Obama & Chrysler - cont'd - Abuse of Rule of Law and Creditor Rights

Many, many folks are weighing in far more articulately on this issue than I. The ugly truth is the Obama administration is bullying creditors who have legitimate senior claims to favor the unions that he is politically beholden to and ideologically aligned with -- the law be damned ! This is really bombshell stuff going on; and despite these detailed critiques, the mainstream media is simply not covering the story accruately (are you surprised ? I'm not). They tend to buy whatever kool aid Obama is selling.

Here is a sampling:

John Mauldin: (www.frontlinethoughts.com)

"And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.

If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits?

Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all "predatory hedge funds." They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors.

Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed.

Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don't create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive."


Jim Manzi: (http://corner.nationalreview.com)


President Obama and the Rule of Law [Jim Manzi]
President Obama scolded investors who refused to just accept what he said they should take for their Chrysler bonds, saying: “I don’t stand with those who held out when everyone else is making sacrifices.” According to the New York Times, one group, Perella Weinberg Partners, was “chastened” and “abruptly reversed course”.

How should we decide who makes what “sacrifice” when a corporation can not meet all of its financial obligations? In the U.S., we use bankruptcy court. Courts are effective for this purpose, in part because they are somewhat more insulated from immediate political pressures than are other agencies of the government. The reason that this matters is that investors require stability of rules in order to agree to put money at risk. This is Rule-of-Law 101. Given that a key political constituency that helped elect the President, unions, are a party to the Chrysler dispute, the potential for undermining the rule of law is obvious and severe.

Seeking Alpha reports an interview in which the eminent lawyer representing two of the hold-out investment funds, Tom Lauria, the Head of Restructuring at White & Case, claims on-the-record that:

One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight…That was Perella Weinberg.

Here’s the list of major banks that apparently led the negotiations and agreed to go along with the desires of the President: Goldman Sachs, Citigroup, JPMorgan and Morgan Stanley. Do you notice any obvious commonality? All are major recipients of TARP funding. Unlike, say, the hold-outs. Perella Weinberg, the first of the hold-outs to crack, is a boutique firm that has a large contract advising on the execution of various government bailouts.

Funny how you tend to win negotiations when you: (i) have operational control of the armed forces, and (ii) are negotiating with entities that are directly dependent on your using your monopoly on coercion to collect money from taxpayers and give it to them. You just tell the other side what they’re going to accept, and never mind any legal technicalities.

For more, see the excellent post by Megan McArdle in which she gets to the key question:

[W]hen did it become the government’s job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?


Zero Hedge: (http://zerohedge.blogspot.com)

The White House Threatened To Destroy Perella Weinberg's Reputation
Posted by Tyler Durden at 10:34 AM
Update - please see additional FOIA information at end of post.

In an interview of momentous importance, WJR's Frank Beckmann interviews Tom Lauria, the Head of Restructuring at top five law firm White & Case, in which the lawyer, who represents Chrysler hold-out hedge funds Stairway Capital and Oppenheimer Funds, discusses on the record the amazing treatment by the White House of Perella Weinberg, which initially had been a transaction hold out but after threats by the White House (not my words) was forced to drop their objection and go with the administration. Says Lauria:
"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg."
In the clip below, fast forward to the two minute mark, where the Obama administration's negotiating tactics become very, very clear.

What is very odd is that Perella Weinberg could possibly have veered away from the administration's path in the first place: Zero Hedge readers know that P-W is the very firm advising the rapidly sinking FDIC "on transactions and strategies to stabilize the banking system, and also on the proper way to dispose failed institutions and how to handle delinquent securities assumed from banks, as well as the creation of the aggregator bank."

This leads to the conclusion that this was really the work of one Dan Arbess, who runs the recently acquired by P-W, Xerion Capital, but nonetheless does not explain the lack of strategic integration at this most critical of advisors to Sheila Bair, and by implication the U.S. administration. How it is possible that one's core advisor would go against its client, even if offset by a Chinese Wall, is likely the big story here, and speaks volumes about the chaos behind the scenes currently occurring with regard to Wall Street's sentiment for the ruling administration.

Incidentally, Zero Hedge is considering launching a FOIA to Ms. Sheila Bair to disclose the compensation structure for Perella Weinberg as it continues to advise the FDIC on the "proper" shuttering and liquidation of bank after bank. After all, we have already seen 31 bank failures for 2009, a number that will likely hit the 100s, and it is every taxpayer's right to understand the motivations behind Perella-Weinberg's recommendations to the FDIC and to the White House, especially ahead of next week, when the stress test results could potentially lead to the closure of some of the "too big to fail" systematically important financial institutions.

