Althouse: "The public is watching and needs to see that, particularly, when the system is under stress, the law will be honored..."

June 8, 2009

"The public is watching and needs to see that, particularly, when the system is under stress, the law will be honored..."

"... and an independent judiciary will properly scrutinize the actions of the massively power[ful] executive branch."

From the brief by Indiana Solicitor General Thomas Fisher, asserting the interests of state funds and seeking to stay the Fiat/Chrysler deal. Justice Ginsburg granted the stay.

49 comments:

Jeremy said...: WASHINGTON - Former first lady Laura Bush says she's pleased that President Barack Obama nominated a woman for the Supreme Court.

"I think she sounds like a very interesting and good nominee," Bush said of Sonia Sotomayor, the federal appeals judge Obama picked.; 6/8/09, 7:54 PM
Lem Vibe Bandit said...: "The public is watching...."

Is that a legal citation or a protest chant?; 6/8/09, 8:00 PM
Lem Vibe Bandit said...: This is going to be unpopular your honors.

Ok, If you dont do this God is goign to call me home.; 6/8/09, 8:02 PM
mccullough said...: It seems like the pension fund made a bad investment; buying these bonds at a discount when they knew Chrysler was in the toilet.

Wishful thinking should be punished.

Anyway, the Obama administration strong-armed the other bond-holders into taking the deal, and they are a majority of the secured creditors. So the other holdouts can't holdout.

And the pension fund doesn't have standing to argue that TARP funds can't be used to bailout the UAW.

Elections have consequences, Indiana. Next time, don't vote for Obama. And don't buy a Chrysler car. The only thing worse than their bonds are their vehicles.; 6/8/09, 8:09 PM
Anonymous said...: The Solicitor General of the United States told the Supreme Court that it doesn't have jurisdiction over TARP.

That's how arrogant the current elite is. They believe they are above the Supreme Court's law of the land.

Ginsberg is merely shooting across his bow; she is telling the Executive that the Supreme Court has jurisdiction of anything that it wants ot have jurisdiction over.

If the Solicitor General persists in alleging that the Supreme Court can't interfere with its Socialization of the country, I suspect he'll be bitch-slapped.

It was a stupid legal move by a moron lawyer.

Oh ... they'll eventually let Chrysler be sold; but not until a pound of flesh is extracted for the Administration's arrogance.; 6/8/09, 8:14 PM
Lem Vibe Bandit said...: This is really weird.

You would think that saving the company, even if it's a smaller company, would be better than a company in it's death bed digging a deeper hole.

The longer they delay the inevitable the worst the pain it's going to be?

Am I missing something?; 6/8/09, 8:20 PM
rhhardin said...: Liquidation is the solution, not the problem.

The assets that can be used for something wind up in the hands of somebody who can use them for something profitable. End of story.

The UAW is up the creek. Golden goose lesson is once more applied.; 6/8/09, 8:23 PM
Darcy said...: I think Ginsburg did the right thing. Painful as it may end up being for my state, we have laws already in place to handle this bankruptcy. Going around them is a dangerous thing in the long term.; 6/8/09, 8:28 PM
Lem Vibe Bandit said...: "the balance of harms tilts so overwhelmingly against a stay"

That truth was not found by Ruth.; 6/8/09, 8:29 PM
rhhardin said...: The reason you can buy Chrysler secured debt cheap is that there's a political risk to it. Is the US a third world banana republic or not? The answer is up in the air. Hence the discount on the bonds.

Not only can you buy Chrysler secured debt cheap, you can buy anybody's secured debt cheap, for the same reason. Political risk. It doesn't amount to secured debt, but junior last-in-line debt.

What that means is that no corporation can issue debt cheaply for them. They must pay a high interest rate in order to offset political risk, even though the debt is "secured senior debt."

That means corporations can't afford to issue debt at all, because they can't afford the rates. No project is that profitable for them to offset the rates.

That's why you want rule of law. The economy stops when capital goes on strike, as in the case of poison secured debt that may be cancelled on Obama's whim.

If the court says actually the law applies here and screw the executive branch and its friends, then people will buy senior debt again, and capital goes off strike, and then you can have, guess what, jobs.; 6/8/09, 8:39 PM
Bruce Hayden said...: "the balance of harms tilts so overwhelmingly against a stay"

Keep in mind that the first petitioner is a bunch of SECURED creditors, and that statement was from the UNSECURED creditors, who are supposed to come behind the secured creditors in a bankruptcy.; 6/8/09, 8:42 PM
Anonymous said...: Average Joes are being crushed all over this country with the car bailout deals, and where are the champion-of-the-little-guy media and reporters?

