Bankruptcy of Chrysler driven by Barack Magoo

“We’re throwing the rule of law in bankruptcy under the bus,” Kaufman said, likening the administration’s move to a “banana republic” tactic.

Bankruptcy of Chrysler driven by Barack Magoo

By LOREN STEFFY May 12, 2009 Houston Chronicle

Chrysler’s bankruptcy is supposed to be fast, like a Formula One lap through court.

In discussing the filing, President Barack Obama laid out a plan in which Chrysler would emerge from court protection in record time sporting fuel-efficient new models, a shiny new balance sheet and safety features for workers, suppliers and dealers.

But less than two weeks after taking the wheel, the president looks less like Mario Andretti and more like Mr. Magoo, shaking a verbal fist at dissident bondholders — he dubbed them “speculators” — and accusing them of hogging the road to Chrysler’s recovery.

In his myopic race to reorganization, Obama may yet lose control of the entire economic recovery. The speculators he was quick to deride are mostly private equity firms that invested billions in Chrysler’s debt even after it became clear the company was in deep trouble.

That investment came, as most do, with an assessment of the risk that the company might go bust. That assessment, in turn, relied on our bankruptcy laws, under which creditors are entitled to fair treatment in a reorganization.

Rewriting the rules

But in Chrysler’s case, the administration decided to rewrite the rules. It said the United Auto Workers would vault ahead of the Chrysler debt holders in seniority, giving the union a recovery of about 43 cents on the dollar while the “speculators” get 28 cents.

“I’m sure it’s politically wonderful to save union jobs and stick it to the man on Wall Street, but I worry about the systemic implications of all this,” said Peter Kaufman, president of the Gordian Group, a New York-based investment firm that finances corporate restructurings.

The administration is trying to orchestrate a quick sale of Chrysler to Italy’s Fiat and the UAW. Under the Bankruptcy Code, though, those sorts of rapid asset sales can’t be a reorganization, which the Chrysler deal clearly is.

A reorganization requires the vetting of all creditors’ claims and ensuring that each group recover at least as much as they would if the company were liquidated.

‘Banana republic’ tactic

“We’re throwing the rule of law in bankruptcy under the bus,” Kaufman said, likening the administration’s move to a “banana republic” tactic. “We’ve got a very well-developed set of bankruptcy laws that let lenders know what their downside is.”
Chrysler, of course, is just the beginning. Already General Motors is circling the courthouse, preparing for a possible filing as early as June 1.

Beyond the auto industry, though, the Chrysler case may spook potential investors as companies are seeking capital and the economy appears to be inching toward recovery.
How will potential investors calculate their risk without the assurance of the bankruptcy process, and how much more will they charge for assuming that added investment risk?

“The lessons of Chrysler will be looming large,” Kaufman said. “The implications here are even before you get to bankruptcy.

Are lenders going to be willing to put money in at all? They won’t have the comfort that the rule of law in bankruptcy will always be followed.”

Just a few weeks ago, Treasury Secretary Timothy Geithner insisted taxpayers had to foot the bill for millions of dollars in bonuses at AIG because those payments were stipulated by contracts, and contracts are sacrosanct. So the rules apply when it comes to bonuses and backdoor bailouts for AIG clients, but not Chrysler’s creditors.

Those sorts of haphazard decisions create what’s known as political risk, and capital tends to scamper from political risk like frantic chickens fleeing an out-of-control jalopy.

In the name of a speedy Chrysler bankruptcy, we may wind up losing the race to recovery.

And if this weren’t bad enough:

CEO Confirms Treasury is Calling Shots at GM

May 11, 2009 Heritage.org

In a surprisingly frank statement this morning, General Motors CEO Fritz Henderson confirmed that the Treasury Department is calling the shots on the company’s on-going restructuring. As reported by the New York Times, Henderson stated that GM was told by the Treasury Department to offer bondholders only up to 10 percent of GM’s equity in return for $27 billion of debt.

“They didn’t support us going above 10 percent,” Mr. Henderson said. “We went to the maximum that they permitted us.” Why 10 percent? According to Henderson, Treasury didn’t give a reason.

Washington’s control over GM isn’t too much a surprise — it’s been clear ever since Rick Wagoner was fired by the White House in favor of Henderson that the government was settling into the driver’s seat. But Henderson’s comments today provide unsettling confirmation of the degree to which Washington is now in control at the erstwhile private company.

No wonder the banks are scrambling to turn back their own TARP bailout money.

Let's not ever forget that American automobile companies and their stockholders and bondholders, who are being treated like criminals by the Obama Administration, are in distress due to Democrat policies, $4 gasoline and the housing and credit crash.