervised restructuring. And in that process, some folks are more important than others (like frex the workers) and everybody has to give up something and get something. During the negotiated process, the senior creditors basically have a veto. They lose the veto if it goes to court. The Obama Admin called their bluff, and called them out as the ones whose veto sent the process to court.
That’s all. No attack on the “sanctity of contracts.” If anyone knows this best, it’s the hedge funds.
Look, I’m a big supporter of vulture funds because I think they’re essential to the financial eco system. But they take these sorts of risks. They never know how successful they’re going to be pushing their seniority claims.
And if pension funds are still holding Chrysler junk, it’s because they didn’t sell ages ago but chose to in effect take vulture fund risk.
Very good comments on this quite interesting post. I think though the take away is off point. “…under threat that the full force of the White House press corps would destroy its reputation..”. If we are to believe this, it means that the administration believes the press corp is so craven that its willingness to toe the White House line can be taken for granted. While it is evident that much of the press is in love with Obama, it is not clear yet that it is willing to do really filthy things at the White House bidding. Still this is something to keep tabs on. Coming out of Chicago, these guys know how to play ball and enjoy it.
The question is not necessarily the “sanctity of contract”, it is the “sanctity of legal process.”
In BK, most K’s are off the table; however, the question of “who” receives “what” *is* a function of BK law and process.
The Obama administration has fundamentally changed the game by threatening attack on anyone who believes that they should somehow harbor a belief in that the combination f *their* contract (i.e. bond) and how tha tplaces them in line to receive a certain measure of satisfaction.
Our commercial (and financial) society has created an enormous aomunt of success due to the orderly fashion in which people can assess their risk in a transaction, and to the orderly way in which they can recover in adverse circumstances.
The “chosen one”, in his ride to restructure Chrysler “in his image” has threatened use of his office to those who dare to rely on those procedures.
As an attorney, this action by the Obama administration is both an attaack on captital holders, and, more destructuvely, an attack on the foundation of the rule of law that has so greatly benefited us as a society.
“While it is evident that much of the press is in love with Obama, it is not clear yet that it is willing to do really filthy things at the White House bidding.”
Not sure where you have been the last 6 – 12 months…
Did you even watch the press conference last week?
NOT ONE CHALLENGING QUESTION (Obama says 150,000 jobs created, YET when asked how these numbers are concluded, NO RELEASE OF ANY INFORMATION TO SHOW ANY METHODOLOGY!)
the Mainstream Media (CNN,NBC, NYT,ABC, CBS, and MSNBC, even CNBC sometimes) are essentially Obama’s (and the democrats) public relations firm.
There are absolutely no checks anymore for this government, when Obama says “Jump”, the MSM asks “How high?”
The MSM are useless, which is why blogs like NK, ZH, Mish.. etc are invaluable indeed.
Thanks Tyler for this post!
Nadezhda said:
“The Obama Admin called their bluff…”
No. The Obama Admin extorted their compliance.
Joebek said:
“While it is evident that much of the press is in love with Obama, it is not clear yet that it is willing to do really filthy things at the White House bidding.”
In Washington they have a saying regarding making accusations in public. You don’t have to prove your accusation. It doesn’t even have to be remotely true. “Just get him to deny it!” and the damage is done.
The Press will report whatever Obama says. ’nuff said.
Tim in Sugar Hill
WE DON'T TORTURE!
BUT WE WILL BROW BEAT YOU, WE WILL BULLY YOU, WE WILL TAKE YOUR MONEY, WE WILL DISTROY YOUR REPUTATION!
This is a very Scary & Dangerous Administration!
You call this extortion, I call it hard ball. The administration has the megaphone and the right to use. The economy is in crisis, and when someone is not cooperating with the administration on the economy, the public has the right to know. Besides, in this climate, hedge funds don’t have a reputation (if it means a good name), there is nothing to destroy.
Still, I am not fan of the administration. It all can still be a pretense: Obama blames the hedge funds, the hedge funds blame Obama, and both deal and wheel in ways that we don’t know. Note that Tyler also points out that PW is an adviser to FDIC.