They're too busy shopping and getting ready for the next media award banquet to bother taking time to show how the government is killing the little guy.

Small town 4th generation car dealer being unilaterally bankrupted? Who in Katie Couric's shop has time to bother with such inanities?

They’re too busy trying to line up that big exclusive presidential interview for the boss-lady so she can ask Obama which leather couch on Airforce One is his favorite.; 6/8/09, 8:51 PM
Lem Vibe Bandit said...: Thanks rh for getting under the hood.

So by choosing the painful way out (follow the law ;) you send the message no more free lunch?

In a nutshell?; 6/8/09, 8:54 PM
Anonymous said...: ….you send the message no more free lunch? In a nutshell?

In a very large nutshell, the interest rate that investors demand to lend money (here buy bonds) is always predicated on the risk that loan will not be repaid (here repayment to the bondholders.)

Under normal rule of law conditions, lenders / investors look at lots of company financial and overall market factors to calculate the risk of a loan to a particular company, and factor some legal risks in as well – but those risks are usually known.

(That is one reason why companies like to incorporate in Delaware; the corporate governance law and cases are quite complete and pretty predictable.)

Anyway, when a government can and is throwing its formidable weight around in commercial deals, breaking contracts at will, and generally pissing on the rule of law with impunity, lenders/ investors face that added huge risk that the government could step in and ruin their loan/investment on an whim.

Investors respond to that new risk by raising the interest they demand in order to agree to a loan/investment.

Companies suffer because the price of getting money goes up.

Capital starts to go to places where governments can’t roll over people and take their money as easily.

That’s the scenario if the SCOTUS doesn’t step in and slap down the administration’s invasive, risk-adding, whimsical meddling.

Not a nut shell, but that’s how it works. You send a message that the government must stay within bounds and risk is again more predicable.; 6/8/09, 9:08 PM
Lem Vibe Bandit said...: Sounds like government involvement has made things worst.; 6/8/09, 9:18 PM
hombre said...: Jeremy wrote: Former first lady Laura Bush says she's pleased that President Barack Obama nominated a woman for the Supreme Court....

Liberals don't get "gracious."; 6/8/09, 9:20 PM
I'm Full of Soup said...: Anyone have any idea how much we are paying the car czar, Steve Ratner?

And how can it possibly be enough to keep him interested? [he is used to making tens of millions a year].; 6/8/09, 9:25 PM
hombre said...: This is great news, but I'm afraid the capitulation by the other bondholders means Indiana loses.

As somebody who holds Ford bonds, I am particularly pissed at the advantage given to the other two by taxpayer financing. Ford and its creditors don't deserve to get screwed because management had more foresight than GM and Chrysler -- who I will be boycotting however it turns out.; 6/8/09, 9:26 PM
Anonymous said...: Hurray for Ginsburg! Let's hear this case out.

Will Obama now hint at packing the court...with laid off UAW workers?; 6/8/09, 9:27 PM
Lem Vibe Bandit said...: Sotomayor takes a tumble at LaGuardia.

Shows initiative ;); 6/8/09, 9:30 PM
I'm Full of Soup said...: Patca said:

"Will Obama now hint at packing the court...with laid off UAW workers?"

Pat - that is Insty link quality!; 6/8/09, 9:33 PM
gbarto said...: So by choosing the painful way out (follow the law ;) you send the message no more free lunch?

To summarize Quayle: Having Chrysler go under is painful. Having the next Microsoft not happen because capital has gotten prohibitively expensive is really painful.; 6/8/09, 9:36 PM
Bart DePalma said...: Thank heaven, Justice Ginsberg put the brakes (at least for the moment) on this government's gross abuse of the bankruptcy process.

A little law and history are in order to provide context.

The Obama Administration Auto Task Force was not assembled to return the auto industry to profitability. Not a single member of the ATF has ever run a business, met a pay roll or turned a profit.

Rather, the intent was to give Chrysler to the UAW with the mandate to build green cars. To this end, the key players on the ATF were Ron Bloom, a brilliant United Steel Worker operative that specialized in union takeovers of troubled companies, and a handful of green government and legal activists.

There was one problem. The government was not willing to pay fair value as required by the Takings Clause to buy Chrysler outright. Instead, the Obama Administration employed strong arm tactics that would make Vito Corleone and and Hugo Chavez proud to strip the secured creditors of their rights in order to finance the takeover of Chrysler.

