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By Gary Starr For the Neville Awards
May 3, 2009
Tom Lauria, head of the bankruptcy group at White & Case, and a Democrat, is the lawyer for a client who bought a position in Chrysler that entitles them to be paid "first dollars out"...that is 100 cents on the dollar before any junior creditors got paid. The client agreed to compromise 50% of their first-lien to help support the restructuring. Under threat of being smeared by Team Obama through the White House press corps the client is being forced to accept 29 cents on the dollar.
In an interview with WJR’s Frank Beckman, Lauria details what can only be described as mob tactics worthy of Tony Soprano. And it becomes clear that the some of the White House press corps is clearly in the bag for the president.
If the Bush White House had attempted any of these tactics there would have been calls for investigations and impeachment. But this is business as usual for Team Obama. No doubt the press will ignore this story...it doesn't reflect well on their golden boy.
Here's where we are today...the president can reach into a private company and fire a CEO (GM's Rick Wagoner) because the company took bailout money...the president can demand that a bank CEO (B of A's Ken Lewis) be fired after that CEO reveals he was forced into accepting a merger with Merrill Lynch and the Treasury Dept. can refuse the return of TARP funds to maintain control of banks that took the money.
Banana Republic Capitalism Part 1 and 2
Fascism on the march...here's the interview:
Listen to the audio:
Transcript of the interview:
Beckman: So what’s the matter with your vulture clients who are so greedy and selfish. Why won’t they go along with this?
Lauria: Well, they bought a contract that says that they get paid before anyone else does by Chrysler. And they have been told by the government who is in complete control of Chrysler, oddly enough, that despite their contractual right, they do not get paid before everyone else.
So they are standing on their rights, standing on the law, trying to defend in effect what is the Constitution of the United States, to make sure that they get what they’re entitled to for their investors.
Beckman: Tom, let me make the argument against you in another way. We’ve heard the President say this, "I wouldn’t want to stand on their side." Ron Gettelfinger says "Everyone else has made concessions. These people won’t; they’re greedy." Why not take a concession that is being asked of everybody else and is being accepted by everybody else, including other hedge funds that had bought some of these bonds in Chrysler?
Lauria: Well that’s a great question, because let me tell you it’s no fund standing on this side of the fence opposing the President of the United States. In fact, let me just say, people have asked me who I represent, and that’s a moving target.
I can tell you for sure that I represent one less investor today than I represented yesterday. 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’s how hard it is to stand on this side of the fence.
Beckman: Was that Perella Weinberg?
Lauria: That was Perella Weinberg.
Beckman; All right.
Lauria: Now let me just tell you, to be clear, that we do not oppose the rehabilitation of Chrysler. We think it is vitally important that a company like Chrysler be protected to the extent that it can be within the framework of the law. I want to also say that we do not oppose the government backstopping or supporting the pensioneers and retirees and workers of Chrysler.
I actually think that in a troubled economic time like we’re in, that is an appropriate role for the government to perform. What we do oppose, however, is the abuse of the bankruptcy law to coerce first-lien lenders subsidize the rehabilitation of Chrysler or the backstop of the obligations to the pensioneers and retirees beyond what they will do voluntarily.
And just to be clear, these clients of mine have agreed to compromise 50% of their first-lien position to help support the rehabilitation of Chrysler — Contrary to what the President said yesterday in his new conference that "these people will not give to support the effort," they have agreed to compromise 50% of what they’re owed to support the rehabilitation of Chrysler, despite the fact that they’re under no obligation whatsoever to do so.
That is what we stand for, and that is what we’re going to go to court to fight for.
Beckman: OK, so they have offered to take 50 cents on the dollar. What are they being offered in return, and how does that compare to what other stakeholders, say the UAW, are going to be receiving?
Lauria: Here’s the troubling circumstance here. My clients bought a position in the Chrysler capital structure that entitles them to be paid "first dollars out." That is, they’re to be paid 100 cents of what they’re owed before any junior creditors get a penny.
The government has offerend them 29 cents on the dollar, in the context of a restructuring of Chrysler that will send over $10 billion of value to junior claims. And when I say $10 (billion), that’s a floor. As we’re continuing to review the papers that Chrysler has filed in the bankruptcy court, that number may actually be more like $20 billion. So in other words, my clients, who are contractually entitled to 100 cents on the dollar, are being asked to take 29 cents on the dollar, while junior creditors are being offered somewhere between $10-$20 billion of value in the Chrysler rehabilitation.