I can see how whining about the sanctity of contracts is a way to get a high moral ground. But we should also recognize something called public interest or common good. And perhaps in some cases it would be in the interest of hedge funds not to nitpick over some of the more poorly thought out contracts.
Whenerver the “rights” of the priviliged classes come under fire, they always trundle out the same old law and order argument to defend their favored status in the social and economic heirarchy.
Martin Luther King confronted the same specious arguments. One must recall, after all, that when Rosa Parks refused to give up here bus seat to a white man, she was “breaking the law.” In “Love, Law and Civil Disobedience” King makes the argument that “just” laws should be obeyed and “unjust” laws should be broken. “[W]hat is the difference between a just and an unjust law?” he asks. “Well, a just law is a law that squares with a moreal law,” he continues. “It is a law that squares with that which is right…”
What I want to know is this: “What kind of law allows a company’s management to subordinate the financial claims of its workers, workers who may have been working towards a pension benefit for 10, 20, 30, 40 years or more, to some Johnny-come-lately propertied class?”
That certainly might be “legal,” but is it right? Is it moral?
In 1933, another time when an out-of-control propertied class had wrecked havock upon the country, Reinhold Niebuhr swung back with this:
The moral attitudes of dominant and privileged groups are characterised by universal self-deception and hypocrisy. The unconscious and conscious identification of their special interests with general interest and universal values, which we have noted in analysing national attitudes, is equally obvious in the attitude of classes. The reason why privileged classes are more hypocritical than underprivileged ones is that special privilege can be defended in terms of the rational ideal of equal justice only, by proving that it contributes something to the good of the whole. Since inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interesta are served by, the special privileges which they hold.~
So true to form, Lauria invokes high-sounding but dubious arguments, saying that the right to property and right to contract are “sacrosanct” and making pompous but highly bogus appeals to the authority of the constitution. The executive, he tells us, “under constitution is charged with the enforcement of the laws” but has stepped in and in effect broken those laws.
But what is this great crime that the administration has supposedly committed? It threatened to use the “full force of the Whitehouse press corps” to “destroy the reputation” of Lauria’s client. But pray tell, Mr. Lauria, since when is it a crime for the Whitehouse to use its bully pulpit to embarass someone into doing the right thing? And if the Whitehouse were to use its bully pulpit to try to impel someone to do the wrong thing, just how effective to you believe it would be?
Rush Limbaugh as one arm of the Roger Ailes media empire failed miserably to separate the Republican party from George W Bush.
Now the White House press corps supposedly has surpassed a 30 year old media empire? Whatever political capital Roger Ailes built, George W Bush squandered nearly all of it. But the White House press corp wields power?
George W Bush ans is dimwit US Labor Secretary Elaine Chao rarely, if ever, met their monthly jobs creation target. Elaine Chao enjoyed a media blackout, but the real numbers behind her 8 years are slowly getting counted. There is no need for any bank in the US. There is no need for any automobile manufacturing. There is no need for any hedge fund obviously. Any judge in his right mind would have to realize the real unemployment numbers in the US.
Remember, Alan Greenspan and Elaine Chao have both chirped health sciences, the only source of jobs left in the US. They didn’t realize there were talking to the extinct FIRE economy and hedgies, probably.
I am somewhat amused by the concern/outrage over contract and the rule of law with regards to anything financial industry. I agree that the rule of law is vitally important. However, as a regular middle class professional not in finance, it seems to me that the rule of law has been ignored for sometime by the finance industry. They have taken the middle class for a ride. I have voted the best way I can by removing my money as best I can away from the financial industry.
This is another case of the laws applying only when the offense is against the finance oligarchy (aristocracy?). Live by the sword die by the sword I say. But, the rule of law was gone regarding finance sometime ago. I am unimpressed by this newly discovered “outrage.”
Disappointing post, false scandal. So the administration threatens to publicly call out P-W for slowing down the “expedited” bankruptcy. Completely legal. Why is Zero Hedge trying to frame this as extortion and a trampling of rights? P-W has a right to make their case in court; they just don’t have the right not to be criticized for it in the media by Obama or anyone else.
I am not opposed to the government using its bully pulpit, criminal code, and regulatory authority to prod the reluctant. The problem is not that the government has (and uses) a lot of power. The problem is that this power always seems to benefit the oligarchs.
