Obama Declares War on Capital

[CSpec]

Source: http://article.nationalreview.com/?q=ZmNjM...jgyOWY5NGYyNWI=

Obama Declares War on Capital

Obama’s first 100 days have occasioned a number of dispiriting moments, but yesterday’s attack on Chrysler’s bondholders represented a new low. In a speech announcing the company’s bankruptcy filing, President Obama blasted “a group of investment firms and hedge funds [that] decided to hold out for the prospect of an unjustified taxpayer-funded bailout.” That is nothing short of a lie. The consortium wasn’t holding out for a bailout. It was holding out for a bankruptcy.

The administration tried desperately to keep Chrysler out of bankruptcy court; in the process, it demonstrated exactly why that institution is so valuable. Obama’s auto task force attempted to browbeat Chrysler’s creditors into taking a terrible deal in order to spare the United Auto Workers union as much pain as possible. The large banks, which owe their continued existence to the $700 billion Troubled Asset Relief Program (TARP), caved and agreed to take a massive haircut on their secured Chrysler debt. But a group of smaller firms, calling themselves “The Committee of Chrysler Non-TARP lenders,” refused to play ball.

In a statement released yesterday, the firms pointed out that they would be shirking their fiduciary duty to their investors if they did not hold out for the best possible deal. For them, the best deal is bankruptcy. In bankruptcy court, secured debtholders take priority over other creditors. The administration’s plan called for secured lenders to get in line behind the UAW.

For resisting this expropriation and following the law, the non-TARP lenders were publicly denounced as vicious Benedict Arnolds by a sitting American president. “I stand with Chrysler’s employees and their families and communities,” Obama said — not “those who held out when everybody else is making sacrifices.” He stands, he said, “with the millions of Americans who own and want to buy Chrysler cars.” If millions of Americans wanted to buy Chrysler cars, the company wouldn’t need the president of the United States to be its pitchman.

Liberals took their cue from the president and immediately denounced the holdouts as “vultures,” too consumed with greed to think of the national interest. But the law compels these firms to act in their shareholders’ interest. Bank of America’s Ken Lewis ignored this responsibility and paid the price. Henry Paulson and Ben Bernanke all but forced Lewis to go ahead with the acquisition of Merrill Lynch even after he learned that the firm was in deep trouble. Lewis finally broke his silence this month, and Bank of America’s shareholders promptly stripped him of his chairmanship.

There is also a double standard at work. The rule of law was extremely important to these industrial-policy Jacobins when the telecoms were in the dock for cooperating with the Bush administration’s terrorist surveillance program. They wrongly argued that the telecoms broke the law, and they weren’t impressed by arguments that the program had yielded valuable intelligence. Apparently, the law is more flexible when bending it might yield a marginally better economic outcome for an interest group that worked very hard to get the president elected. National interest, indeed.

From the beginning, we’ve argued that GM and Chrysler should land in bankruptcy court. Instead, the Bush administration gave them a temporary crutch and sent them hobbling into the Obama administration. With their powerful unions and poor prospects, the automakers posed a thorny problem for Obama; he solved it by making the bondholders an offer they had to refuse. Now Obama has his scapegoat, and investors have another reason to mistrust the U.S. as a destination for capital.

[CaddyXLR-V]

And the public will buy everything the president and government says. I can only see bad things resulting from this.

[turbo200]

if you have half a brain, you can probably tell from the bush terror program tie-in with a chrysler bankruptcy article, the NATIONAL REVIEW is a conservative mouthpiece. was it fair to ask the bondholders to take a huge cut? well bondholders get major returns monthly in exchange for investing in basically junk bonds/companies......and one knows when investing in 'junk' bonds, there is a huge probability you can sacked on your investment, that's why they are rated so poorly by the banks. the president is correct in saying everyone else met sacrifices that were requested of them, but this group did not. in any case, it will be settled in court.

Edited May 2, 2009 by turbo200

[BuddyP]

if you have half a brain, you can probably tell from the bush terror program tie-in with a chrysler bankruptcy article, the NATIONAL REVIEW is a conservative mouthpiece. was it fair to ask the bondholders to take a huge cut? well bondholders get major returns monthly in exchange for investing in basically junk bonds/companies......and one knows when investing in 'junk' bonds, there is a huge probability you can sacked on your investment, that's why they are rated so poorly by the banks. the president is correct in saying everyone else met sacrifices that were requested of them, but this group did not. in any case, it will be settled in court.

No other bankruptcy would go any other way, why should this be any different? It shouldn't be!!

Obbie should have NEVER got involved with any of this. GM and Chrystler should've been halfway through normal bankruptcy already. But now he's got his hands in control of 2 major US companies, all to save the UAW.

[CaddyXLR-V]

if you have half a brain, you can probably tell from the bush terror program tie-in with a chrysler bankruptcy article, the NATIONAL REVIEW is a conservative mouthpiece. was it fair to ask the bondholders to take a huge cut? well bondholders get major returns monthly in exchange for investing in basically junk bonds/companies......and one knows when investing in 'junk' bonds, there is a huge probability you can sacked on your investment, that's why they are rated so poorly by the banks. the president is correct in saying everyone else met sacrifices that were requested of them, but this group did not. in any case, it will be settled in court.

I don't care what the source is. That doesn't mean what theye're saying is incorrect. You're defending Obama like people here used to defend GM.

[CaddyXLR-V]

The point is, this sets a bad precedent. If banks or investors are afraid this is going to happen again when they make secured loans, they will charge higher rates or not make the loans at all, because there is more risk for them. Put any spin you want on that, it is still bad.