The ATF plan was to transfer all useful Chrysler assets to an entity called New Chrysler in exchange for $2 billion in TARP money, which would be used to pay the secured creditors pennies on their investment dollar. 55% of New Chrysler would be given to the UAW, a minority share would be given to Fiat for nothing except a promise to build green Fiat cars in Chrysler plants and the US and Canadian governments would get the rest. The government would directly or indirectly appoint a majority of New Chrysler's board and in fact control the new company.

The ATF simply assumed the power to compel Chrysler to adopt the ATF plan. Nowhere does TARP or any other statute give the executive the power to do so.

Most of the secured credit was held by TARP banks, whom the Obama Treasury department compelled to waive their fiduciary duties to their shareholders and waive their secured status.

A group of smaller secured creditors protested, but the ATF threatened to have the White House destroy their public reputations. Obama started that process by publicly attacking the secured creditors as greedy speculators. Nearly all of these creditors quickly folded.

The only secured creditors left standing were Indiana's teacher and police retirement finds and the state roads fund.

The ATF came up with a plan to abuse the bankruptcy process to trip those teachers and police officers of their retirements.

The reason bankruptcy law provides secured creditors with superior claims to the borrowing company's assets is to provide the company with low interest credit and provide secured creditors like retirement funds a safe place to invest their money. Win win.

The ATF subverted the law by blackmailing the bankruptcy court. The government and Fiat threatened to withdraw their assistance to Chrysler if the bankruptcy court did not order the transfer in a couple weeks. Internal emails of the Chrysler bankruptcy attorneys disclosed during the bankruptcy hearing indicate that the intent of the withdrawal threat was to "stuff" the judge. It worked.

The court collapsed under government pressure, denied the Indiana retirement funds any appreciable time to conduct discovery and engage experts, and then ordered the transfer on the basis of a single Chrysler accountant who claimed without any particular evidence that the retirement funds would get more money under the government plan than if Chrysler was sold off in pieces. The court relied on the fact that this testimony was undisputed. However, the only reason the testimony was undisputed was because the court refused to grant the funds time to engage a rebuttal expert.

Folks, this is the kind of thing that happens in Castro's Cuba or Chavista Venezuela. Not in the United States and certainly not ratified by a court of law. The quotes from the petition for cert are putting the situation mildly. The Obama Administration's attempted nationalization of Chrysler is a frontal attack on the rule of law.; 6/8/09, 9:42 PM
Lem Vibe Bandit said...: Sotomayor follows precedent.; 6/8/09, 9:44 PM
I'm Full of Soup said...: Bruce:
That was quite an excellent overview.Thanks.

How ironic if the court's most liberal judge, Ginsburg, smacks down the ATF plan submitted by the Obama admin!; 6/8/09, 9:50 PM
Swifty Quick said...: Chrysler should've been put into a straight-up Chapter 11 six months ago. No bail out and no TARP money. Just bankruptcy, according to the rules. GM too. We can thank Bush for not letting that happen back then, and handing it all over to Obama to fashion what he fashioned. Maybe the court will reel it back in. We can hope.; 6/8/09, 9:55 PM
Anonymous said...: Thanks, Bart. Very clear. Very troubling.; 6/8/09, 10:13 PM
kimsch said...: Bart, excellent explanation. Thank you very much.; 6/8/09, 10:20 PM
Anonymous said...: And where is the champion of the rule of law, the New York Times, when we need them?

They were all hot and bothered when Bush was violating FISA. It was all front page and splashy-big.

Where are they now when the rule of law is being blatantly challenged by Obama?

Crickets.; 6/8/09, 10:28 PM
EnigmatiCore said...: Good for Ginsburg.

Good for us.; 6/8/09, 10:40 PM
EnigmatiCore said...: Hey, look! Jeremy posted something completely and utterly irrelevant.

Almost like he is trying to change the subject or something.

Why do you think that would be?; 6/8/09, 10:41 PM
hombre said...: Thanks, Bart. I hope all that is in the record before SCOTUS, or that they will remand to allow the record to be completed.