Harlem Dad said:
Nadezhda said:
“The Obama Admin called their bluff…”
No. The Obama Admin extorted their compliance.
No. This is really an important point to get straight. He called their bluff after warning of the consequences of not agreeing to the deal everyone else had signed on to. And let's get a grip on the hysteria – the warning was reasonable. "You guys are going to be seen as the fly in the ointment, and given how taxpayers are getting pretty disgusted with financial institutions, you're not going to be doing your reputation any favors."
Despite the warning, they didn't "comply" with what the other parties to the negotiation had agreed. And the other parties didn't back down.
So since the hedge funds hold a veto, the process now moves to the next stage, where they're not likely to make out much better than what they were offered, because now they lose their veto power.
I truly don't get this "Obama's destroying the law" hysteria. If the Admin was trying to intervene in a liquidation proceeding to prefer a particular fianncial institution or a junior class of financial creditors over a senior class, regardless of legal rights, then there would be grounds for complaint. But this is a negotiation in which all parties have some bargaining chips, including appealing to the court of public opinion.
No one was forced to give up their bargaining chips, but there are consequences for not doing so. In this case, the process moves to a forum less congenial for the hedge funds. That's the outcome they chose!
Given the stakes here for a whole lot of folks who aren't sitting at the table — like the state of Michigan for starters — it seems to me that everybody at the table should have been working for win-win solutions. And maybe they were. But that isn't what the parties other than the hedge funds thought was going on with the hedge funds. And I see nothing wrong with the parties to the negotiation, including the government, clarifying their view as to who was and who wasn't working to get to win-win.
The only important issue I think ZeroHedge has raised in this post is that P&W is facing some conflicts of interest that probably can't be handled with chinese walls. Because public appearances in the media don't really take chinese walls into account very well. So they need to think carefully about whether they're going to be the adviser to the government's restructuring of the banking sector, or whether they're going to be sitting at the table negotiating against the interests of those very banks they're helping to restructure.
Lauria represents hedge funds. Is it possible he is more clever by half than Obama? Hasn’t he put a dent in Obama’s reputation -at least with commentators to this blog –with a very ambiguous statement accusing the press corp and Obama?
Perhaps he would like to be more specific. The bankers didn’t get to own the entire economy and government by retaining patriotic attorneys.
Since when would an attorney paid the bucks this guy is paid get himself interviewed on the radio to tell the truth?
I love the comments on this blog but think it may be naive to believe what anyone playing in this league says for public consumption.
What ever the eventual outcome, understand this; the outcome will be eventual. When attorneys get involved they will spend more real intellectual work trying to figure out how to extend the proceedings (fear is always the best input) to further the billing cycle then to actually remedying the problem.
The longer this takes I think the weaker the original idea of Fiat making any real business sense of the event will become.
Attorney’s are not businessmen they are captains of the dispute.
That is what is so damn disturbing to me regarding George W. Bush; he was our first MBA to command the White House. What a f*cking disaster!! A criminal performing tomfoolery as a businessman (with a Harvard MBA to boot!).
biofuel said:
"But we should also recognize something called public interest or common good."
I agree with that 100%.
I'm no defender of Hedge Funds. And I admit that for this argument I'm taking Lauria's statements at face value. And you've an excellent point about the reputation of Hedge Funds. Sort of like accusing a "working girl" of being an indiscriminate lover.
> "You call this extortion, I call it hard ball."
I just can't agree on this one. To me playing hardball would be something like "if you don't stop fighting me on the Chrysler thing, you're fired from advising the FDIC."
Also, I associate hard ball tactics, including the use of Public Relations tactics, with private entities fighting each other in or out of court, but always under the law.
And I expect that politicians will use hard ball tactics to get elected. But getting elected and administering your sworn duties under the Constitution are two very different things.
Taking Lauria at his word, the threat to use the White House Press Corps to destroy someone's reputation if they don't roll over and comply is extortion.
And note that such implies willful Slander and Libel. Because if the reputation of P-W is so bad that merely telling the truth would destroy them, then why are crooks who should be prosecuted. If so, why are they advising the FDIC at all?
