Bankruptcy Judge Arthur Gonzalez ruled yesterday in favor of the plan to auction Chrysler to Fiat, the UAW benefit trust and the U. S. and Canadian governments. He overruled an objection filed by Wall Street lawyer Thomas Lauria on behalf of holdout hedge and investment funds.
For this critic of Geithner's, Summers' and Obama's kid-gloves treatment of the banks, Obama's leadership in the Chrysler crisis has been encouraging, even inspiring. Why it's important as a sign of where this Administration is headed in dealing with the global economic collapse after the break.
I had my doubts about what Obama planned to do with Chrysler as news stories began to proliferate that the Administration planned to let the company go into bankruptcy. On March 30, Obama announced the Chrysler had only 30 days to make a deal with Fiat or go under ("Obama questions viability of GM, Chrysler").
what we didn't know at the time was that the Administration would embark on an intense program of hard-nosed negotiations with the secured creditors who had to be brought in line in order for Chrysler to survive. Most of the larger creditors, including JPMorgan Chase, were TARP recipients, but as negotiations began, they were taking a hard line position. Emptywheel wrote back then:
JP Morgan Chase wants to push Chrysler into bankruptcy so it can jump the line ahead of retirees and US taxpayers to get paid back.
If JP Morgan Chase does that, 300,000 people will lose their jobs.
That's sorry thanks we get from a company that has gotten $25 billion in TARP funds from American taxpayers--plus billions more in other benefits from the Wall Street bailout.
But things had changed dramatically by April 30. Obama, with his auto industry task force standing behind him, announced that a deal had been struck to save Chrylser. It would still be necessary to go through a quick, surgical Chapter 11 bankruptcy filing because certain "speculators" refused to sign on to the deal. Obama had nothing nice to say about them:
"They were hoping that everybody else would make sacrifices, and they would have to make none," Mr. Obama said of the creditors, among them several hedge funds and boutique investment funds. "I don’t stand with them."
It's understandable why the President had little sympathy for them. Felix Salmon explains:
As for the smaller creditors who stood in the way of a deal which would have avoided bankruptcy, I have very little time for their plaints. They’re offering nothing which will help Chrysler in the future: they just want to get the maximum return on selling the bonds they picked up for pennies on the dollar. I hope and trust that the bankruptcy judge will give them short shrift.
After the announcement, several of the holdouts, including Perella Weinberg, reconsidered and joined the creditors ready to go along with the Obama plan. The attorney representing the holdouts, Thomas Lauria of the Wall Street firm White & Case, took to the right-wing talk circuit crying that Obama was threatening and browbeating creditors:
"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."
Rush Limbaugh, Fox and right-wing bloggers jumped on the claim and went on the attack:
"[N]ow the White House, by the way, is denying all of this, but there's a pattern here, ladies and gentlemen, that sort of gives the lie to the denial. I mean, this is -- we've referred to the situation that's going on in Washington as loan-sharking, Obama loan-sharking people."
After receiving this attention from the Fox & Friends crowd, Lauria has stepped up his crusade. He has assumed the mantle of the courageous defender of constitutional rights, averring that the Chrysler deal amounts to an unconstitutional "taking" of the property of the hedge and investment funds he still represents. The right-wing bloggers are loving it:
If the Obama administration expected the senior creditors of Chrysler to fold their tents under political pressure, they may have gotten a rude shock today. Thomas Lauria, who accused the White House of threatening the creditors withn humiliation at the hands of the White House press corps, has filed a motion to halt the administration’s machinations on behalf of the UAW in the Chrysler bankruptcy. Lauria and his allies claim that the Obama administration has violated the Constitution in their bid to devalue the senior creditors’ holdings on behalf of junior creditors, and have some precedent to support the allegation.
Lauria, however, is no champion of the Bill of Rights. He makes a living by trying to disrupt Chapter 11 proceedings and extort a sweet deal for creditors he represents.
Thomas Lauria, head of the restructuring practice at White & Case, is in a tough spot: the lead lawyer for the group of holdout lenders that the Obama administration is blaming for pushing Chrysler into Chapter 11...
Lauria has been here before. In the contentious Adelphia Communications bankruptcy, Lauria led a group of creditors that filed late motions calling for a special trustee to investigate whether each group of note holders was getting what they deserved, according to this 2006 story from the New York Law Journal. A judge dismissed his motion, calling it a "nuclear war button" that threatened to disrupt the planned sale of Adelphia's prime assets to Time Warner and Comcast for nearly $18 billion.
It appears that Mr. Lauria has gone a bridge too far this time around.
First, Perella Weinberg rebuked his claim that they had been pressured:
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.
Then Judge Gonzalez ruled against Lauria and required the hedgie holdouts to come out of the shadows and identify themselves publicly.
Finally, the judge overruled Lauria's motion yesterday and moved the deal forward over the objections of the remaining holdouts.
The story isn't over yet. We can expect Lauria to appeal from the Judge Gonzalez' ruling, and Chrysler and Fiat have many obstacles to overcome before they can become a successful car manufacturer again so that those jobs and pensions are saved. The bottom line, though, is that the deal is on track.
But let's review what Obama did to put this deal together and save Chrysler:
- He took a hard line with respect to all parties and required them to make significant concessions so that Chrysler wouldn't be permanently attached to some sort of taxpayer "umbilical cord."
- He never failed to note the repeated sacrifices made by the UAW and its members. He never criticized them for failing to give up enough.
- Behind the scenes, TARP recipients like JPMorgan Chase dropped their objections for some reason.
- He offered the secured creditors, including the big TARP recipients and the smaller hedge and investment funds, a limited cash payout (around 30 cents on the dollar) and no future stake in the company.
- He gave Chrysler $7.2 billion in interim and bankruptcy that will not have to be repaid.
- His strategy of getting tough with creditors and standing with the workers is working so far.
I have wished Obama would confront Wall Street more directly after their greed and corruption have sent the world economy into depression. But I can find no quarrel with the way he has handled the Chrysler situation. In fact, he seems to be a real working class hero occupying the Oval Office. Let's hope we see more of this from the Obama Administration.