Now I ask your listeners, what would they do if they were in our position?
Beckman: Now Tom Lauria, let me cite a New York Times piece, I believe this was yesterday’s New York Times. No, it’s today’s as a matter of fact. And it says about the creditors who are standing firm: "Many of them bought Chrysler debt for about 30 cents on the dollar." So what they’re saying is, "Look, they got a discount to begin with. They’re getting a good deal here. If they bought it for 30 and they’re being offered 29, that’s a great deal, better percentagewise than anybody else got."
Lauria: Well, what people need to understand, first of all, that that is only speculation. There are people who bought this debt at par in my group, there are people who bought this at 70 cents, there are people who bought it at other prices. But what people really need to understand is that the people who bought this debt are pensioneers, teachers’ credit unions, personal retiree accounts, retirement plans, college endowments. That’s who my clients act as fiduciaries for. And they make all kinds of investments. And as you can imagine in this economy, there are numerous of those investments that have gone bad.
This was an investment that people made based on their assessment of the assets of Chrysler, and the view that this was a very secure, very safe investment. And they bought a contract that said they would get a very low rate of return in exchange for that high level of security. So the argument about what they paid for their investment really is irrelevant.
The fact of the matter is they bought a contract that said "you’re first in line, and in exchange for that you’re going to get a very low rate of return." And I think everybody in this country should be concerned about the fact that the President of the United States, the executive office, is using its power to try to abrogate that contractual right. If the President will attack that contractual right, what right will it not attack?
Beckman: You made a comment to me before we went on the air about the significance of this case as it relates to the Constitution. I’d like you to explain that to my audience.
Lauria: Well, look, there are kind of two aspects to that. The first is the right to property and the right to contract are kind of sacronsanct in this country. I think everybody understands that when you make a deal it’s supposed to be honored, and if it’s not honored you’re supposed to be able to get protection in court. And what is happening here, through the force of the United States government, and that’s what’s disturbing about this — I mean, private parties have contract disputes all the time — but for the United States Government to step in, the Executive Office of the United States Government, who under the Constitution is charged with enforcing the laws to step in and try to in effect break the laws, I think we should all be concerned about that. That is a constitutional issue.
OK, number one. Number two, realize that our Constitution is premised on the notion that there is a balance between the three branches of government: the executive, the legislature, and the judiciary.
And what’s going to be happening, in fact I’m going to have to go here, because I’m heading down to the bankruptcy court to start taking on this battle, which is of epic proportions. But what is going on here is you’ve got the executive branch coming into the judicial branch. And I think it is really important for the Constitution of the United States that people understand that the judicial branch can stand independent and interpret and apply the laws as it’s required to do under the Constitution in the face of intense pressure from the Executive branch to do otherwise.
Beckman: Tom Lauria, really appreciate it. Final question, will Oppenheimer Funds and Stairway Capital, your other two clients in this, are they committed to standing firm? I’ve got to believe they’re facing the same pressure Perella Weinberg did before it changed its mind and said "Okay, we’ll go along now."
Lauria: Well they are today, but the Executive Office hasn’t called them yet and made threats to them. So, maybe by tomorrow I won’t have any clients, and maybe this fight will be over.
Banana Republic Capitalism Part 1
April 30, 2009
The Chrysler reorganization is shaping up as another milestone in the decline of the rule of law under Barack Obama. We've said for quite a while that bankruptcy is the only viable option for Chrysler and General Motors, not--as Obama claims--because they don't know how to make the right kinds of vehicles, but because their unsustainable union contracts make it impossible for them to be profitable. That reality has now been turned on its head, as the administration has tried to bully Chrysler's secured creditors into going away, while the United Auto Workers Union, solely on the basis of political clout, would be paid at an implied rate of 50 percent and would emerge owning 55 percent of the company, with the government also holding a stake.
This is banana republic capitalism at its worst. Political influence, rather than the law, dictates the rights of the parties. When some of the secured creditors refused to be intimidated, Obama libeled them in the press, saying, outrageously, "I don't stand with those who held out when everyone else is making sacrifices." Actually, under Obama's plan the politically favored parties, principally the UAW, will benefit--will steal money, to put it crudely--from the parties who held out. Those parties call themselves the "non-TARP lenders."
