Friday, May 1, 2009



President Obama’s scrofulously disingenuous demonizing the hedge funds, mutual funds, and other secured debt holders of Chrysler was nothing short of appalling. According to Mr. Obama, “a small group of speculators whose decisions endanger Chrysler’s future…decided to hold out for the prospect of an unjustified taxpayer-funded bailout.” He went on to tell us “I don’t stand with those who held out,” lest we benighted types thought that he would stand with such obvious Snidely Whiplashes. Mr. Obama was bested in his vitriol by Representative John Dingell who called the holdouts “rogue hedge funds” and “vultures.” Mr. Dingell assured his listeners that such recalcitrants “will now be dealt with appropriately in court.” Hmm… Thank the good Lord for separation of powers, eh?

President Obama understands bankruptcy and contract law better than I do, so he surely knows that for the last, oh, century or several, that secured lenders (i.e., the villainous buccaneers in this case) stand in front of unsecured lenders (i.e., the UAW and the government in this case) and way ahead of parties that might be interested but who have, as yet, no skin in the game (Fiat in this case). So he knows he is vilifying the secured lenders for something they have the right, indeed, in most cases the fiduciary obligation to do.

Some might argue that the government’s offer of 33 cents on the dollar to the secured lenders was a good deal, that the security these lenders are counting on is worth little, especially if Chrysler is forced out of business, and might be worth less than nothing once environmental issues have to be addressed. Given what I know of the industry (which, at the expense of sounding somewhat bragadocious yet realistic, is probably far greater than that of most of the holders of the secured debt), I suspect this argument is true. (See my next (or last, depending on one’s perspective) post on Chrysler’s prospects.) But that doesn’t matter. The holders of this debt bought the debt based on any number of assumptions, one of which was doubtless that the collateral was good, and they are entitled to test those assumptions in court. Further, from what I know of bankruptcy and contract law, that one is secured is more important than by what one is secured because being secured gives one a senior claim. In any event, these lenders are entitled, and indeed are obligated to press their arguments in court.

What does the administration’s unilaterally declaring hoary principles of law invalid as it sees fit do for the investment climate? As a long time friend and loyal reader of the IP (and a bankruptcy attorney by training) said in a note, perhaps the American people have been wise to not save and invest if the terms of those investments can be altered, and their value made to vanish, by presidential fiat.

The Chrysler situation presents yet another series of examples of hubris that is endemic to the Obama administration and to government in general. Contract law can be changed at will if it suits the administration’s purposes. One of the largest, if not the largest, bankruptcies in U.S. history can be equated to a mere rinse and completed in 30-60 days. The Obamacrats can run one of the most complicated businesses in the world though they have no experience doing so. The administration can make people knuckle under to its whims by questioning their patriotism and subjecting them to public ridicule…or worse. We can only hope that the prototypical Greek tragedy plays itself out and this hubris leads to the Obama administration’s downfall, or at least its comeuppance. A little humility on the part of the young president and his insular team would serve our nation well.

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