I think it particularly important that the extortion of the majority of bondholders be considered, but I may be misremembering the little I ever knew about bankruptcy.; 6/8/09, 10:42 PM
traditionalguy said...: The smell of property rights in the morning. That scares a collectivist crisis manager to death. It requires negotiation and purchase of property rather than confiscation followed by sacred "Redistribution" ceremonies honoring the God of Thieves.; 6/8/09, 10:56 PM
Zach said...: It's worth noting how the presence of a deadline to complete the sale to Fiat dramatically strengthens the Obama administration's hand. Now the threat is that any delay results in disaster (as opposed to a slower bankruptcy process or an open auction).

Von Neumann covered this in his book on Game Theory. He said that if you're playing a game of chicken, it's to your advantage to publicly limit your options -- to throw empty bottles of whiskey out of the window, or throw away the steering wheel. By publicly throwing away your own ability to change your mind, you force your opponent to blink.; 6/8/09, 10:58 PM
Anonymous said...: "He said that if you're playing a game of chicken, it's to your advantage to publicly limit your options ..."

The only defense to this strategy is to ignore it, which Ginsberg did, at least for a day.

Ultimately, it's all just for show. Ginsberg can't let it appear that Obama has defeated it before the game even began with a third-grade game theory strategem, called "Chicken."

The court still has its pride, after all, even if it has no balls left.; 6/9/09, 1:10 AM
reader_iam said...: Thank you, sincerely, to a number of commenters on this thread for helping to illuminate various pieces of the salient issues.; 6/9/09, 1:46 AM
Michael Haz said...: Thank you Bart. Excellent explanation of the Chrysler situation, and I hope that you do the same thing for the GM mess.; 6/9/09, 2:47 AM
Chip Ahoy said...: Pardon me. Have I accidentally stumbled onto the set of Evita?; 6/9/09, 3:35 AM
AllenS said...: Most excellent, Bart.; 6/9/09, 5:45 AM
save_the_rustbelt said...: Assuming for a moment Bart's scenario is 100% true, the Indiana pension funds could end up with less if Chrysler collapses and is liquidated.

Why the funds were holding such risky bonds is an interesting question, and the potential to destroy a bunch of Chrysler jobs in Indiana is a subplot.

Is Mitch Daniels such a moonbat he would destroy jobs in his own state just to hurt a union?

Stay tuned.; 6/9/09, 6:19 AM
KCFleming said...: This comment has been removed by the author.; 6/9/09, 6:35 AM
KCFleming said...: Overnight, we're a banana republic. Obama strong-armed his way into ownership of Chrysler and GM.

Now they have their sights set on fully 16 percent of the nation's economic output, through Kennedy's bill on health care. It will turn over all medical decisionmaking to an unelected agency that will be forever unaccountable to the public.

In effect, it takes the property currently owned by hospitals and clinics and gives all the power over spending and clinical choices to the government.

The winners and losers will be political decisions rather than market effects, with some horrific waste -like Murtha's empty airport, and lots of corporate quid pro quo pay-to-play campaign donations and selection of board members. The customer is no longer the patient, but the payer, the State.

The State's wishes must be served, the patient? Not so much.

The little guy can't vote anymore, not through elections and not with his dollars. You are now subjects, and no longer citizens. Your only remaining choices will be like a teenager's: what to spend your 'extra' money on. Uncle Sam will control all the rest.

And their's not a goddamned thing you can do about it.; 6/9/09, 6:37 AM
Anonymous said...: Assuming for a moment Bart's scenario is 100% true, the Indiana pension funds could end up with less if Chrysler collapses and is liquidated.

At this point, I'd argue that, no, they couldn't get a worse deal with liquidation. That is one of the major problems Obama has: the deal he's sticking them with is so bad that outright liquidation won't be any worse for them than this is. If this goes through normal bankruptcy, worst case, they'll end up with basically the same deal they have now.

Why SHOULDN'T they at least try for the best deal? It is their legal requirement.

Is Mitch Daniels such a moonbat he would destroy jobs in his own state just to hurt a union?

He could be sued if he DIDN'T try to do this. He's legally required to watch out for his fund.

Why is the union pension fund more important than IN teachers and firemen?; 6/9/09, 7:35 AM
Bart DePalma said...: save_the_rustbelt said...

Assuming for a moment Bart's scenario is 100% true, the Indiana pension funds could end up with less if Chrysler collapses and is liquidated.

The analogous model should be the airline bankruptcies after 9/11.

The major airlines were saddled with absolutely insane union labor costs and were facing non-union carriers providing superior services for less money. The crash in air travel after 9/11 made an untenable situation impossible.

