Chrysler Bankruptcy Exposes Dirty Politics

Declan McCullagh: Obama Calls Creditors Who Lent Money To Chrysler "Speculators," But What About the Rule Of Law?

(CBS)  Chrysler's sad tale that led to this week's bankruptcy hearing in New York is not only an important business and political story. It also encompasses morality, the rule of law and strong-arm tactics used by some politicians.

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."

Rep. John Dingell, a Michigan Democrat, sent reporters a statement calling the creditors "vultures" and "rouge hedge funds." Michigan Gov. Jennifer Granholm piled on, taking aim during her radio address at a "few greedy hedge funds that didn't care how much pain the company's failure would have inflicted on families and communities everywhere."

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.

If those politicians thought about this a bit more, they'd probably realize their mistake. Creditors didn't force Chrysler's management to head to the capital markets and beg for funds: It was poor management, uncompetitive wages, and a union that opposed pay cuts.

Without those greedy "vultures" and "rogues" injecting sorely-needed cash into a business they knew was risky, Chrysler might have been forced to declare bankruptcy much earlier. (And now that lenders know they may be demonized by the president, will they be as likely to help out next time?)

One of the better critiques of this unusual situation comes from Clifford Asness, managing partner at a $20 billion hedge fund named AQR Capital Management. His essay responds to what he called "toxic demagoguery" and says "the president's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him."

On Wednesday, the list of creditors standing up for their rights shrunk and now includes OppenheimerFunds, Stairway Capital, Schultze Asset Management, Group G Partners, and Foxhill Capital Partners - which hold a combined $295 million of about $6.9 billion in secured Chrysler debt.

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 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.

In the Federalist Papers in 1788, James Madison wrote that "laws impairing the obligation of contracts are contrary to the first principles of the social compact, and to every principle of sound legislation." Unfortunately, Washington politicians seem to pay little attention to history, morality, or the rule of law.

[thatchmo62]

Hey Obama! As someone who has purchased Chrysler vehicles regularly for the past 27 years, and, as someone who will be trading in his Dodge Grand Caravan soon, I will not consider any Chrysler cars, vans or trucks (or GM either) from hereon. This whole takeover of two of the big three makes me sick. I'll be buying a Ford or Toyota next time around.

[vetsence]

Whether it be the hedge funders or the unions, all have had to take a loss. Maybe we have too many greedy hedgefunders. Take your 29 cents and wait for a brighter day. This generation of vipers will have to learn the hard way with a heal into the head. Now, get some good managment and plow ahead.

[shedhouserob]

Oprah is worth 3 billion dollars and she doesn't want to pay taxes on her investments income altho that is what is called profit. The average American worker isn't making as much as he was in the 70's but the upper class (Oprah,,etc are doing pretty good.) If this country would have kept up with the middle class America they would all be making 100 g's and we would have still been with in the ratio. But the old greed of mankind takes over and if it's a 1/10 of a cent cheaper the computer points to China and the CEO buy!

[shedhouserob]

3 things that have no concience. a P##$k, a computer and a corporation.

[shedhouserob]

when I was a young lad of 21 (I'm 74) my father in law said that the unions are like a clock they start out doing good and protecting the American worker and as the hand goes around and winds up on 12 again they are too powerful and corrupt. UAW are there now. They with their demands over the years, wages, retirements health are the reason the company they work for is bankrupt. You can't produce a car that competes with Toyota and the cost of a worker is $75 an hour while Toyota is 1/2 of that!

[homernixon]

How many times are you idiots going to re-post the same lie?

Secured credit lines are being extended to individuals and business every day. This business with Chrysler has had NO EFFECT WHATSOEVER on business as usual.

Instead of repeating the lies crafted by Wall Street propagandists, why don't you go an apply for a secured line of credit?

That is, if you weren't all a bunch of unemployable morons that don't have the balls or the brains to do anything but re-post your favorite political lies on the cbsnews.com boards.

Credit headlines from this week:

Sears Swings to a Profit and Secures New Credit
J. Alexander?s Announces New Credit Facilites
ZTE Bags Another $10B in Credit
Canwest raises $175M in new financing
NHL is latest to get a credit deal done
Golden Star Resources secures $30M credit line
THQ Announces Commitment for $35 Million Senior Secured Credit


Get a f'n clue and a job!!!!!

[kstornado]

I'm posting this information everywhere I can so people will be aware.... I sold my Chrysler sebring last month and received a refund in the amount of $284.00 on the Warranty and Gap insurance that I got when I purchased my sebring in 2004. I deposited the checks in my bank and guess what....THEY BOUNCED! The checks were written on a FROZEN/BLOCKED account. ***! Isn't that illegal!!

I immediately called Chrysler because now I'm out almost $300.00 that I've already paid bills on! After 20 minutes on the phone trying to understand foreign accents I'm supposed to be receiving replacement checks (yea checks) in 10 to 14 days!! But they won't pay for the bank fees that I now have to eat. Chrysler even had the nerve to tell me to call my bank and ask them to waive the fees. Again...***. It's not my banks fault that Chrysler wrote me 2 hot checks, not my fault that Chrysler wrote me 2 hots checks....IT CHRYSLER'S FAULT!

