May 9, 2009

Obama’s Frightening Fiduciary Follies (Updates: Non-TARP Lenders Fold; Barone on ‘Gangster Government’)

Note: This column originally appeared at Pajamas Media on Thursday.


Chrysler’s holdout lenders have a higher duty – and it’s not to him.


On April 30, President Barack Obama denounced “hedge funds” that he claimed ruined concession discussions that might have enabled Chrysler to avoid filing for bankruptcy.

Since then, most of the outrage in the establishment media has focused on these holdouts. Matt Goldstein of Business Week called them “cowards” for not revealing their names (remember the AIG bonuses, Matt?). No one in the establishment media leveled a similar charge at Team Obama when they similarly refused. When the holdouts issued a press release describing their legal rights and why they were asserting them, Jessica Pressler at disgracefully accused them of playing “the Obama-is-a-communist card.”

First of all, these are not all presumably evil (unless you’re John Edwards and happen to have worked for one) “hedge funds.” As the lawyer representing these firms, Tom Lauria, told Frank Beckmann of WJR Radio in Detroit last week:

…. what people really need to understand is that the people who bought this debt are pensioneers, teachers’ credit unions, personal retiree accounts, retirement plans, college endowments. That’s who my clients act as fiduciaries for.

Lauria was also saying in so many words, “We’re just doing our job.”

The Employee Retirement Income Security Act (ERISA), passed in 1974 with strong bipartisan support, subjects retirement plans to a very strict standard of fiduciary duty, specifically:

(1) …. a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;

There is nothing ambiguous about this requirement, and nothing about the words “solely” or the term “exclusive purpose” to misunderstand. The Wall Street Journal’s Gregory Corcoran also pointed out on April 30 that hedge fund managers are subject to a nearly identical common-law standard, “to the exclusion of any contrary interest.”

Fiduciary duty directly ties in to the situation at Chrysler. As Lauria explained to Beckmann — in between describing what he alleges are threats to his clients’ reputations and safety, which he later expanded to include death threats that have been turned over to the FBI — the creditors he represents have collateralized first-lien rights.

In a normal bankruptcy, first-lien creditors get paid what they are owed before anyone else. Since assets rarely fetch their ongoing-use value in liquidation, it appears reasonable that Lauria’s group would have come down in negotiations from 100% to 65%, and then to 50%, in the interest of avoiding bankruptcy. Presumably, 50% is a reasonable estimate of what might be realized in liquidation.

But Obama, Steve Rattner, and his car people wanted Lauria’s group to come down to 29% of their collateralized value in return for what appears to be almost nothing. Under current plans, the United Auto Workers’ health care trust will own a majority of the company if and when it emerges from bankruptcy. It appears that lenders who have no first-lien rights, and whose arm’s-length interests are questionable, given that many of them have received Troubled Asset Relief Program (TARP) funds, will receive company shares in an amount roughly proportional to the total of all debt balances, including those of Lauria’s non-TARP first-lien lenders.

In other words, Obama et al want Lauria’s group to essentially act as if their first-lien status doesn’t exist. They frame this as being “in the national interest.”

There’s only one “little” problem: Under ERISA, Barack Obama’s definition of “the national interest” is not relevant to “the interest of the (retirement plan) participants and beneficiaries.” It is also not relevant to hedge funds’ common-law duties. If the non-TARP lenders act against their participants’ and investors’ interests and give in to such a deal, they will more than likely be virtually defenseless against shareholder and participant lawsuits.

Perhaps the example of Bank of America’s Ken Lewis is weighing on the minds of those who are still in Lauria’s group.

Lewis claims he was intimidated by former Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke into hiding from the public the extent of losses at its recently acquired Merrill Lynch subsidiary. Bank of America is being sued by shareholders, and Ken Lewis is no longer BofA Chairman. Does anyone think that the government will provide witnesses to defend Lewis or BofA?

There will likely be an anti-Chrysler backlash by those who see Team Obama’s tactics for what they are. Before the bankruptcy filing, General Motors was catching almost all of that heat.

At GM, in the first full month following Obama’s sacking of Rick Wagoner that signaled the company’s de facto nationalization, it sold all of 171,258 vehicles. Only about 131,000 vehicles were sold to individual consumers, a 45% drop from April 2008. Some of the company’s fleet (i.e., not individual) sales may have occurred because of a sped-up purchasing campaign announced in early April by an Uncle Sam desperate to prop up GM any way it conceivably can.

Since the first bailout funds were sent in December, Chrysler, whose CEO Bob Nardelli spent most of 2008 ruining the company on his own, has somewhat stabilized, and may even have been the beneficiary of a bit of public sympathy. More than likely, that is over, and Nardelli’s announced departure won’t stop it. As it is, Chrysler sold a pathetic 15,558 cars (i.e., excluding light trucks) in April, putting it in eighth place, behind even Hyundai and Kia.

What has happened since the bailouts began has become so obvious that after reviewing April’s results, the Associated Press’s auto writers told readers that “Detroit’s Big Three is becoming Ford and the other two.”

