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Chrysler Bankruptcy, Obama, and the Rule of Law

King Banian persuasively argues that this statement by President Obama on Chrysler’s bankruptcy was “utterly contemptible.”

While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them. I stand with Chrysler’s employees and their families and communities. I stand with Chrysler’s management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don’t stand with those who held out when everybody else is making sacrifices. And that’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success.

King points out that the holdouts that Obama was excoriating include Yale University’s endowment, the University of Kentucky’s endowment, and the Bill and Melinda Gates Foundation.  Their crime?   Investing in Chrysler when no one else would and insisting that they be treated as senior creditors under existing bankruptcy law.

They did so under the expectation that the rule of law would apply in America, that their place in line under bankruptcy law was purchased with that debt. President Obama’s ire over their unwillingness to give away that place in line — a place purchased by those endowments and foundations and pensions not for themselves but for students, pensioners and grant recipients — is an indication that the president thinks his noble ends are superior to theirs.

He points to a WSJ editorial arguing that “bankruptcy court, and not the political arena, is where Chrysler belongs.”

It’s especially rich for Mr. Obama to blast the creditors for seeking “an unjustified taxpayer-funded bailout” while offering the UAW a 55% majority stake in Chrysler. He also praised the large banks that hold most of the Chrysler debt and supported the government plan. But of course J.P. Morgan and the other big banks are also recipients of billions of dollars in taxpayer cash and have a strong interest in playing nice with their creditor, Uncle Sam Obama.

The Chrysler creditors at least represent teachers, pensioners and retirees, among others. The Administration is advancing its own social and political agenda through its ever-deeper entanglement with Chrysler and General Motors. That explains why the government is giving 55% of the new Chrysler to the UAW’s retiree-benefit trust, a junior creditor, while those ahead of the trust in line get a mere 30 cents on the dollar.

One hopes the bankruptcy judges follow the law rather than giving in to this nonsense.

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About James Joyner
James Joyner is the publisher of Outside the Beltway, an associate professor of security studies at the Marine Corps Command and Staff College, and a nonresident senior fellow at the Atlantic Council. He's a former Army officer and Desert Storm vet. He has a PhD in political science from The University of Alabama. Views expressed here are his own. Follow James on Twitter.

Comments

  1. PD Shaw says:

    Or the Bankruptcy Judge will get appealed to the district court, etc., etc. Not the makings of a quick bankruptcy.

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  2. Alex Knapp says:

    There are so many things wrong with King’s analysis from a legal perspective that I don’t know where to start… I might have to write something later today if I have the time.

    Like or Dislike: Thumb up 1 Thumb down 0

  3. PD Shaw says:

    The White House reportedly directly threatened Perella Weinberg to accept the deal or face the full force of the White House press corps to destroy their reputation. Perella Weinberg dropped their objection.

    Audio Link

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  4. sam says:

    Here’s the NY Times story I linked yesterday on Perella Weinberg et al:

    The Lenders Obama Decided to Blame

    PS…James, can you fix the comment preview thingy? TIA

    Like or Dislike: Thumb up 0 Thumb down 0

  5. sam says:

    Hmmm. Would it be correct to say that the UAW is being treated as a preferential creditor here? I ask this because Chrysler’s contribution to the UAW’s retiree-benefit trust represents a form of compensation (like a wage) owed by Chrysler via a union contract to the workers, and employees, according to wiki article cited, are treated as preferential creditors.

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  6. sam says:

    Sorry, this was as munged in the preview, I had added: Are preferential creditors given priority over secured creditors in US bankruptcy proceedings?

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  7. [...] by President Obama on Chrysler’s bankruptcy was utterly contemptible. Excerpt from: Chrysler Bankruptcy, Obama, and the Rule of Law Share and [...]

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  8. JKB says:

    Well every experience is a learning opportunity. After this little experience with Obama-ference, what fool will invest in any company that has attracted the interest of the Whitehouse or has a large politically-connected union liability?

    What this experience has taught is that the rule of law is subject to partisan interpretation and the hard fought rules on unwinding a failed enterprise are of no consequence when the politically connected want to boost their priority.