Jefferson said "Let us hear no more talk about the government of men, but bind them down by the chains of the Constitution."
A threat from your opponent's lawyer to air your dirty laundry is one thing. The same threat coming from the White House is tantamount to Tyranny.
Tim in Sugar Hill
Nadezhda said:
“This is really an important point to get straight. He called their bluff after warning of the consequences of not agreeing to the deal everyone else had signed on to.”
I’ve thought about your arguments and I have to admit they’re really strong. And they have the virtue of sounding like “the way these things really happen.”
By contrast, mine depend on Lauria having spoken the truth, the whole truth and nothing but the truth. As LeeAnne rightly pointed out, this ain’t necessarily so.
So I admit that your take on “what really happened” is most probably correct. You’ve persuaded me. Well done.
But I hold to the principle of my argument. Running for Office and “running” an administration are two very different things. What’s fair in one, is a criminal act in another.
{sigh!}
I so distrust my government. I’m still reeling from 8 years of Bush who gave us Extreme Rendition, Torture and Homeland Security.
Tim in Sugar Hill
“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 was Perella Weinberg.”Based on this we should immediately conclude that there is a current and highly visual and audible set of attacks being launched by the Obama administration to destroy the reputation of these funds right now…
…
now?
…
maybe now?
…
Well, he did complain that the hedge funds shot down the deal…, but that was true.Perhaps instead reality was something like this:
One of my clients directly threatened the White House and in essence attempted compelled to withdraw its opposition to the proposed deal [$4.5 billion and 40% equity] under threat that the full force of the PR division to destroy the administration’s reputation if it continued to fight…Lets check the smell test on that? Is there a PR attack being launched based on unverifiable claims that vilifies the the White House? Yep, right here.
Give me a break. The White House threatened to sic the press corps — I’m sorry, the full force of the White House press corps on P-W? I don’t see how that’s scary, let alone extortion.
Now if you tell me that the White House threatened to sic the IRS, FBI or another part of Justice on P-W, then I can see your point.
But if the threat is that the White House would disclose to the press the negotiating positions of each creditor, I fail to see what the big deal is here.
Big-money players like P-W complaining about using leaks to the press as a tactic in negotiations of global, public interest remind me of Capt. Renault in “Casablanca.”
Well–like Captain Renault, but without the charm.
Are we supposed to be mad at the Obama administration? Hedge funds buy bonds that would be worth $0 without government propping the company up in the first place. Then complain about the sanctity of contracts when their gamble about what percent of the government dole they would get to run off with doesn’t look to be paying off? Give me a break. Three cheers for the administration. 3 more cheers if they threatened massive IRS audits and SEC or FBI investigations into possible fraud.
More financiers these days should be fighting to end up in the minimum security instead of low security prison during their next 10 years, rather than fighting over whether 100% of their bets will be doubled with taxpayer money instead of only 90%…
Of course, as noted above, contracts are renegotiated and disputed all the time — and there is seldom anything certain about bankruptcy. However, there is a more or less established process.
The key issues here, really, have nothing to do with the outcome of the pre-petition discussions. There were dissenting holders and the White House was pissed. Welcome to the corporate restructuring world. As cool as it may be were private investors to prioritize Obama’s version of “the national interest”, the imperatives of fiduciary asset management don’t really work that way. The larger point has to do with the legitimacy of the negotiation and the integrity of the bankruptcy process now that the debtor has filed. Are (were) the TARP banks conflicted? Is the administration opening the TARP funds injected into Chrysler to a valid equitable subordination claim? Is the 363 sale process, benching off the Lehman precedent, an end-run around protections that creditors – especially secured creditors — would otherwise have? These are important questions and the “holdouts”, though they may be unpopular and though they may end up outvoted or even rail-roaded, raise legitimate concerns.
Political pressure, shaving the corners of established protections, public demonization of certain types of investors can be effective in one-off situations — maybe even several such situations. But eventually a tipping point of sorts is reached where investor perceptions about the predictability of outcomes (or “analyzability”) results in a material repricing of these situations and/or a cessation of capital flows into investments/speculations with this particular risk set.
