May 6, 2009

"Economic policy or comic opera"

I 'm not trained in economics, but I am trained in the law and the rule of law still means something to me.  So I'm with Neo who writes
Where's the Outrage.

The general lack of concern about the administration’s throwing out the usual rules regarding senior lenders in the Chrysler negotiations still has the power to surprise me.

There is no way this course of action can end up benefiting our economy, or even Chrysler. The only beneficiaries are the unions (at least, temporarily; if the company ends up failing, they will go down too)
Hedge funds which hold about $1 billion in Chrysler bonds, refused the government's offer to take 30 cents on the dollar.  Legally, they couldn't: they are obligated to get the best return for their shareholders.  The best return would be in bankruptcy court where their senior position as secured creditors under the U.S. bankruptcy code would be followed.  These are  the rules of the game that everyone knows. -
Neo quotes s Bill Frezza who asks

Has it dawned on you what the consequences will be if the President gets his way and consideration is given to creditors not according to contracts, rules, and established legal precedents but according to which group is most politically favored? And do you believe the President advanced the cause of economic recovery by publicly excoriating “speculators” who once hoped to profit by lending money against hard assets to an ailing company?

In Chrysler’s case the TARP-backed lenders – that is, banks-too-big-to-fail now living on the dole – chose to kowtow to the executive branch. What they “sacrificed” was the economic interests of their shareholders in favor of the political interests of their management. The non TARP-backed lenders, in this case a handful of hedge funds trying to protect the pension funds, university endowments, and insurance companies that invested in them, balked at getting lower consideration for their secured debt than the UAW is getting for its unsecured obligations. Hence, a trip to court and a tongue lashing by the president.

This is a colossal abuse of power against the rule of law.  Megan McArdle asks

when 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?  Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group. 

One hedge fund leader blasted the "bullying" and "abuse of power".  Hedge Funds outraged at Obama Bullying But Also Cowering in Fear

Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.
The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.
Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments here are backwards and libelous.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

And what do we taxpayers get out of all of this?  Bill Frezza again.

A doomed third-rate car company majority owned by its militant union run by Italian management building congressionally designed “green” cars no one wants to buy financed by taxpayers into perpetuity because no private investor in their right mind will touch the company with a ten foot pole. Is this supposed to be economic policy or comic opera?

Posted by Jill Fallon at May 6, 2009 10:47 AM | Permalink