Un-American Government Intervention 47 comments
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“Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law.
Unfortunately, this past week's events demonstrate that the phrase now more aptly describes our own country.
On Monday, the Supreme Court refused to hear an appeal from Chrysler's secured creditors based on the government's argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.
When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.
The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That's precisely why we have contracts.
Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?
Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.
The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa's body.
As if this wasn't bad enough, testimony on Thursday from former Bank of America (BAC) CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from BofA shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.
Again, the justification for the interference seemed to be the “greater economic good” the merger would serve. The right of BofA shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.
More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.
As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments.
However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat.
The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness.
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This article has 47 comments:
We know that for a marketplace, economy, environment, institution, etc. to function properly the "rules of the game" must be clearly stated at the beginning and those rules cannot be arbitrarily changed once the market mechanism is set into motion.
Our current administration is changing the rules of the game as they see fit. Just like your statement above, without full faith that the rules of the game will be followed and protected "players" will no longer want to participate.
On Jun 14 11:13 AM theblindtibetan wrote:
> This on point. The government is now the wild card in our economic
> system. Third world economies run by dictatorships are now more predictable
> than the US, as old school cronyism and "who you know" gets thrown
> into the cuisinart along with the wooly-headed fuzziness of "the
> greater good" followed by a random splash of basket cases deemed
> "too big to fail". Whatever happened to letting the market sort things
> out? This is going to get ugly.
Does the above quote sound fitting to the present authorities?
What the present administration and it's agents have done will NOT go unnoticed as Peter has described. This is another nail driven into the coffin lid of free enterprise. America has well turned down the road to socialism. U.S.S.A. and the Americanski's!
As things turned out the Supreme Court just doesn't look too supreme but much akin to a bunch of groveling nerds, and the Fed isn't as reserve as it sounds but exhibiting signs of madness in printing.
Yes, I concur with Market Sniper - things are most likely going the "other way".
Peter is right now we are totally into “crony capitalism”, on one side we have AIG style bailouts on the other we have Chrysler style bond holder cram downs. If you notice most of the bond holders were “TARP” banks which caved in without even a fight – that shows the extent of mafia control. The only one left to fight was a teachers union. Wall Street banks have shown they are spineless and lack principle- they simply believe in cronyism. Wall Street will go with anything that preserves their bonuses – Goldman, PIMCO etc exemplify this. They don’t care about principles or nothing simply a fast buck. Wall Street is simply a Den of Thieves – shameless crooks – will do anything to steal your money.
Ken Lewis also showed how much of a strangle hold the Govt. has – he backed off every allegation in the testimony. “I was threatened but I think it was well intended”. “We were forced into the Merrill purchase, but it was a great buy”.
Now with major sectors of the economy nationalized – financial services and banking (AIG, Citi, GSEs, …), auto companies, healthcare in a couple of months, what next.
Chrysler cram downs were achieved through the courts; I thought the courts were independent and not subject to political pressure. If courts cave in this way, democracy itself is in peril.
If you are indeed planning on running for Dodd's senate seat, let me know what I can do to help.
I'm with you 100%.
(I'm not foreign born, but my parents were.)
On Jun 14 12:57 PM Teutonic Knight wrote:
> As many astute SA commenters pointed out, the norm of human behavior
> is for self-denial acts right up to the breaking point. So it is
> hardly surprising that the Obama regime did what it did - - - i.e.,
> Business as usual - - - under King Barrie the Unready.
>
> As things turned out the Supreme Court just doesn't look too supreme
> but much akin to a bunch of groveling nerds, and the Fed isn't as
> reserve as it sounds but exhibiting signs of madness in printing.
>
>
> Yes, I concur with Market Sniper - things are most likely going
> the "other way".
On Jun 14 02:25 PM chhegu wrote:
> i would not worry to much about the future of the bond market it
> has gone on for a long time and just a couple of miss steps may well
> be forgotten.i do think this could make credit default swaps a bigger
> part of the businees of buying bonds. that is good thing isnt it.
