Obama To Secured Creditors: Drop Dead

This is an excellent article about the dangerous road Obama is pushing America down with his takeover of Chrysler, a private company. Outstanding stuff, so read the whole thing (emphasis mine):

Are you following the disembowelment of Chrysler’s secured creditors with an eye not just toward what it means for the moribund car company but for what it could do to the very concept of secured debt? Has it dawned on you what the consequences will be if the President gets his way and consideration is given to creditors not according to contracts, rules, and established legal precedents but according to which group is most politically favored? And do you believe the President advanced the cause of economic recovery by publicly excoriating “speculators” who once hoped to profit by lending money against hard assets to an ailing company?

Profit? There’s no profit to incentivize risk taking in this country, only sacrifice!

Law? There’s no law to protect the politically unfavored in this country, only derision!

According to U.S. bankruptcy code, secured creditors - that is lenders who have a contractual security interest or claim to specific collateral - have to be paid before unsecured creditors. Unsecured creditors' claims are prioritized according to explicit rules defined by law. With the exception of short-term payments approved by a bankruptcy judge to keep a company running during the reorganization process, each priority level has a right to be paid in full before creditors with the next lowest priority get a dime. That is why secured debt can be had at a lower interest rate than unsecured debt. In fact, that is why troubled companies have any ability at all to raise money. Credit flows because everyone knows the rules of the game, even in bankruptcy.

Well, at least they used to.

The system is not supposed to deliver equal outcomes or demand equal sacrifice. If it did money could only be borrowed at the highest rates of interest, if at all. Under the law, payment priorities can only be modified if all debtors agree. The ability to hold out and force a company into bankruptcy court is baked into the price of a loan or the discount at which bonds trade.

In Chrysler’s case the TARP-backed lenders – that is, banks-too-big-to-fail now living on the dole – chose to kowtow to the executive branch. What they “sacrificed” was the economic interests of their shareholders in favor of the political interests of their management. The non TARP-backed lenders, in this case a handful of hedge funds trying to protect the pension funds, university endowments, and insurance companies that invested in them, balked at getting lower consideration for their secured debt than the UAW is getting for its unsecured obligations. Hence, a trip to court and a tongue lashing by the president.

Forget about the law for a moment. Forget about right and wrong. This exercise should be getting easier now that pragmatism is the basis of government policy, right? So think for a moment only about the pragmatic consequences of the administration’s reorganization plan.

Why would anyone lend money to heavily unionized companies knowing that if things went wrong, the president and his men could trash their security interests by executive decree, hold them up to public vilification, and subject them to future retribution by regulators?

Why would anyone buy the shares of TARP-backed banks or invest alongside them knowing that their executives have proven their willingness to sacrifice shareholders’ interests and throw co-investors under the bus any time the president snaps his fingers?

Why would foreigners buy the distressed debt of American companies knowing that this debt cannot be secured by law but only by political clout?

How is the Federal Government supposed to unwind its ownership in the growing number of companies it has nationalized if prospective buyers know that should things ever take a turn for the worse, Uncle Sam will be back demanding extralegal “sacrifice” in the name of “saving” jobs?

How is private credit supposed to “start flowing again” if the United States of America morphs into a caudillo-run kleptocracy whose explicit policy is to “empower the workers,” chasing ever higher poll numbers by demonizing the very people whose job it is to provide credit?

The fate of Chrysler and its workers pale in comparison to the wrecking ball that would be taken to economic order if bankruptcy judge Arthur Gonzalez approves the administration’s plan to give Chrysler’s secured creditors the shaft. And what prize will we-the-people get in return? A doomed third-rate car company majority owned by its militant union run by Italian management building congressionally designed “green” cars no one wants to buy financed by taxpayers into perpetuity because no private investor in their right mind will touch the company with a ten foot pole. Is this supposed to be economic policy or comic opera?

How many more billions do you think will be flushed down this rat hole before the fat lady is allowed to sing?

This is precisely the problem with nationalization, and specifically with Obama's attempts to render legally binding contracts as irrelevant. Think about it - when you sign a contract, you agree to hold up one end of the deal, and you have 100% right to expect the other party to hold up the other end. Right? Right, because the contract is an unchangeable set of rules by which both of you agree to play.

Now, if you know that the other party can change the rules that he has to play by at any time, would you still sign on the dotted line?

And that's the key to this whole thing. By ripping up contracts between private companies and their investors Obama is effectively stifling the economy because those private investors will no longer invest their private money. Why would they, if the rules can change?

The ripple effects of this are twofold. First, we have the slowdown in the economy, as investors pull their money out of the markets. We've already seen this, and there's no reason to think we'll see any major recovery while Obama continues to take over private companies. Second, because of this effect, the federal government will likely step up to fill the void and pump massive amounts of taxpayer dollars into the system to try to artificially start things up. Unfortunately, we've seen this, too.

The problem is that this won't ultimately work, since each dollar taken from taxpayers and pumped into the nationalized companies is a dollar of debt added to the bottom line, and a dollar taken out of potential real stimulus in the form of consumer spending. The only 'benefit' is that the government gains more and more power for as long as the cycle goes on.

Obama is deliberately pushing America down the path toward nationalization, not because it will recover the economy, but because it will increase the power of the federal government. And if the federal government is telling private companies to drop dead, how do you think they're going to treat you?

There's my two cents.