I doubt the union of states will fail over the Chrysler situation. I am reasonably sure, if only from discussions with many distressed debt colleagues, that substantial concern exists and is growing about process protections. Go ahead, dump on the “hedge funds”; it’s everyone’s cost of capital in the long run – if there is one.
As an aside, the leak regarding the administration’s threat to use the press to ruin PW’s reputation is a substantially watered-down version from what some close to the situation were saying Thursday evening. But then, those early rumors may be untrue or, more likely, there is a certain unwillingness to accuse the administration of more serious misdeeds.
“Go ahead, dump on the “hedge funds”; it’s everyone’s cost of capital in the long run”
Yes, because like so many other players in financial industry, –you know the paper one that blew up– they performed an indispensable function.
The cost of capital in the future will necessarily be higher because the easy credit of the bubble and paper economy are gone. I often ask the question why does Goldman Sachs exist? What service does it perform other than the financial aggrandizement of its employees? It is much like a modern day Tyrannosaurus. It was the top predator of its time but its era is past. Post-meltdown, we need to be asking this question of all players in the financial system. For many of them, including most hedge funds, I suspect the answer is that like the dinosaurs their age has come and passed.
“Our commercial (and financial) society has created an enormous aomunt of success due to the orderly fashion in which people can assess their risk in a transaction”
This is actually quite funny when you think about it. Apparently I was just dreaming that the housing bubble, financial meltdown, recession, and depression happened.
Lucky for us, wasn’t it, that Wall Street in all of its wisdom was able to assess its risks and avoid such a clownish series of disasters?
Here we see the signs of the Imperial Obama Presidency.
His speech was as inflammatory as those given by Cheney.
Was he not trying to give directions to the BK judge. And in doing so attempting to undermine the freedom of the Court.
He3 gave every indication of a man who had put his full power behind trying to present an Obama-mediated deal.
Instead he found that he was thwarted by a small group, who for whatever reason held to their rights under the law. And he did not like it one bit.
I had hoped that Obama would see the danger of putting himself above the Law.
But he failed this early trial.
Plschwartz
So what was it when the poor hedge funds unilaterally decided to halt withdrawals a few months ago?
They were losing clients money, and when the client tried to stop the bleeding, the hedges said they were not done losing their money yet.
Also, what exactly did the Obama administration have on these people that they were going to feed the press?
Were they just going to make stuff up?
Something smells like rotten meat. I don’t trust politicians any more or any less than I trust the banks and other institutions involved in this mess.
They were worried about bad press. They were so worried that they rushed out to tell everybody what happened. If they are to be believed, there should be negative news coming soon in retaliation.
“Lucky for us, wasn’t it, that Wall Street in all of its wisdom was able to assess its risks and avoid such a clownish series of disasters?”
Perhaps you did not notice that the comment on the “orderly fashion” on assessment of risk was directed at the rule of law that provides an objective basis on how to apportion both risk and upside. It was obviously not directed at a quant analysis of risk, just at the probelmatic effects of abandoning the rule of law as many seem to want to do.
Apparently you did not understand that, and my apologies that you missed the reference.
So Tyler, I do find this an interesting post, and there is an important point, to me, in the concerns you raise regarding the Administration’s conduct, a point which seems to be getting a bit buried in comments.
To begin at the beginning, Chrysler isn’t worth it’s debt; therefore, many debt holders are going to take a loss. Contract law in principle set up a hierarchy or dibs and rights for apportioning that loss, but the gravity of the situation exceeds the sanctity of those niceties. I would have no great problem if the Admin, using approriately granted powers in full public view, nationalized Chrysler and told prior stakeholders, ‘Here is your share; here is your share; here is your piece; here, for you, is the door, and godspeed.’ Sovereign actors make such interventions, in principle for the public good. And wails from those who provided capital for money-rent, if such they are, are chirps in the grass not engaged with the scale of the problem _for the nation as a whole_.
But that is exactly _NOT_ the process which is happening. We have no exercise of properly granted powers. We have zero (0) transparency. We have more than the suspicion of unequal treatment of parties with claims, on the basis of their relative importance to the inner circles of government. We have, in short, an economic Star Chamber trial, here. And that is bad. Contract law is far too important to be trifled with because it is ‘inconvenient.’ And deciding much of this in closed chambers reeks of the insider dealing with which the entire financial system bailout is sick rotten ripe. Yes, yes, “A judge will review any final settlementd.” Like hell: the pressure on the BK judge for this one to just wave through the government’s Plan of Salvation will be intense indeed; don’t expect too many revisions.
