Chrysler's Secured Creditors Lose $4.9 Billion
Paul Sterne
June 11, 2009
William Shakespeare got it wrong. His famous saying should have been “Never a lender be, because the borrowers will buy off the bankruptcy judge”. The sad thing about the current era is that the US Government is doing everything in its power to undermine the rights of lenders.
The US Government wonders why Americans don’t save and invest. Well, after being ripped off again and again, by inflation, collapsing bubbles, institutions too big to fail, another old saying comes to mind, “Once shame on you; twice shame on me, thrice shame on the Feds.”
Case in point was Supreme Court Justice Ruth Bader Ginsburg's decision yesterday that it was more expedient to cheat Chrysler’s secured creditors out of $4.9 billion than to uphold the rule of law; shame of her and her fellow jurists. John Adams must have rolled over in his grave.
Violating the fundamental rights of secured creditors is a very high a price to pay for the political expediency of getting Chrysler in and out of bankruptcy as fast as possible. Until yesterday, secure creditors believed that in a bankruptcy they would get their money back, first, before the unsecured creditors were paid. In the Chrysler bankruptcy, the Obama Administration turned this basic tenet on its head and paid unsecured creditors like suppliers, dealers , and customers, first, at 100% on the dollar, and then paid secured or First Lien lenders, second, at only 28 cents on the dollar. One party to the bankruptcy, Fiat, got 20% of the equity of company for entering into an alliance and promising to provide ‘small car technology’. Whoever cut that deal, in the words of Mary-Ann Keller, the eminence gris of auto analysts, “has no clue about the auto industry.”
Even more frustrating is that the Obama Administration paid some obscure guy from New Jersey named Robert Manzo [of the Capstone Advisory Group www.capstonecr.com ] $10 million to engineer this rip-off. By the way, the victims of this crime are not only shady distressed debt speculators like Cerberus but also the teachers and civil servants of State of Indiana.
The argument that convinced Justice Ginsburg to violate the rights of creditors was that the majority of the secured lenders had approved the deal. Because the dissidents are small investors – i.e., owed less than $100 million out of $6.9 billion – they were deemed ‘inconsequential’. Cerberus, which is owed billions decided to stay on the sidelines, given their culpability in the whole affair, but they were hoping that the dissidents would prevail.
An even sadder fact is that the consequential majority – Goldman Sachs, Morgan Stanley, Citibank and JP Morgan Chase – had all received billions in bail-outs so they were, in effect, playing with taxpayer money.
This is the first time that I have questioned the Obama Administration’s judgment. This time President Obama has played it too fast and loose. Since Mr. Obama is a first-rate lawyer and intellectual, he knew exactly what he was doing.
P.S. It is telling that in the GM bankruptcy, the secured creditors are getting 100 cents on the dollar. This time the majority decided to push back, probably because they had repaid their TARP funds and were no longer beholden to the executive branch.