At this time, I would be very nervous to purchase anything Chrysler. Its the little people like us who are going to suffer. Thank God I traded in my Chrysler for a Suzuki. I guess it worked out for the best that Chrysler wouldn't give me a good deal and Suzuki could. What does that say? Anyone who currently owns a Chrysler and purchased an extended Warranty and Gap insurance beware you could be screwed in the end!

[finan1]

Some of you don't get it. These funds are owned by you and me. When I invest in bonds, and the bond fund takes a hit like this, I lose. You seem to think that these funds are owned by a few rich companies. No, they are owned by the people with 401Ks and private investors. These are the people that save and are responsible for creating wealth in our economy.

So in essence what has been accomplished by a few Chrylser employees has now sent ripples throughout the entire bond market. Instead of making credit easier, now it will make it more difficult for companies struggling to get credit. Bond values are plummeting just like 401Ks and all of the equity here in the US.

The dems must get over their infatuation with the poor, or else the US is going to be an entire nation of excactly that - an entire nation of poor people.

[policywank]

What is it that Mr. McCullagh is so upset about? Congress passed no law. The President issued no executive order. What we had were opposing camps exercising their right to free speech. If the senior creditors are neither clever nor persuasive enough to craft a case that the public would find compelling, they were still free to pursue their interests in court. They freely chose not to do so. Mr. McCullagh should save his wrath for the creditors who abandoned his crusade against the workers of Chrysler.

[peekay19]

To Bouyancy101,

You did not vote for Obama, never campaign for him, and has never been a democrat. You don't have the makeup of a democrat, and you want join the party that survive on the suffering of others? The party that vehemently opposed: the civil rights movement, workers rights, financial aid to students, and subsidized student loans. Programs that offer equal opportunity to everyone, including poor people to be the best that they can be. Spare me your lies; I think you've found a party that fits your psychograph.
Do you know how many high paid lawyers are the pay rolls of these investors, if the government did anything illegal, they would have been court litigating. I bet you so closed minded so you don't how often the so call "victims" investors take advantage of the little guy. The author tried humanized the investors, trust me these are hedge funds and mutual funds who only care about their percentages and commissions.
If the government doesn't fight for the workers, who's going to fight for them?

[boyancy01]

I live in PA and was buying a 300M at Reedmans Auto Center this weekend (Was supposed to have it this Saturday, today). After reading this article, I called up the Chrysler dealer, and told them that I want to cancel. They bloated, bargained, and everything, even knocked off $1,900 off the sticker price. The guy than started talking about his family, his employees, and the American economy. I said no, absolutely no. I will not invest in a company that engages in dirty politics. It wasn't the money I was spending, it was the ethics of their business.

I voted for Obama, but I wish I hadn't. I campaigned for Obama, I wish I hadn't. I donated to the Democratic Party, I wish I hadn't. I told others to vote for Obama, I wish I hadn't.

Congrats Republicans, today I join your side. Don't mess it up this time :)

[kevsan1]

If I recall, Declan advocated not too long ago that all the auto companies should be forced into bankruptcy. Now he's saying it's a bad idea? Another moron posting on the Internet is what he is. What did he think would happen when bankruptcy occurs. Everyone takes a hit.

And he completely ignores the workers and common folks who always get the shaft from investors, banks, etc., who, we should always remember, were behind all the massive layoffs and movement of jobs to other countries just so they can see maximum earnings for no sweat investment on their part. Management often does the bidding of the investors. They are getting their reward now for our suffering. 29 cents on the dollar is really too much for them. I hope the judge says they get nothing, seizes their assets and/or throws them into jail for contempt. Wish we could throw them in for theft, too.

[peekay19]

Good, but disingenuous piece. For starters, without the government the bondholders would have been in a worse situation than the .29 that the government is offering them. One way that a party to a contract can be discharged of his or her contractual duty, is through bankruptcy. If it was unlawful for the government to put the plight of the workers above the bondholders, they would have been in court litigating. You have to be a person of low intelligence to buy into what Thomas Lauria of White & Case's bankruptcy practice, is selling. The white house has the right to defend its action as well as respond to criticism, doing just that, does not amount to destroying ones reputation. Anytime a company goes into bankruptcy, the only beneficiaries are people like Lauria. The author is making the bondholders out to be victims, no they're not. For years both hedge and mutual fund managers have been complicit to bad management decisions and unconscionable CEO salary.
The only real victims or losers here are the workers, who gave everything they've to Chrysler, only to be robbed by investors who are more concern about short term results and inefficient and selfish managers.

[brianbwb-2009]

"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."

Disingenuous attempts at heart-string tugging. Mr McCullagh, everyone knows that these creditors simply allocated funds to the fund managers based on promised returns, it was the fund managers who determined where it would go. Your use of "human shields" behind which to hide a blatantly fascist agenda fools very few at this point.

[brianbwb-2009]

"Without those greedy "vultures" and "rogues" injecting sorely-needed cash into a business they knew was risky, Chrysler might have been forced to declare bankruptcy much earlier..."

