Pappy O'Daniel: "I signed that bill. I signed a dozen aggeyculture bills. Everyone knows I'm a friend of the farmer. What I gotta do, start tendin' livestock?"
Junior O'Daniel: "We can't do that, Daddy. We might offend our constitchency."
Pappy: "We ain't got a constitchency! Stokes got a constitchency!"
First aide: "Well ... it's a well-run campaign. Midget and broom an' whatnot."
Second aide: "Devil his due."
First aide: "Helluvan organization."
Junior: "Say, I got an idee."
First aide: "Whassat, Junior?"
Junior: "We could hire us a little fella even smaller than Stokes's."
Pappy: "You slump-shouldered sack o' guts! Why, we'd look like a bunch of Johnny-come-latelies. Braggin' on our own midget. Don't matter how stumpy. An' that's the goddam problem right there. People think that Stokes got fresh ideas. He's au courant and we're the past."
First aide: "It's a problem of ... uh ... uh ..."
Second aide: "Perception."
First aide: "At's right."
Second aide: "Reason why he's pullin' our pants down."
First aide: "Gonna paddle a little behind."
Second aide: "Ain't gonna paddle it. Gonna kick it. Real hard."
First aide: "No, I believe he's gonna paddle it."
Second aide: "I don't believe that's a proper description."
First aide: "Well, that's how I'd characterize it."
Second aide: "I believe it's more of a kickin' sitcheyation."
— O Brother, Where Art Thou?
After several days of holding my peace and refusing to engage in a pointless pissing match with spokespeople for the militant wing of the Salvation Army, the card-carrying socialists at The Wall Street Journal have rallied to my rescue. Today they published a page one article which described exactly what happened during the negotiations over debt recovery before and during the Chrysler bankruptcy. I am pleased to report, Dear Readers, that their investigation has thoroughly confirmed the argument I made in these pages over a week ago.
Attentive readers will remember that I asserted several substantive points1 in my tirade. First, the negotiations over debt recovery by Chrysler's secured lenders in the company's restructuring were just that, negotiations, not a cookbook allocation of value according to rigid, unvarying legal precedents. Second, while acting unequivocally like the schoolyard bully throughout, the Obama Administration did nothing fundamentally wrong or even unexpected by pushing hard to further its own political objectives. It certainly did not run roughshod over the rule of law or undermine the bankruptcy process, as some wilder-eyed commentators have claimed. Third, it completely failed to surprise me that the administration wiped the floor with the dissident creditors in both private and public, given its vastly superior negotiating position. And finally, I personally found the whiny, martyred tone of the public pronouncements from said dissidents both morally and aesthetically repugnant.
Begging your indulgence for a moment, I will repeat the summation from my prior piece here:
Here's a clue for the novices in the room: It's called politics, you fucking morons. Stop being such a bunch of whiny pansies.
Now, thanks to the crack reporting of a newspaper which all right-thinking troglodytes will henceforth consign to the ninth circle of capitalist hell, along with other traitors to kith and kindred, we learned just how badly Chrysler's creditors judged their chances, and how thoroughly the government spanked their little bottoms:
President Barack Obama's auto task force heard a blunt message early this spring from J.P. Morgan Chase & Co., the largest lender to Chrysler LLC. In any deal to remake the troubled auto maker, Chrysler would have to repay its lenders all $6.9 billion it owed.
"And not a penny less," said James B. Lee Jr., vice chairman at the bank, in a call to auto task-force boss Steven Rattner on March 29.
The next day, Mr. Obama called the banker's bluff. The president stepped before a podium to announce that Chrysler could face a disorderly bankruptcy or even liquidation. His meaning was clear: If that happened, the lenders would get nowhere near $6.9 billion.
A few hours later, Mr. Lee called Mr. Rattner back. "We need to talk," he said.
The banker's about-face was a vivid example of the government's tightening grip on a humbled financial industry. Pulling a trick from the hedge-fund playbook, the government used its leverage as the sole willing lender to Chrysler, either in bankruptcy court or out, to extract deep concessions from some of the country's biggest banks.
My, how the worm turns.
Notwithstanding the concerted attempt by certain creditors and third-party commentators—whose passion and outrage seemed to vary inversely to their closeness to and understanding of the actual situation—to portray the dissident lenders as saintly defenders of widows and orphans unjustly crushed beneath the hobnailed boot of an overweening Executive Branch, it appears that almost everyone involved understood exactly what type of game they were playing:
Many of the lenders believed the administration wouldn't let Chrysler file for bankruptcy. "The plan was to call the government's bluff. The game was to game the government," said a manager of a distressed-debt fund.
In retrospect, perhaps that wasn't the best of plans. It's hard to win a gun fight when all you bring is a penknife.
In the following days, the lenders began to realize their leverage was small and dwindling. Only the government had the ability or willingness to finance a bankruptcy reorganization of Chrysler, while also supporting its warranties and suppliers and recapitalizing Chrysler Financial. None of the lenders, some of which had consumer operations in the Midwest near Chrysler plants, had any desire to take over and liquidate the company.
Anyway, we all know the outcome. The large secured lenders folded, smaller dissident creditors balked, and the Administration threw the company into bankruptcy court, where a judge was charged with dividing the baby. As soon as the dissidents saw there were enough votes among the capitulating creditors to cram down the government's restructuring plan, and the judge was not inclined to block it, they threw in their cards and walked away. No matter what their ideological attitudes were, I think they eventually realized the fiduciary duty they defended so loudly in the press could come back to bite them if they continued to waste their investors' money in fruitless battle.