My concern with the overall political climate is how easily the rule of law is being abandoned and how complacent the public is about it. Foreign investors and sophisticated parties are a great deal more concerned. Make no mistake. The strength of our system relies on the rule of law. And there is a price to abandoning it. Peter captures the issue here: "U.S. assets ... have historically traded at premium valuations based on faith in our legal system." That is all changing now.
So much has been written about "reversion to the mean" -- for example, on housing prices, P/E ratios, etc. I respectfully submit that the reversion to the mean will still occur, but in the context of inflation. And quite possibly with volatility and panics causing us to overshoot. My biggest question is When? Is it in two months or two years? I doubt we have as much as 5 years. I believe we're being propped up still with 401k money (many people are still investing a portion of each paycheck every month, along with matching funds) and whatever the gov't is secretly doing. But the larger market forces can only be held back so long, and a black swan event could still act as a catalyst. (Of course, I don't claim to be a credible market timer, but I freely share my perspective, for whatever it is worth. Good luck to you all.)
On Jun 14 03:55 PM Paul in Texas wrote:
> So, come election time next year, if your politian voted for the
> TARP bill and the stimulus package vote him (or her) out of office
> and find someone with more understanding of the economy and the constitution
> to vote for.
It is a term where the government is just a revolving door of influence for the business so they can secure their own interests and wealth. Gee, that sounds familiar. Ah, yes, 8 years of George Bush. Not at all Barack Obama or his crew. As far as I can tell, almost none of the folks making economic decisions in his cabinet or beyond have any dog in the race. Shocking. How can they be doing all this and have no direct personal wealth outcome at stake? Hmm. Maybe it's a new term, Peter: good government.
On Jun 14 03:32 PM Ergo wrote:
> Point of view of an patent litigator on the S.Ct.: I haven't reviewed
> the briefing to the S.Ct., so I can't comment on the legal reasoning.
> BUT, with the rule of law being widely criticized, they should have
> reviewed the issue. The trouble with the S.Ct. is their total lack
> of experience on technical and business issues. They concentrate
> on constitutional law and social issues, and tend to be wary of much
> else. They'd have been very reluctant to interfere with current
> business issues out of fear that they'll be blamed for economic problems.
> Most of their cases have been on appeal for years, and have volumes
> written about the issues by the time they decide. But give them
> a real-time crisis, and their weaknesses become much more apparent.
> Unfortunate really.
>
> My concern with the overall political climate is how easily the rule
> of law is being abandoned and how complacent the public is about
> it. Foreign investors and sophisticated parties are a great deal
> more concerned. Make no mistake. The strength of our system relies
> on the rule of law. And there is a price to abandoning it. Peter
> captures the issue here: "U.S. assets ... have historically traded
> at premium valuations based on faith in our legal system." That
> is all changing now.
>
> So much has been written about "reversion to the mean" -- for example,
> on housing prices, P/E ratios, etc. I respectfully submit that the
> reversion to the mean will still occur, but in the context of inflation.
> And quite possibly with volatility and panics causing us to overshoot.
> My biggest question is When? Is it in two months or two years?
> I doubt we have as much as 5 years. I believe we're being propped
> up still with 401k money (many people are still investing a portion
> of each paycheck every month, along with matching funds) and whatever
> the gov't is secretly doing. But the larger market forces can only
> be held back so long, and a black swan event could still act as a
> catalyst. (Of course, I don't claim to be a credible market timer,
> but I freely share my perspective, for whatever it is worth. Good
> luck to you all.)
Documents filed with the US Bankruptcy Court for the Southern District of New York make it clear that Obama’s Auto Task Force—headed by millionaire private equity manager Steven Rattner—had decided as early as Inauguration Day that a court-ordered restructuring of GM and Chrysler was needed.
