President Obama scolded investors who refused to just accept what he said they should take for their Chrysler bonds, saying: “I don’t stand with those who held out when everyone else is making sacrifices.” According to the New York Times, one group, Perella Weinberg Partners, was “chastened” and “abruptly reversed course”.
How should we decide who makes what “sacrifice” when a corporation can not meet all of its financial obligations? In the U.S., we use bankruptcy court. Courts are effective for this purpose, in part because they are somewhat more insulated from immediate political pressures than are other agencies of the government. The reason that this matters is that investors require stability of rules in order to agree to put money at risk. This is Rule-of-Law 101. Given that a key political constituency that helped elect the President, unions, are a party to the Chrysler dispute, the potential for undermining the rule of law is obvious and severe.
Seeking Alpha reports an interview in which the eminent lawyer representing two of the hold-out investment funds, Tom Lauria, the Head of Restructuring at White & Case, claims on-the-record that:
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.
Here’s the list of major banks that apparently led the negotiations and agreed to go along with the desires of the President: Goldman Sachs, Citigroup, JPMorgan and Morgan Stanley. Do you notice any obvious commonality? All are major recipients of TARP funding. Unlike, say, the hold-outs. Perella Weinberg, the first of the hold-outs to crack, is a boutique firm that has a large contract advising on the execution of various government bailouts.
Funny how you tend to win negotiations when you: (i) have operational control of the armed forces, and (ii) are negotiating with entities that are directly dependent on your using your monopoly on coercion to collect money from taxpayers and give it to them. You just tell the other side what they’re going to accept, and never mind any legal technicalities.
For more, see the excellent post by Megan McArdle in which she gets to the key question:
[W]hen did it become the government’s job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?