    Chrysler is done and the creditors are at the whims of the administration. They have little power now. But they and any one with foresight will take this into account in future investments. But it does appear that the administration is willing to hold a gun to people’s head and make them an offer they can’t refuse.

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  9. sam says:

    Can you answer the question I asked, JKB?

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  10. Phil Smith says:

    There are so many things wrong with King’s analysis from a legal perspective that I don’t know where to start… I might have to write something later today if I have the time.

    Bullshit. He’s right on the money. Put up or shut up.

    Like or Dislike: Thumb up 0 Thumb down 1

  11. Greg Ransom says:

    There’s a reason why Hayek’s _The Road to Serfdom_ is one of the top handful of backlist books sold at Amazon …

    Perhaps the central theme of Hayek’s book is how the rule of law gives way to expedient politics of BSing politicians ..

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  12. JKB says:

    Are preferential creditors given priority over secured creditors in US bankruptcy proceedings?

    While I can’t speak to bankruptcy law, if your premise that the UAW is a preferential creditor is correct then clearly the answer to your question is “no”. Otherwise, there would be no need for the Whitehouse to intervene in the normal execution of the bankruptcy nor would the “greedy” creditors pursue a claim where they have no hope in the face of current law.

    The very fact that efforts are being made to use the power of the executive to force “voluntary” subordination of senior claims outside of bankruptcy court indicates UAW claim is junior to those claims and the administration is seeking to boost the priority of their political supporters claim outside of established law and practice.

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  13. PD Shaw says:

    Are preferential creditors given priority over secured creditors in US bankruptcy proceedings?

    Not that I’m aware of. The priority claims like domestic support and taxes only have preference over unsecured creditors.

    Like or Dislike: Thumb up 0 Thumb down 0

  14. Dave Schuler says:

    To reiterate something that Drew mentioned in a previous comment thread, if things work themselves out this way it’s going to have a chilling effect on investment going forward. Risk assessment is being made impossible. The level of risk is being changed after the fact.

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  15. [...] Joyner (I’m quoting extensively, here: I’m in a hurry): King Banian persuasively argues that this statement by President Obama on Chrysler’s bankruptcy was “utterly contemptible.” While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them. I stand with Chrysler’s employees and their families and communities. I stand with Chrysler’s management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don’t stand with those who held out when everybody else is making sacrifices. And that’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success. [...]

    Like or Dislike: Thumb up 0 Thumb down 0

  16. Phil Smith says:

    And it doesn’t matter any longer if you “had your snout in the government trough” or not, as some of Obama’s team of apologists has argued. Tom Lauria, a bankruptcy lawyer involved in this case states:

    Lauria: Let me tell you it’s no fun standing on this side of the fence opposing the President of the United States. In fact, let me just say, people have asked me who I represent. That’s a moving target. I can tell you for sure that I represent one less investor today than I represented yesterday. One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the 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.

    Beckman: Was that Perella Weinberg?

    Lauria: That was Perella Weinberg.

    I can’t wait to hear what sort of pathetic excuses some of the local puppets come up with.

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  17. anjin-san says:

    under the threat that the full force of the White House Press Corps would destroy its reputation if it continued to fight

    Sorry, but this sounds like utter crap. The White House Press Corps does not take marching orders from the administration.

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  18. Phil Smith says:

    So, since you can’t dispute the threat, you dispute the effectiveness.

    However, your position is fallacious. They don’t have to “take marching orders”. All they have to do is repeat whatever they’re told. If you don’t think the WH press corps is enough of a stenographer pool for that, well, you’re simply a fool.

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  19. anjin-san says:

    If you don’t think the WH press corps is enough of a stenographer pool for that, well, you’re simply a fool.

    Yawn. Come back when you have something beyond stock right wing drivel…

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  20. Phil Smith says:

    Non-response from puppet noted.

    It isn’t “right-wing”. The left made the exact same accusations for the first six years of Bush’s administration.

    Come back when you have, well, anything at all.

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  21. Phil Smith says:

    And incidentally, it’s already started.

    As far as the “threat” Lauria alleges, it sounds an awful lot like someone told his client that public opinion would not likely be favorable to people who would obstruct a fair deal to save Chrysler. That’s not a threat, it is a reality.