And the impact would have been less than if they declared it later, and we would now be further along the path of recovering from their demise. McCullah seems to think that wasting money trying to delay the inevitable is somehow a virtue.

" (And now that lenders know they may be demonized by the president, will they be as likely to help out next time?)"

They didn't help out this time, and there is no reason to think that they would ever "help out", their kind of "help" is not needed. They actually exacerbated the problem. McCullah might serve his point better by explaining just what "help" these hedge funds actually are.

Come on CBS, you can get better contributions than this, don't "Chrysler" yourselves by foisting this faeces upon the public as credible product.

[brianbwb-2009]

"... behaves like he is still running ACORN, he is not only screwing GM and Chryslar, he is screwing the entire credit markets." Posted by biggoofer

A few points, you are sooo afraid of the grassroots organization called ACORN, it is funny, but when was Mr. Obama actually running ACORN? I believe that comment to be a lie.

GM and Chrysler "screwed" themselves, making overpriced products that no one wanted, ignoring real trends, and laying off the core of the car buying public. You are deluded if you think that they can continue to survive making products that fewer and fewer can afford, or even want. Regardless of how much credit they might borrow against, it means nothing if no one can buy their product.

As far as credit goes, thinkers from Thomas Jefferson to Marcus Garvey, and many others knew long ago that credit was only a step towards slavery, and tried to discourage over-reliance on it, you however appear to support slavery, and posit that credit markets are something that should be allowed to prey on the public with impunity. Your entire concept is flawed, as proven by the current economic situation.

[brianbwb-2009]

"With Obama breaching the rule of law as he see's fit, then law no longer governs and we are replaced with absolutism, and if Obama is able to roll over these 'tycoons' then what are we to him?" Posted by herodotus1

An idiot neo who would lie and accuse the President of something he did not do.
If President Obama really felt like rolling over "tycoons", he could have nullified their contract, which is within the powers of a president, but is something which he did not do.

If you are going to assume that those who don't share your delusions have not attended business school, and inferring indirectly that you have, then perhaps you should request a refund from whatever business school you attended.

[brianbwb-2009]

"...In the Federalist Papers in 1788, James Madison wrote that "laws impairing the obligation of contracts are contrary to the first principles of the social compact, and to every principle of sound legislation." Unfortunately, Washington politicians seem to pay little attention to history, morality, or the rule of law."

Mr. McCullagh is sorely mis-educated if he thinks that "the federalist papers" are law, they are not. The Constitution however, is the law, and in it there are provisions for "force majeure" which says that in the event of alterations to contracts as result of government fiat, the contract is no longer necessarily binding to any party involved.

He also dismisses the fact that it was indeed the greedy hedge-fund speculators that blew the deal by refusing to make the same sacrifices everyone else was being asked to make.

Those buzzards are only lucky that the WH didn't invoke "force majeure" to nullify any obligations to those funds, and let the gamblers eat their losses.

McCullagh is one to whine about the rule of law, many of his articles indicate that he has no problem with ignoring the rule of law if the act that breaches it agrees with his agenda.

To CBS, you can save your stockholders money, by not paying for such idiotic claptrap as is so often submitted by Mr. McCullagh.

[elz523]

You attempted to sound a bit more eloquent in your defense of Mr.Obama but again failed misserably to cover up that you have never taken a business law class IN YOUR LIFE!

There is something called contract law that is the fundamental fabric of business. As Madison put it (you know who that is right?): it is the first principal of a social compact. With Obama breaching the rule of law as he see's fit, then law no longer governs and we are replaced with absolutism, and if Obama is able to roll over these 'tycoons' then what are we to him?

I am glad someone with clout (Cliff Asness) is able to put in the lime-light the very real threat this poses to capitalism and liberty at large.
Posted by herodotus1 at 2:43 PM : May 8, 2009

Obama has not breached contract law. The contract still stands. The bankruptcy judge will decide this and that is how the rule of law works. The administration has put it's negotiating leverage behind this, that's all.

[elz523]

Nothing here alters the fact that the investors knew they were buying junk bonds when they bought them. Junk bonds carry a high interest rate because of the very real risk of non payment, etc. The savy junk bond investor knows full well that his investment is subject to extremely high risk and is prepared to lose it all. So no sympthaty for these investors is justified.
Posted by ramos1129 at 2:55 AM : May 9, 2009

Agreed and we might add that the alternative would be to see Chrysler liquidated. That is, after all, how the secured creditors would get the most return. They knew and understood that it was unlikely the government would let the company fail and that they would be dealing with the US government at some point in any event. The bondholders are really asking that Chrysler be allowed to fail and put hundreds of thousands out of work, so that they can receive that additional $.21 on the dollar. The government is working to find a solution where everyone gives so that everyone can gain. No one will be happy with the result, but it was necessary to have the biggest positive impact. It should be remembered that the unions gave up substantial concessions as well.

I will give MR McCullah credit this tiem for at least making a logical argument and keeping the right wing hacks best friend -the straw man- out of this one.