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.