    Tommy Christopher - member of the White House press corps, dutifully spouting administration talking points while denying that anyone would spout their talking points.

    The fairness of the deal is exactly what is being disputed. This country has a legal mechanism for determining what is and isn’t fair in bankruptcy proceedings. It isn’t the executive branch. It’s bankruptcy court.

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  22. Peter says:

    It’s funny that state as a title Obama and the rule of law…there is a RULE of LAW to follow and it isn’t Pres. Obama threatening creditors to take a deal. Our forefathers were wise in the separation of branches of government to forestall any kind of injusty and tyrany. We do not have a kingdom – this is still a democray.

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  23. anjin-san says:

    Non-response from puppet noted

    Right Phil, everyone who does not see things just as you do is a puppet/tool/fool… Of course. Well, we wait for you to further dazzle us with you cut & paste skills. Gosh you even have a link to a site were a lawyer says the evil white house threatened his client. Who says wingers don’t dig the internets?

    You sound like someone who has a lot of anger, a lot of information from biased websites and not a lot of life experience. Here is a hint. 90% of what lawyers say in their public statements is total garbage. It exists only to serve the needs of their client (which they give a damn about as long as they are getting paid, and not one second longer) and to promote the career of the attorney in question.

    Run along and chat with the 5 or 6 other remaining members of the GOP. They all hang out on “I hate Obama Island” or wherever you are getting your boilerplate nonsense from…

    It is interesting that the right is suddenly alarmed about the need for the rule of law in this country after an 8 year nap.

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  24. Phil Smith says:

    In other words, you cannot refute the logic, the facts, or any other aspect of what I’ve “cut and pasted”. In fact, you have presented no counter-arguments at all, only a string of informal logical fallacies, from a variety of particularly lame ad hominems, to poisoning the well, to tu quoque.

    If you have any facts that are counter my statements, or logical refutation, by all means set me straight. In the meantime, you have nothing at all, as was noted. I stand by my previous assessment of your character.

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  25. anjin-san says:

    In fact, you have presented no counter-arguments at all,

    Don’t really find what you are saying interesting enough to burn much daylight on. Blah, blah, blah, Obama sucks. Blah, blah, blah, you are all fools and puppets…

    Can somebody text me when the varsity shows up?

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  26. Phil Smith says:

    Don’t really find what you are saying interesting enough to burn much daylight on.

    And yet you continue to respond.

    A couple weeks ago, you allowed as how you like to argue on the internet. So do I. What you’re doing right now, however, isn’t arguing. Whenever you decide to start, “text me”. You’ll get varsity replies when you bring something other than second-rate traveling-squad smack.

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  27. PD Shaw says:

    I generally share the skepticism of what an attorney may say to advance the interests of their client. But Tom Lauria is discussing a former client, whose agreed to accept the deal. So unless Mr. Lauria is seeking to be sued by his former client, I think the statement has to be largely correct.

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  28. Zelsdorf Ragshaft III says:

    Anjin has been around here for a long time. He is a lot like flatulence. He makes a little noise really stinks up the place but there is little substance to him. When there is it tends to be sh*t.

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  29. Grewgills says:

    I generally share the skepticism of what an attorney may say to advance the interests of their client. But Tom Lauria is discussing a former client…

    He still has clients whose interest it does forward. Anything a lawyer says publicly about a case he is working on should be taken with a shovel of salt. Of course anything a politician says should likewise be taken with a shovel of salt. We are left with a he said, she said situation with a politician and a lawyer edited by a partisan. This leaves us with very little other than our preconceptions to guide us.

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  30. Drew says:

    Sam –

    “Are preferential creditors given priority over secured creditors in US bankruptcy proceedings?”

    I don’t know what a “preferential’ creditor is. But employee comp stands behind the securedes.

    Interestingly, (as a side note) unpaid payroll taxes can be a personal Board member liability. The government always gets there’s.

    I see Warren Buffet has weighed in making the same point about the effect on lending I did. I thought that guy might have some promise.

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  31. [...] Chrysler Bankruptcy, Obama, and the Rule of Law (outsidethebeltway.com) [...]

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