This highlights the government's conflict of interest in this transaction, as in so many others now underway. Some of Chrysler's secured creditors are banks that received TARP money. As the New York Times put it, those lenders are "beholden to Washington" and "defying the administration was never a serious option."
It remains to be seen what will happen in bankruptcy court. Already one key player, Perella Weinberg Partners, "under intense pressure from the White House," has caved in and agreed to accept Obama's terms. Whatever the ultimate result, this episode will have consequences. The Wall Street Journal notes:
If the current plan is pushed through, then good luck to any unionized firm trying to raise secured debt on decent terms in the future.
For Chrysler, the administration's plan spells disaster. It is inconceivable that the UAW, the principal source of Chrysler's problems, will manage the company back to profitability. More likely, Chrysler will become a vehicle through which the federal government provides uneconomic subsidies to unionized auto workers and retirees.
Barack Obama's conduct in this affair has been disgraceful. Our bankruptcy laws are well developed and are fairly implemented by experienced bankruptcy judges. Priority among creditors is established according to legal rules and precedents. The process is transparent and subject to appellate review. But in this case, the law did not favor the parties who have the most influence with the White House--notably, the United Auto Workers--so Obama substituted political threats and bullying for due process. Il Duce would have approved.
UPDATE: Michael Barone has similar thoughts:
The bondholders made a good point. They are secured creditors, and in our bankruptcy law secured creditors get paid off in full before unsecured creditors get anything. That's a sound legal principle: why would secured creditors lend anyone anything unless they can get their security back if the loan isn't paid off? In this case, the small bondholders were willing to settle for only 60% of what they were owed. But, they complain, the government wouldn't negotiate directly with them, but only through JPMorganChase, which (unwillingly) took TARP money on October 13 and thus is under pressure to do what the government wants.
Translation into politispeak: The government squeezed the small bondholders too hard in order to protect the United Auto Workers, which of course has over the years been a bounteous source of money (and manpower) for the Democratic party.
Banana Republic Capitalism Part 2
May 2, 2009
On Thursday, I wrote about the banana republic capitalism that we are experiencing under the Obama administration. In connection with the Chrysler bankruptcy, Obama, ignoring laws that assign priority to secured creditors, has tried to bully lenders into abandoning their legal rights in favor of the United Auto Workers Union. To my knowledge, there is no precedent for this sort of arrogant lawlessness in American history. (Germany, Italy and Argentina are familiar with it.) Now, bankruptcy lawyer Tom Lauria adds more:
Lauria: Let me tell you it's no fun standing on this side of the fence opposing the President of the United States. In fact, let me just say, people have asked me who I represent. That's a moving target. I can tell you for sure that I represent one less investor today than I represented yesterday. One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the threat that the full force of the White House Press Corps would destroy its reputation if it continued to fight. That's how hard it is to stand on this side of the fence.
Beckman: Was that Perella Weinberg?
Lauria: That was Perella Weinberg.
There is a pattern here. Financial institutions holding billions of Chrysler's secured debt are being held hostage by the TARP loans they are not permitted to pay back. They are being forced to accept just pennies on the dollar for loans they made in good faith less than two years ago. Just like mob loan sharks, the administration wants them under its thumb so they can extort more and more concessions.
I drew the same analogy to organized crime loan sharking in my "banana republic" post. Sadly, I'm afraid it is apposite. Once again, the Obama administration has steered us into uncharted waters: we have no experience with this lack of respect for the rule of law.
By the way: does anyone doubt that Barack Obama can mobilize, as he threatened, the "full force of the White House press corps" against any political opponent? No doubt there would be an honorable exception or two, but the threat is obviously credible.
UPDATE: The Obama administration denies making the threats alleged by Lauria. The denial, however, is merely a bald assertion. Lauria is the head of the bankruptcy group at White & Case, and a Democrat who contributed $10,000 to the Democratic Senatorial Campaign Committee in 2008. In that sense, you could say that he helped to bring about the corrupt regime that is now bullying his clients. But his credibility vastly exceeds that of an administration spokesman who, having no knowledge of the facts, is sent out to issue a blanket denial.