We are now seeing Star Chamber powers tacitly wielded by the American Executive. It doesn’t even matter if the action is needful—for Chrysler, it is—or even thoughtful with some hope of success. Once we have granted to any chosen clutch of Friends of Bo the right to enable binding ‘law’ rather than advance approved policy, that same power unchecked will be used for adverse, malfeasant, and in time evil ends all the more readily.
We could be doing for Chrysler the right way, but this process says we’re doing it all wrong, _quite apart from the outcome_. Worrisome, but really just a continuation of the Metastisization of the Executive begun through eight years of Dickie and Dufus.
The economic neoliberal cabal talking outcomes out the mouth of Barack Obama have their priorities, indeed their _realities_ ser-i-ous-ly inverted. Not just a Looking Glass view, it’s one as seen through glassified nucwaste, it’s so cooked. Lesse now: “Nationalization under law is ‘expropriation;’ that’s immoral.” By contrast: “Rigging outcomes under color of authority is ‘hardball dealmaking;’ that’s just business as usual, folks.” Yesss—and that’s exactly the problem, isn’t it, Larry, Timmy, Hank, and Benny?
And there is, of course, a reason for that neoliberal disequilibrium: insider dealrigging favors the top 1% of wealth who can get a seat at the table and a ‘made man’ in office, while nationalization might actually be used by the sans-culloutes _against_ the 1%. This is what the entire ideology is about, protecting and furthering the interests of the wealthiest from any government constraint. Where the government denies itself the power to contain that 1%, they are perforce obliged to negotiate with that 1% for what they, the government, can get. This is the ideology we see mad manifest in the Administration of Barack Obama.
The problem is that although you can perhaps understand why the administration took the steps they took it sets a precident.
What happens to the advisor who says starting a war with Iran is not a good idea. Will they be bullied in the same way.
The scary thing is that open discussion seems to be being discouraged. It matters not who is right, but that you are allowed to express your opinions.
Richard Kline,
As always, very incisive insights.
The situation in the United States is not unlike what we see here in Mexico. If the government brings down some big drug capo, one never knows if a triumphant blow has been struck in the war against drugs or if it’s just the government acting as executioner, taking out the competition for some other drug capo. Politicians and drug capos have become so inextricably intertwined that it’s impossible to know.
But I suppose hope runs eternal, and I keep hoping that Obama will have an epiphany. FDR, after all, had to suffer a betrayal by the “financial royalists” and stiff populist opposition before finally coming around:
The evidence was fast accumulating: the (Roosevelt) Administration’s great experiment in ‘business self-rule’ had come into full collision with the ingrained determination of business executives to hold down their cost of doing business, to push up prices if they could, and in general to run their companies as they pleased, come hell, high water, or General Johnson. Where they could turn the machinery of the NRA to their own ends, they did so–and it was they, not labor or the consumers, who held the initiative in framing the codes. Where they could not turn this machinery to their own ends, some of them complied; others fought the law or nullified it…
On the left Roosevelt must reckon with Huey Long, the Kingfish of Louisiana…
Huey Long had a fantastic utopian “Share Our Wealth” program for the country, very explicit as to objectives but very vague as to methods… No wonder the New Deal, champions of the “fogotten man,” feared Huey’s rising power! When during 1935 the Democratic National Committee conducted a secret poll on a national scale, it found that on a third-party ticket Long would be able to command between three and four million votes for the Presidency. And nobody could tell how much further he might go.~
–Frederick Lewis Allen, Since YesterdayI had hoped that Obama was a more astute student of history than he has proven to be, making it unnecessary to reinvent the wheel. Or maybe this is just a painful political and social process that the country has to go through, kind of like an alcoholic who has to “hit bottom” before he can begin to recover. Or perhaps Obama is indeed nothing more than a political hack put into office to carry water for the finance industry.
The story doesn’t hold water.