It’s reasonable to believe that the Team Obama’s “Chicago Way” tactics have accelerated the downward trend at GM, and that it will now spread to Chrysler. It shouldn’t surprise anyone if we learn a few months from now that one, the other, or even both are gone, and aren’t coming back.


UPDATE, May 9In a Wednesday BizzyBlog post that went up the day after I submitted the above column to PJM, and the day before it was actually published (“The Non-TARP Lenders Aren’t Making Stories of White House Pressure Up”; also carried at NewsBusters and the Wall Street Journal), I noted that the lender group’s membership had shrunk from $1 billion in first-lien Chrysler debt to about $300 million.

So the following news from yesterday shouldn’t be that surprising (bolds are mine, and replace bolds used at original article):

Dissident Chrysler Group to Disband

1:34 p.m. – A group of Chrysler creditors opposing the carmaker’s reorganization will disband after two more investment firms withdrew from its membership, a lawyer representing the firms told DealBook on Friday.

The decision to dissolve the unofficial group was made in connection with the withdrawal of OppenheimerFunds and Stairway Capital Management, said Glenn M. Kurtz, a White & Case partner representing the bloc. With those two firms pulling out, the so-called Committee of Non-TARP Lenders would hold below 5 percent of Chrysler’s $6.9 billion in secured debt. That would almost certainly eliminate the group’s standing in federal bankruptcy court.

The committee is unlikely to regroup unless other dissident creditors come forward, Mr. Kurtz said.

“After a great deal of soul-searching and quite frankly agony, Chrysler’s non-TARP lenders concluded they just don’t have the critical mass to withstand the enormous pressure and machinery of the US government,” Thomas E. Lauria, a partner of Mr. Kurtz’s and the lead lawyer for the group. “As a result, they have collectively withdrawn their participation in the court case.”

As Michael Barone would say, or actually did say, welcome to “Gangster Government”:

The Chrysler negotiations will not be the last occasion for this administration to engage in bailout favoritism and crony capitalism. There’s a May 31 deadline to come up with a settlement for General Motors. And there will be others.

In the meantime, who is going to buy bonds from unionized companies if the government is going to take their money away and give it to the union? We have just seen an episode of Gangster Government. It is likely to be part of a continuing series.

It’s actually a series that began back in December; the series, which has actually been ongoing for some time, continued on Thursday in Des Plaines, Illinois.

UPDATE 2: …. and in California.



  1. Talking about Banks and balance sheets, it seems there is way to much Happy Talk going on that the so called Stress Tests covered up:

    …As Philippa Dunne and Doug Henwood, proprietors of the Liscio Report, shrewdly observe, the highly publicized exercise made it look as if Washington’s aim was “to restore confidence in the financial system before restoring the financial system.” And the stress test itself struck them as being “precooked, with just enough talk of raising fresh capital to be credible, but not so much as to induce fear.”…

    …As it happens, IRA performs its own stress tests on some 7,600 banks using the vital statistics compiled by the Federal Deposit Insurance Corp. and it has even fashioned a stress-test index. Its latest ratings of bank safety and soundness — the handiwork of the outfit’s Dennis Santiago — tell a much less comforting tale than does the Washington version.

    More specifically, IRA’s bank-stress index, which stood at 1.8 at the end of the final quarter of ’08, shot up to 5.57 in the first quarter of this year (the benchmark year, 1995, equals 1). Behind this sharp increase in stress is the startling number of the nation’s banks — 1,575 — that wound up in the red in the first quarter.

    In a follow-up report, Chris comments that it’s “pretty clear that the condition of the U.S. banking industry is continuing to deteriorate, and we are still several quarters away from the peak in realized losses for most banks.” Indeed, he adds, “We’re not even on the right block to make the turn.”…

    So Tom, we have been yet again lied to by the government.

    Comment by dscott — May 9, 2009 @ 10:47 am

  2. #1, I’ll betcha that an independent CPA firm was nowhere near any of the information used to cook this up, nor were they asked. You could argue that they were auditing themselves, but that could have been solved by having a firm other than the bank’s particular review do the stress test.

    Of course, they might not have liked the report the independent firms would have produced, which is why they weren’t risked. Why bring in independent professionals when beholden political hacks can be manipulated?

    Comment by TBlumer — May 9, 2009 @ 10:51 am

  3. #1, if as expected (and desired?) the economy continues to stay in the tank, the stress on the banks may “just happen” to be bad enough that the government will oh-so-reluctantly have to take them over.

    “We really didn’t want to do it, but we had to …”

    “Once this crisis has abated, I will lay down the powers you have given me, and return the nation to free-market capitalism!”

    Comment by TBlumer — May 9, 2009 @ 11:16 am

  4. #3, it seems they have cleverly covered their bases to profit no matter what direction the market takes. Isn’t it so convenient when they are the ones making the rules to facilitate the desired outcome? Thus we see the point of the rules, to guarantee the outcome… I guess this is the benefit of a legal fiction – The Stress Test which has no underlying legislation authorizing it.

    Comment by dscott — May 9, 2009 @ 12:56 pm

  5. #4, I’d substitute “clumsy” until “clever” gets proven.

    Comment by TBlumer — May 9, 2009 @ 1:18 pm

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