Now the good news in all this hullabaloo is that the system worked exactly as it should. Stakeholders in a financially troubled company always have the right to negotiate a restructuring solution outside the courtroom, and Chrysler's did. There are indeed extensive precedents for the division of value among various stakeholders, including a normally preferential position for secured creditors. These provide useful guideposts for negotiation, but they are neither absolute and unvarying in every situation, nor are they the only legal principles which govern a corporate restructuring.2
Furthermore, bankruptcy case law makes allowance for occasions when contending parties have such lopsided negotiating leverage that the solutions proposed can be unfair. In these instances, an independent judge has discretion to revise or even scrap a plan in favor of minority and other interests where appropriate. This is exactly what happened: the government attempted to ram down a plan adverse to the interests of secured creditors, a small, determined subset of those creditors screamed bloody murder, and a bankruptcy judge considered the facts and nonetheless ruled against them. Due process and the rule of law had their day, the sun rose in the east and set in the west, and everyone went home to watch American Idol on flat screen television. Case closed.
Far from representing evidence that the Administration has set out sub rosa upon a course of stealthy expropriation, creeping socialism, or outright fascism, the final outcome in the Chrysler case simply represents the triumph of bare knuckled negotiation from a position of overwhelming strength, within the settled confines of existing law and practice. The government simply did what any hedge fund driven by fiduciary duty and self interest would have done if it held the reins: it dictated the terms it wanted to see, and it told the creditors to pound sand if they didn't like it. The creditors, on the other hand, seemed to sally forth onto the field of battle without fully considering who was supplying their reinforcements (the Treasury), where they were fighting (in the forum of public opinion, as well as the arena of commerce), and the outside chance that their primary opponent might be smarter than a bag of hammers (and therefore realize and exploit its advantages). In return, they got schooled, but good.
I see little reason to give credence to those alarmists who see the Chrysler case setting a dangerous precedent. With the admittedly substantial exception of General Motors—whose existing creditors should be busy stocking up on Vaseline, ball gags, and Motrin—I cannot fathom why the government would want to get more broadly involved in corporate restructurings. The process causes massive amounts of brain damage, absolutely nobody likes the result—with the possible exception of the lunatic fringe on the left—and it sets up the Administration for all sorts of political pain in the future. There is absolutely no upside and tons of downside, which is a situation so anathema to politicians that most of them spend their entire careers dodging difficult decisions that would land them in such soup. Obama cannot be happy about it, unless he is an idiot or a nut. I will hazard an educated guess that he is neither.
Listen, I'm all for sanctity of contracts, the rule of law, and a stable, predictable bankruptcy process. I think they are critical underpinnings to our current system, which I happen to admire, warts and all. Undermining any of them would be a serious mistake, with long-term deleterious consequences both to the economy and the political fabric of the country.3 Should I see any real evidence that ne'er-do-wells from any branch of government are moving demonstrably down that path, I will don my cammo fatigues, grab an AK-47, and join Equity Private and her fellow Objectivists on the barricades toot sweet. (My first act of insurrection would be to pick off any Aeron Chair Socialists I happen to see tampering with the traffic signals.)
But the system we have is strong. The strongest defense against accidental or intended overreach by the government in any bankruptcy situation will be the swift and decisive ruling of a bankruptcy judge. Call me naive if you will, but I have seen enough grinning, pointy-toothed restructuring advisors in my day to know that any judge capable of swatting them down will be more than up to the task of telling Steven Rattner where to get off. Most of those judges can bite the ass off a grizzly bear.
Which leads me to my final remarks.
I continue to find the whinging and apocalyptic fear-mongering from certain quarters of the finance and business community about the government's present involvement in economic affairs despicable. For chrissakes, people, what did you expect? The bloody economy has gone off the rails, the global financial system is in tatters, and millions of citizens are seething on the unemployment line. (2010 election motto: I'm unemployed, and I vote.) The market failed. Deregulation didn't help. And the only economic actor with the will and the financial wherewithal to borrow heavily enough from the future—our future, natch—to fix this shitstorm is the government. Did you really think you were going to get government help without a government (read political) agenda? What are you smoking?
It doesn't take a masters degree in political economy to realize that when you go up against the government in a financial negotiation where it holds all the cards—including some of yours—you are going to get your head handed to you on a platter. Deal with it. Buck up, and move on. Find a less lopsided game to play in.
Because I can guarantee you the government and 95% of the people who elected it to power don't give a rat's ass that you're going to lose money on your Chrysler bonds.
1 If, in fact, I failed to make any of the following points, or failed to make them clearly, consider them made here. Honestly, I can't be bothered to treat these pages like a fucking Freshman debate class.
2 Readers who are open to learning something about this—as opposed to continuing to tilt at real and imaginary windmills—could do much worse than to consult The Bankruptcy Litigation Blog here, here, and here.
3 George Akerloff and Robert Shiller contend that real and perceived government interference in the economy helped depress business investment and was a serious contributing factor to the general loss of confidence and malaise they credit for the length and depth of the Great Depression. Animal Spirits. Princeton: Princeton University Press, 2009, pp. 69—70.
© 2009 The Epicurean Dealmaker. All rights reserved.