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How Chrysler Got Stolen


Bondholders shafted, markets threatened.

On May 1, the United States took a drastic step toward becoming Russia. Not Russia at its best - the motherland of Dostoevsky, Tolstoy, or Rachmaninoff. Instead, Russia at its worst: The one that, in 1917, took from the bourgeois and gave to the working class; the one that signed contracts with western oil companies in the 1990s when oil prices were low, and then in 2007, when oil prices skyrocketed, blatantly and unilaterally "renegotiated" those contracts.

Wielding the public's empathy as a weapon, President Obama took Chrysler from its rightful owners: secured-loan holders (a.k.a. TARP - tainted banks, the "evil" hedge funds, faceless pension funds). And he gave it to struggling, very sympathetic, $40-an-hour-earning (including benefits, this isn't a typo), blue-collar workers: Chrysler's employees and the United Auto Workers. Chrysler, quite simply, was stolen from its rightful owners.

Fixed-income investors spend an enormous amount of time studying bond covenants, which spell out how assets are disbursed in the event of a bankruptcy. Secured senior lenders have dibs on the secured assets; unsecured, junior bondholders and loan-holders follow (as part of the leveraged buyout, Chrysler had no unsecured outstanding bonds or loans); unions and employees are next in line; and equity investors get whatever is left, which in this case, would be almost nothing.

The White House Fish-Fry

For 200 years, our country has had a well-functioning bankruptcy-court system that was designed to make sure division of assets is equitable. Now that system is threatened.

The banks -- the ones that received billions of Federal funds -- were forced to give up their legal ownership first. Were they told they'd fail the recent stress tests (which they recently passed) if they didn't give up their rights? Or maybe their CEOs were told they'd be fired if they didn't go along?

These days, you don't have to be a conspiracy theorist to make these accusations. After all, then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Benjamin Bernanke used the latter tactic to get Ken Lewis, CEO of Bank of America (BAC), to lie to his board and shareholders about the purchase of imploding Merrill Lynch. We may never know what happened, but I'll promise you this: Banks didn't walk away from billions of desperately needed dollars - not at their own will.

After the big fish were fried, President Obama went after smaller loan-holders -- those hedge funds and pension funds he called "speculators" -- who put up a fight. Those institutions weren't tainted by TARP money, thus the president had to use populist rhetoric, saying they "endanger Chrysler's future by refusing to sacrifice like everyone else." He turned public opinion against the loan-holders, whose only fault was that they financed the dysfunctional automotive sector for too long, and maintained fiduciary duty to their investors by attempting to collect what was legally due.
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