The administration saw this as the most effective means for the companies to jettison unprofitable factories, brands and dealerships, gut the jobs and living standards of current auto workers and escape obligations owed to hundreds of thousands of retirees.
The Wall Street Journal reported Monday that GM will use a portion of the public assets from the US Treasury to subsidize a private equity firm’s buyout of the bankrupt auto parts supplier Delphi. GM will provide more than $2.5 billion of the $3.6 billion necessary for Beverly Hills, California-based buyout firm Platinum Equity to gain control of Delphi, the Journal reported. The newspaper added, “Such transactions can prove hugely profitable for a buyer, depending largely on financing costs and the buyer’s ability to turn around the business.”
Obama’s Auto Task Force has focused on one thing from the beginning: how to exploit the crisis of the auto industry to create conditions for Wall Street to reap huge profits.
Liberty is dying -- and it depresses me.
The silent majority in this country (those that work hard, take care of their family, and don't have time to picket on Capital Hill) need to push on Congress for term limits and need to vote in a change of guard there. If the people and the free-market don't take back this country, maybe we would be better off following Jim Rogers elsewhere.
I am guessing that this is really a one-off event though. A situation where the administration guessed it would have enough public sentiment onside to do as it pleased and get away with it. The message is so negative though it defies common sense.
If GM was too big too fail and the "presses were rolling" to assist the subsidized bankruptcy then why punish secured creditors? Especially US based unions. This makes no sense.
Unless the Fed has sharpened it's pencils and determined that in fact it cannot afford to bail out every failed company in America. That it cannot borrow to bail out GM and Chrysler. That the most politically expedient thing to do is to force secured creditors to subsidize Federal largesse.
We are in trouble in all these cases. If there is a real precedent then, the principles of our legal system will have been bankrupted long before the currency crashes and we are truly broke.
Cam
as long as i am able i will resist peacefully. the pressure against the bill of rights increases on every front.
the usual state of man through history is tyranny. the constitutional republic is worth saving.
If you read the Bankruptcy Court's decision you will see that
s/Arthur J. Gonzalez
UNITED STATES BANKRUPTCY COURT,
ruling that the secured creditors are entitled to the satisfaction of their claims "out of the bankruptcy estate", which is/are what is left of the assets of the Debtor.
So it came down to liquidating the whole thing with a likely max valuation of $800M, or sell the Chrysler assets to New Chrysler (Fiat, US, Canada, UAW) and get about $2B for the creditors.
And you want to call this a "sham bankruptcy"?
I believe the "sham" is the campaign that tries to imply the creditors are being short changed. The fact that the creditors wanted the Feds to inject more taxpayer capital so their secured claim would be larger is the second part of the sham.
Fortunately, the bankruptcy court was the appropriate place to make the necessary decisions. Using the very rule of law and contracts you preach about the creditors received more than liquidation would have provided...but obviously less than if the secured creditors were able to suck out more from the taxpayers.
Why do I get the impression you did NOT read the Gonzalez opinion? And how does a bankruptcy court that provides more than double the valuation of a bankrupt entity to creditors get labeled a sham by you?
….So it came down to liquidating the whole thing with a likely max valuation of $800M, or sell the Chrysler assets to New Chrysler (Fiat, US, Canada, UAW) and get about $2B for the creditors. And you want to call this a "sham bankruptcy"? Why do I get the impression you did NOT read the Gonzalez opinion? And how does a bankruptcy court that provides more than double the valuation of a bankrupt entity to creditors get labeled a sham by you?...
Arthur J. Gonzalez
UNITED STATES BANKRUPTCY COURT,
09-50002-ajg Doc 3073 Filed 05/31/09 Entered 05/31/09 23:15:29 Main Document
Pg 22 of 47
…In every bankruptcy case involving the sale of substantially all of a debtor’s assets, a purchaser may decide to assume certain contracts but not others.18 Moreover, the purchaser is not accorded any less right because the purchase is funded by the government…
18New Chrysler has determined that, to effectively carry on its business, it should take over certain other of
the Debtors’ obligations. Any such assumption of liability reflects the purchaser’s business judgment, the effect of which does not constitute a sub rosa plan because the obligation is negotiated directly with the counterparty. Thus, any of the obligations under those agreements are satisfied by New Chrysler and do not constitute a distribution of proceeds from the Debtors’ estates.