[Z-06]

Just letting everyone know in advance that this is NOT a political thread, so let us keep the politics out of the picture as much as we can.

[CaddyXLR-V]

Just letting everyone know in advance that this is NOT a political thread, so let us keep the politics out of the picture as much as we can.

With the car makers becoming intertwined with the government, I don't see how talking about politics will be avoided.

[Z-06]

With the car makers becoming intertwined with the government, I don't see how talking about politics will be avoided.

What I meant was there should be no political sniping. Yes this thread borderlines on being political, but let us not go into which party or which politician is better or worse.

[Drew Dowdell]

Because there is a difference between government and partisan politics.

This article is partisan politics. Obama didn't declare war on capital.... the very thought is absurd. The bond holders didn't want to play ball on renegotiating the debt.

From the article:

Obama’s auto task force attempted to browbeat Chrysler’s creditors into taking a terrible deal in order to spare the United Auto Workers union as much pain as possible.

The choice was "keeping some equity" or "keeping no equity". "Keeping all equity" was not an option and it was the only option the bond holders were willing to have.

But the law compels these firms to act in their shareholders’ interest.

The bond holders, for some reason, felt the bankruptcy threat was a bluff.

and after all of that... since when are bond holder/banks/investors worried about "the rule of law"? They can't even abide by their own accounting standards.

No more articles from The National Review please. I don't have the time to sit here and debunk them all.

[CaddyXLR-V]

Because there is a difference between government and partisan politics.

This article is partisan politics. Obama didn't declare war on capital.... the very thought is absurd. The bond holders didn't want to play ball on renegotiating the debt.

From the article:

The choice was "keeping some equity" or "keeping no equity". "Keeping all equity" was not an option and it was the only option the bond holders were willing to have.

The bond holders, for some reason, felt the bankruptcy threat was a bluff.

and after all of that... since when are bond holder/banks/investors worried about "the rule of law"? They can't even abide by their own accounting standards.

No more articles from The National Review please. I don't have the time to sit here and debunk them all.

No, the bond holders felt they would fare better through the normal bankruptcy process.

If you own a business, and you owe banks 40%, your workers 40%, and the govt 20% of the worth of your business, why would the banks only come out with 10% when you offer them equity, while the workers and govt come out with the other 90%? If that was your 40% owed, wouldn't you want as much of it back as possible? Especially when you should be the FIRST in line to get your money back?

[Drew Dowdell]

No, the bond holders felt they would fare better through the normal bankruptcy process.

If you own a business, and you owe banks 40%, your workers 40%, and the govt 20% of the worth of your business, why would the banks only come out with 10% when you offer them equity, while the workers and govt come out with the other 90%? If that was your 40% owed, wouldn't you want as much of it back as possible? Especially when you should be the FIRST in line to get your money back?

The only way the bond holders would have fared better was if Chrysler was in chapter 7 rather than chapter 11. Obama is specifically trying to avoid liquidating Chrysler.

[Teh Ricer Civic!]

The entire point of bond holders is that they know they are taking a huge risk. If a company defaults on its loans, the way it can have them forgiven is by losing MASSIVE amounts of equity in their company. That is how it works... especially with start up firms.

By removing that aspect, it does remove some incentive to invest in the more risky junk bonds... after all, whats the point if the government is just going to screw you in the end?

Saying that bondholders didn't play ball and wanted what they would regularly get and then punish them in the name of "fairness" would definitely constitute a war on capital. The additional fact that Obama said that Wall Street will play a smaller role in the future is just further proof of the claim.

Edited May 4, 2009 by Teh Ricer Civic!

[haypops]

The entire point of bond holders is that they know they are taking a huge risk. If a company defaults on its loans, the way it can have them forgiven is by losing MASSIVE amounts of equity in their company. That is how it works... especially with start up firms.

Chrysler is no start up firm and the classical "pay off" for bond holders is during liquidation. Normaly bond holders are not the ones taking the huge risk as that would be first common stock holders and then prefered stock holders. The question really boils down to what Chrysler's assets (real estate, tools, old offic furniture) would be valued at in this economy(not much).

[Drew Dowdell]

The entire point of bond holders is that they know they are taking a huge risk. If a company defaults on its loans, the way it can have them forgiven is by losing MASSIVE amounts of equity in their company. That is how it works... especially with start up firms.

By removing that aspect, it does remove some incentive to invest in the more risky junk bonds... after all, whats the point if the government is just going to screw you in the end?

Saying that bondholders didn't play ball and wanted what they would regularly get and then punish them in the name of "fairness" would definitely constitute a war on capital. The additional fact that Obama said that Wall Street will play a smaller role in the future is just further proof of the claim.

How is offering them something in the face of getting nothing a "war on capital"?

[Teh Ricer Civic!]

How is offering them something in the face of getting nothing a "war on capital"?

Because as a creditor, what would you rather have? A ton of ownership in a company so that you can either liquidate (or perhaps try to rejuvenate and sell off a company) or being forced to take a much smaller percentage ownership than usual and a huge gamble of whether it will actually return to profitability and possibly being able to recoup the loans?

$15 million NOW may be worth more than 30 million in 5 years...

As to Haypops, your right, but with junk bonds and massive leveraging of companies that occurred during the easy money periods of the 90s and the 2000s, its the same effect. Equity is always the largest risk, because if a company defaults they either 1) risk losing a TON of their equity portion to the creditors, or 2) are forced to liquidate and receive nothing.

Edited May 4, 2009 by Teh Ricer Civic!