Why would a company cave in to threats, potentially costing them vast sums of money, only to turn around and risk the very same retaliation by floating allegations of non-specific threats.
How do you damage someone’s reputation? The traditional way is by exposing their wrongdoings, and that used to be the roll of the media.
If the lawyer is suggesting the White House was going to use slander, well, I’d first wonder what the White House had on the company.
Wow…this is downright Ayn Randian. So let me see if I have this straight…
We have an interview on Frank Beckman’s Radio Show…the host who likes his callers to say, “Who is John Gault?”…
In this interview, the developing Chryslerf#%k is summarized as
“The President is trying to abrogate contractual rights; if he will attack that contractual right, what right will he not attack?”
OK, so contract rights are sacrosanct, and we’re all Ayn Rand disciples…and the government just needs to stay out.
Yet, when it comes to mortgage cramdowns, NakedCap writes–just last Thursday:
“In another disheartening development on the banking front, the Senate defeated legislation giving judges the authority to modify residential mortgages in bankruptcy.”
In which case the notion of “contract rights” is essentially irrelevant, Ayn Rand is a charlatan and the government needs to step in and exert it’s power.
OK…thanks for clearing that up.
Equity Private reports that an anonymous source says Steve Rattner threatened Perella Weinberg to sick the IRS and SEC on the fund, its investors, and its employees in order to destroy them, substantially as follows:
“Who the fuck do you think you’re dealing with? We’ll have the IRS audit your fund. Every one of your employees. Your investors. Then we will have the Securities and Exchange Commission rip through your books looking for anything and everything and nothing we find to destroy you with.”
http://www.finemrespice.com/node/56
Rattner, Geithner, Summers, and Bernankeo should be very, very careful about making sure they don’t start violating the law. If Congress gets upset with them, it can have federal officials audited by the CBO and the GAO, investigated by independent prosecutors, and issued Congressional contempt citations for refusing to provide information to Congress. If Rattner, Geithner, and Summers in take illegal actions, attorneys and accountants helping them can have their licenses suspended or revoked.
The cronyism is getting as bad as the 1940s, when the IRS and other government agencies were plagued with bribe taking, influence peddling, and embezzlement.
How about this?
Obama taught Constitutional Law, so he well understands the importance of following established legal principles.
He can’t very well yield to the hedge funds here, though, for political reasons.
So he sets up a very unfair reorganization expecting it to be shot down by the hedge funds and then does some political grandstanding to appease the UAW and others who elected him.
But secretly he knows that in bankruptcy court things will swing the other way and first-lien holders will get their share, the UAW will be worse off than they are now, etc.
But it’s no trouble to him politically that way.
There. Everyone happy?
Several people have posted excellent comments on this post, but I would like to call out DownSouth for his or her excellent appeal to the moral (and ethical) ground that laws must also pass.
I feel the current legal system has run completely amok. Our laws, rules, and regulations are so large and confusing and narrowly written that it is hopeless for any one person to understand them any more.
I know that this is getting way off subject for this blog, but I was shocked to discover that in several states the building codes are not in the public domain. They are owned and copyrighted by private institutions. These laws are made by the very industry that they are supposed to regulate.
Some of you may cry foul, that this can’t possibly be true. But I suggest you look it up. When I found this out my lawyer told me I was nuts. I bet him a bottle of wine, and he sheepishly furnished me with a most excellent Pinot Noir next time we met. He too was shocked.
How can we live in a state where the public does not even control the laws? How can such a law be proper?
So I propose their is a larger problem than just the financial industry. The law, regulation, and rules process is so corrupt and broken, how can we hope to fix the financial industry before we reform our legislative process?
I have jokingly proposed that no one person should be subjected to more than 100,000 words of rules, regulations, or laws. This includes all building, tax, civil and criminal law. I am not sure this would work, but it would certainly make Washington focus on writing high level laws instead of inane legislation like Sarbanes-Oxley. They would have to periodically review case law and codify that into new laws to keep applicable case law at at a reasonable word count.
I apologizing for going off track in this post. I am not attacking the legal profession, they are working in the confines of how the “system” works. It is rather a system that is in desperate need of reform, and any attempts to fix things now may at best tie us over until the next catastrophe strikes.