I think what is being referred to here as a “sham” is a scenario where a class of investor that stood in first position to benefit as owner of the assets, regardless of their “valuation” in terms of Federal Reserve Notes, saw their rightful receipt of same circumvented by a government entity with a printing press and backroom debts being repaid to special interest groups.
America is lost. It is no longer a democracy. Choosing Party A or Party B every four years isn't democracy. Sorry, it just isn't. You get an incredible choice of ... two men. And when an elected official does something that EVERYONE is outraged with, what do we do? We write letters and make phone calls. Wow. "I'm so angry, I'm going to... write a letter!" What a threat.
And then if we remember, years later we vote them out, and the next guy with almost the exact same views gets in... and things continue down the wrong path, down the dangerous path.
And what is with the MSM! What a total failure it has been to us. It's nothing more than a propaganda machine controlled by an oligarchy. And with only their point of view hitting the main stream, they are able to control the mob and put candidates of their choosing onto the fast track. When we vote, we get a choice to vote for a variety of men that are all picked by the powers that be and fast tracked by the MSM. That's not choice.
There's something to be said for education. Too bad education reform can't happen. They'll just throw more at the school system without actually fixing the design of the school system. Then they'll make sure every student is reading the government mantra and politically correct propaganda that the school system is stuffed with.
Bush and Obama have both been disasters. Most likely anyone that becomes party leader for either the Democrats or the Republicans will continue to be a disaster for the country. We need a viable third party that cares more about this country than power, corruption, greed and petty politics. If Americans would stop voting for the Democrats and Republicans in mass, perhaps a viable third or fourth (or more) parties would be born and men that are independent given a chance to do the country right. Sadly, I doubt the average MSM watching American is smart enough to know any better. We've turned the once independent hardworking America into a nation of babies that cry for government to help them or bail them out and take care of everything. And that's what we're getting. We voted for it. Not that we had much choice.
Is anyone else out there allarmed by the govts use of the word "czar"?
Also, Pete I had a thought. Given Obama regime's propencity to honor contracts how long before that great hoard of dollars held in private IRA's becomes irresistable to thems in WA? Indeed there have already been several reps hinting about that very thing. How long before our Gov't decides "for the good of the many" to confiscate the wealth held in these accounts??? Or as some have already ascerted, remove the tax exemption available to some investments. I believe it will simply be too tempting for our politicians to pass up. How else will they fund Obama care or prop up the SS, Medicare or Medicaid?
-Marc
Why should the average citizen not max out their credit card, HELOC, then default on those and other obligations?
Is this not the example that is being set by the government and the bailouts and the shredding of contracts and law for expediency?
Cannot they not see that they are setting the stage for a great tragedy for all of us?
"Regardless of their valuation"??
So, as a preferred holder, I get to put any valuation on the assets of one step away from liquidation entity that Gonzalez and the BK court has determined is worth only $800 million? My preferred rights allows me to petition the federal government to inject billions more of taxpayer money so my investment can be returned in full??
It's bankruptcy court folks, the debtor's get what's left in the entity...and that's exactly why investor's purchase preferred investments, to be protected in BK court. Now if you want to discuss "bad investments" in poorly run companies, that's another, different, column.
The state will stop at nothing in order to preserve the state. Invest accordingly.
The USA is a wounded animal and a wounded animal is not safe.
"Regardless of their valuation"??
So, as a preferred holder, I get to put any valuation on the assets of one step away from liquidation entity that Gonzalez and the BK court has determined is worth only $800 million? My preferred rights allows me to petition the federal government to inject billions more of taxpayer money so my investment can be returned in full??