The airlines went through bankruptcy and compelled the unions to accept market wages and benefits, making the carriers competitive again. The investments of the secured creditors were protected, which enabled the airlines to obtain further bridge loans to navigate bankruptcy.

Likewise, Chrysler and GM should have entered bankruptcy, the UAW compelled to accept comparable compensation to US Honda workers, unprofitable lines (like green cars) should have been terminated and, if discovery indicated, the Chrysler or GM entities could have been eliminated, their profitable lines sold to other manufacturers and the secured creditors reimbursed what was gained.

Under normal bankruptcy rules, Chrysler would have been dissolved and its profitable lines like Jeep sold to another auto maker. What was gained would have gone to the secured creditors and the stock holders and UAW would have been out of luck.

GM would have survived, but half of its lines would have been terminated and it would have been primarily in the business of making light trucks that sell with the American people. Idiotically uneconomical lines like the Chevy Volt would have been terminated.

However, the Obama Administration was hardly going to allow its UAW sponsors to be broken and its favored green cars terminated in bankruptcy court. Thus, the nationalization of Chrysler and Ford.; 6/9/09, 8:46 AM
Dust Bunny Queen said...: It seems like the pension fund made a bad investment; buying these bonds at a discount when they knew Chrysler was in the toilet.

Wishful thinking should be punished

As should any shred of entrepreneurship, initiative, innovation or any other portion of capitalism, according to the Obama regime.

The point isn't that that the mutual funds or investment firms bought an investment at a reduced rate. The point is that OBAMA has violated the law, is using criminal tactics to favor one group of investors (the ones who voted for him and gave him LOTS of money) over the other investors who by right of contract law should be further in line in a bankruptcy proceeding.

I'm an investment advisor. Some of my clients, generally LOL's (little ole ladies) personally bought some of these types of bonds and notes years and years ago when they still had good credit ratings.(GM, GMAC, Chrysler, Lehman Brothers, Bank Of America and other industrial and financial companies). They also bought mutual funds that contained these types of investments. The reason for purchasing was income. Monthly income to supplement their pensions, social security.

Unless they sold their bonds and mutual funds at the first hint of the avalanche that Obama was going to launch on the economy, (some did some would not) they are now looking at greatly reduced values in their portfolios.

I can attest that I and MANY other financial professionals will NOT invest in any firm that is Unionized nor in any firm that may be the next take over target of the Federal Government... and God knows who King Obama is going to set his sights on next. Foreign bonds are looking better all the time especially since our dollar is about to be worthless.

Buy American.....in a pigs eye.; 6/9/09, 9:06 AM
holdfast said...: I wonder how long until we start discussing how many ratings notches it will cost a company if that company has a powerful union, or even any union at all? I would say 6 notches on the senior secured debt long-term debt, but I am no expert.; 6/9/09, 10:00 AM
mccullough said...: Dust Bunny Queen,

The "rule of law" is that secured creditors, as a group, vote on the plan. Now Obama strong-armed them, but so what?

As for unionization, who fucking cares? It's the very financial firms you pimp for that brought on this mess.

The GM and Chrysler bailouts are peanuts compared to the financial bailouts.

My financial advisor has made me money in the last year. Apparently, your clients and the Indiana pension funds didn't have such a good one.

The market should punish you.; 6/9/09, 12:42 PM
Bart DePalma said...: mccullough said...

Dust Bunny Queen, The "rule of law" is that secured creditors, as a group, vote on the plan. Now Obama strong-armed them, but so what?

Lets set aside the rule of law for a moment and talk economic realities.

The comparative advantage that American and British business had over the rest of the world over the past 600 years was a superior financial system that protected investors from the predations of the political class. I would recommend Walter Russell Mead's "God and Gold" for an excellent book on the subject.

In plain English, law protecting creditors allowed American business to obtain credit at the lowest possible interest rate and the money saved was plowed back into the business creating economic growth and jobs.

Countries which do not protect creditors from the predations of the political class are without exception economic basket cases because business cannot obtain credit or can only obtain credit at uneconomical interest rates, placing them at a severe competitive disadvantage. Think Africa and Latin America for much of the past century.

Do we really want to exchange the world's most successful economic system for that of a bankrupt banana republic?; 6/9/09, 12:55 PM
Hoosier Daddy said...: The "rule of law" is that secured creditors, as a group, vote on the plan. Now Obama strong-armed them, but so what?.

That last sentence pretty much precludes you from understanding basic economics or existing bankruptcy law.; 6/9/09, 1:10 PM