The full interview with Tom Lauria below is a must hear for everyone as it discloses not only the administration's strong arming tactics in black and white, but also discloses some other critical facts that the president on his regular TV appearances has failed to mention such as:

- First lien holders were willing to accept a 50% discount on their positions, however the 71% demanded by the administration was seen as too much.
- The cash going to Junior claims (creditors below the first liens) will be between $10 and $20 billion, a number which in practice should satisfy a par recovery for the 1st liens if the Absolute Priority Rule was actually withheld.
- Among the creditors are not just vulturous hedge funds but "pensioners, teachers, credit unions, college endowments, retirement plans, and personal retirement accounts."

In conclusion, Lauria summarizes the developing Chryslerf#%k best:

"The President is trying to abrogate contractual rights; if he will attack that contractual right, what right will he not attack?"

Update: Zero Hedge urges our readers to click on the following link and submit a FOIA to the FDIC with regard to the abovementioned Perella Weinberg compensation matter. While one request will likely be ignored, as will ten or a hundred, if there are thousands of FOIA petitions, the FDIC may see it as their civic duty to provide the requested information. While you are at it, you may also request information on the remaining balance under the FDIC's Deposit Insurance Fund.


SUNDAY, MAY 3, 2009

White House Claims Head Of White & Case Restructuring Group Lied
Posted by Tyler Durden at 7:41 PM
In a story becoming more bizarre by the minute, ABCNews has now picked up on the Perella Weinberg scent with some new twists. According to ABC, White House deputy press secretary Bill Burton claims that the allegations by Tom Lauria, global head of the Financial Restructuring and Insolvency at White & Case are "completely untrue". As Zero Hedge already disclosed, Perella Weinberg was previously a client of White & Case, however, the firm run by former head of M&A at Morgan Stanley Joe Perella (where incidentally Steve Rattner was head of the Communications group until 1989), decided to fire the law firm after developments unknown, and in a radio show, Tom Lauria had this to say about the White House's alleged strongarming tactics:
"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg."
The White House has now stepped in and claims that this story is patently false:
"The charge is completely untrue," said White House deputy press secretary Bill Burton, "and there's obviously no evidence to suggest that this happened in any way."
What is more strange is that now Perella Weinberg itself is claiming Lauria's story misrepresented the facts:
"A Perella Weinberg Partners spokesperson told ABC News on Sunday that “The firm denies Mr. Lauria’s account of events.” The spokesperson would not elaborate."
What is strangest is that Lauria would stake his career and reputation on the line by stating on the record the facts previously disclosed. As such his downside is much bigger than that of Mr. Burton or of the PW's spokesperson, as they effectively side with the Obama's side of the story.

Granted there could be even more to this story than meets the eye, thanks to some keen observations by our friends at Finem Respice.

Ultimately, this will be a very interesting development, because without factual backing, Tom Lauria's career is now on the line, as he has taken on not just the administration but his very own, former client. The bottom line here is that someone is lying, and if any further facts emerge to substantiate White & Case's position, it could prove to be a massive PR blow to both the White House and the FDIC's advisor, Perella Weinberg.

The full statement by Perella Weinberg is presented below:
Suggestions have been made that the Perella Weinberg Partners Xerion Fund changed its stance on the Chrysler restructuring due to pressure from White House officials. This is incorrect. The decision to accept and support the proposed deal was made by the Xerion Fund after reflecting carefully on the statement of the President when announcing Chrysler’s bankruptcy filing. In considering the President’s words and exercising our best investment judgment, we concluded that the risks of potentially severe capital loss that could arise from fighting this in bankruptcy court far outweighed any realistic potential upside.

We have a very specific mandate from our investors, and that is to carefully weigh investment risks and rewards. It is not our investment mandate to pursue political or risky legal campaigns with our investors’ money. This was our assessment of investment risk and reward, nothing else.



While we did and still do believe that the lenders would be justified in pressing their objections under conventional bankruptcy law principles, we believe a settlement would now be in the best interests of all parties in the context of avoiding a drawn out contested bankruptcy litigation proceeding, and we encourage our colleagues in the loan syndicate to pursue this immediately.”