It's bankruptcy court folks, the debtor's get what's left in the entity...and that's exactly why investor's purchase preferred investments, to be protected in BK court. Now if you want to discuss "bad investments" in poorly run companies, that's another, different, column.
Jun 16 08:01 AM |Report abuse| Link | Reply
00
Correct me if I’m wrong, but the preferred status allows that class of investor the rights the “purchaser” bought when they ponied up the $2B to pay them off. I would have thought they would liquidate some assets, install some better management, wipe the slate clean of all the contracts from the old entity and start over with new agreements, something the government was bound and determined to prevent, thus the term “crony capitalism”. What compounds the insult is the ruling is made by a government employee that receives compensation from the same purchaser of these assets. See again the Honourable Arthur J. Gonzalez’s own ruling / opinion below. I think the operable word “may” illustrates the point. Like Jim Rome says... “Scoreboard”.
Arthur J. Gonzalez
UNITED STATES BANKRUPTCY COURT,
09-50002-ajg Doc 3073 Filed 05/31/09 Entered 05/31/09 23:15:29 Main Document
Pg 22 of 47
…In every bankruptcy case involving the sale of substantially all of a debtor’s assets, a purchaser may decide to assume certain contracts but not others. [18] Moreover, the purchaser is not accorded any less right because the purchase is funded by the government…
[18] New Chrysler has determined that, to effectively carry on its business, it should take over certain other of the Debtors’ obligations. Any such assumption of liability reflects the purchaser’s business judgment, the effect of which does not constitute a sub rosa plan because the obligation is negotiated directly with the counterparty. Thus, any of the obligations under those agreements are satisfied by New Chrysler and do not constitute a distribution of proceeds from the Debtors’ estates.
On Jun 14 06:35 PM bklyn wrote:
> LOL! Someone talking about the rule of law and confidence in our
> integrity as a nation of laws....NOW??? I take it you read the Drudge Report for your information on foreign views of our legal system and its integrity. Try Handlesblatt...
Wednesday, 15 April 2009 --- Handlesblatt:
2. "Other fiscal measures should impart an increasing degree of stimulus to the German economy as 2009 unfolds for example, the reductions to income taxes, to social security contributions, child benefit … spending."
Pretty interesting that your source believes reductions to these sacred cows will "impart an increasing degree of stimulus" to an economy. If you believe this, please forward the notion to our current CEO in chief.
Rules change.
On Jun 14 09:56 AM ebschor wrote:
> "Without absolute faith that deals will be honored, it will be extremely
> difficult for U.S. companies to borrow money."
>
> We know that for a marketplace, economy, environment, institution,
> etc. to function properly the "rules of the game" must be clearly
> stated at the beginning and those rules cannot be arbitrarily changed
> once the market mechanism is set into motion.
>
> Our current administration is changing the rules of the game as they
> see fit. Just like your statement above, without full faith that
> the rules of the game will be followed and protected "players" will
> no longer want to participate.
"The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness."
Friedrich Hayek, from The Road to Surfdom:
Economic security is often represented as an indispensable condition of real liberty. In a sense this is both true and important.
Independence of mind or strength of character is rarely found among those who cannot be confident that they will make their way by their own effort.
But there are two kinds of security:
1) the certainty of a given minimum of sustenance for all and
2) the security of a given standard of life, of the relative position which one person or group enjoys compared with others.
There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health.
Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.
It is planning for security of the second kind which has such an insidious effect on liberty.
It is planning designed to protect individuals or groups against the diminutions of their incomes."
The medical, dental, legal, financial and political professions are all closed shop union based professions.
Well?
Your article was good until the last statement. "Raise Our Cost" !
If no one buys the junk the cost goes down. Do you really think there are that many fools now, knowing how the game is rigged, that would set themselves up for losses, wipe outs or law suits? Anyone buying bonds now deserves what they get. Sorry Peter you ruined a good article.