Oliver
As a lawyer who has been drafting high level contracts for 20 years, I find this “sanctity of contracts” nonsense the height of hilarity. I draft long term, extremely valuable contracts, and during the process of drafting each and every one, I am mindful to constantly counsel my clients that the rights they think they are fighting for in any particular contract are mostly meaningless. Leverage is often binary and shifts instantaneously upon new information. No one is promised tomorrow, and a client who thinks that anyone other than a capo with hoods who will break your thumbs can enforce a contract is delusional. The only “protection” in making long-term contracts is making a contract with someone who you expect to be solvent in years to come and will most likely act honorably when his or her promises are called upon. I always caution my clients to view a long term contract as a road map for future divisions of gains (they are all partnerships to some degree) rather than some piece of leverage to compel proper action when things go awry. It is the rare situation where the costs of litigating a contract will not outweigh the benefits of winning and being proven right. Seriously, anyone who starts claiming “sanctity of contract” is either a thief or a fool.
Now we have an anonymous source from an obscure Internet page. Why didn’t Lauria say so? As an attorney if the following comes from him and he lies, he can have problems with his license.
“anonymous source says Steve Rattner threatened Perella Weinberg to sick the IRS and SEC on the fund, its investors, and its employees in order to destroy them, substantially as follows:
“Who the fuck do you think you’re dealing with? We’ll have the IRS audit your fund. Every one of your employees. Your investors. Then we will have the Securities and Exchange Commission rip through your books looking for anything and everything and nothing we find to destroy you with.”
the patois is not convincing. In a threatening rant since when do you spell out ” then we will have the Securities and Exchange Commission …” huh?
I don’t like the possibility this blog has been hi jacked for political propaganda.
All Obama had to do is to threaten the hedgers with widespread public outrage over their special tax treatment of income. I’m a lower class middle class wage earner and even I was appalled to see that my effective tax rate was higher that most of the wealthy hedge fund managers. I guess corporations do have a higher set of rights than I do.
I’ll add that if hedges didn’t want to support the government that is there to enforce your contracts thru taxes then you should not weep when we don’t give a damn about you.
Where were these businessmen when our Constitution our biggest overarching contract was being shredded by the War Powers Act, Patriot Act or the latest pre-election FISA act that created an ex post facto law to let telecoms off the hook? They even had the gall to even support a Supreme court decision to elect the president using an argument that even a third grader would have found repugnant. They would even continue the sham of corporate personhood “rights” thru support of his corporate attorney appointees to the court.
You are lucky the middle classes don’t take to the streets or bring out that staple of the colonists, tar and feathering on the way to revolution and insurrection.
You created a system that eliminates the rational normal course of business including ethics and openness and brought 42,000 plus lobbyists into the public’s most hallowed halls and now you ask the public to sit back and take the fall for you? Get real. I would support Atilla the Hun if it meant I could get my government back from the oligarchs who so twisted and manipulated my government and Constitution to their own greedy ends.
Ok please I have had enough with this crying that Obama is bullying these hedge funds, guess what if some of you people had have took an interest when Bush was in office we wouldn't be in this mess in the first place.
Everyone knows what bankruptcy is for, the hedge fund managers took a gamble that the interest of the US economy and hundreds of thousands of jobs were on the line compared to the risk that they made to make a fast buck, was going to convince a judge to rule in their favor,well guess what that's why a bankruptcy judge is there to decide what is fair and whats not.
They decided to go into court and they lost, But now we get alot of crying about oh the process wasn't fair to use well that's what bankruptcy is a judge decides and he has decided get over it.
And as far as contracts go i can see alot of you don't have a knowledge of US bankruptcy law the court has the right to dissolve some contracts when a company files bankruptcy and if you come into court and show you made a good faith effort at a fair deal the judge will find in your favor everytime,Chrysler and the government made a good offer the hedge fund managers declined the offer which they have the right to do and the decided to let the judge decide he ruled in Chrysler's favor now there's a bunch of crying over his decision.
And my last point on this matter is to remind all you boohooers out there to the fact that investments are not insured or gauranteed, You are aware of this right so if you get into the stock market you can gain or you can lose as simple as that.