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Published: Saturday, 5/9/2009

The strong arm of no law

PRESIDENT Obama s car czar has no experience in the automobile industry and is under investigation by the Securities and Exchange Commission for allegedly paying kickbacks to obtain New York state pension business.

A former journalist turned investment banker and Democratic party fund-raiser, Steven Rattner also was involved in a deal with Cerberus Capital Management, the hedge fund that owns most of Chrysler, which made other Chrysler investors wonder if Mr. Rattner could decide without bias how the government should aid the auto firm.

They need wonder no longer. Mr. Rattner proposed a deal that would reward the United Auto Workers at the expense of the people who loaned Chrysler money and attempted to bully bondholders into accepting it. The deal would have given bondholders about 30 cents on the dollar for their secured debts while giving UAW retirees about 50 cents on their unsecured debts.

This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors those who have lent money only on the contractual promise that if the debt was unpaid they d get specific property back get paid off before unsecured creditors get anything, noted columnist Michael Barone.

In a radio interview, Tom Lauria, an attorney for several bondholders, said, 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.

The White House denied it had made threats, but two other participants in the negotiations told the Business Insider that conversations with administration officials left them expecting that they would be politically targeted.

Both told the Business Insider they had voted for Mr. Obama. The client of Mr. Lauria s that was bullied into submission was Perella Weinberg, the firm that made White House Chief of Staff Rahm Emanuel rich.

All of Chrysler s creditors who d accepted government TARP funds accepted the deal, but several firms that hadn t taken government money rejected it, forcing Chrysler to file for bankruptcy protection April 30. Mr. Obama and other Democrats ascribed the rejection to greed. But they have that exactly backward.

Think carefully about what s happening here, Mr. Barone said. The White House ... is seeking to transfer the property of one group of people to another group that is politically favored. In the process, it is setting aside basic property rights in favor of rewarding the United Auto Workers for the support the union has given the Democratic Party.

Why should the UAW, which shares responsibility with Chrysler s management for running the company into the ground, be rewarded at the expense of the bondholders, without whose funds the doors at Chrysler would have been shut long ago? The bondholders represent pension funds on which workers who are not responsible for bankrupting Chrysler depend for their retirement.

Bailing out the UAW at the expense of the law may not be such a good deal for unions in the long run. Businesses need to borrow money. But, Mr. Barone asked, Who is going to buy bonds from unionized companies if the government is going to take their money away and give it to the union?

It isn t just unionized companies that could suffer from the Obama Administration s cavalier attitude toward the rights of bondholders. The Treasury Department has to sell several trillion dollars worth of bonds to fund the President s massive spending.

Will the White House treat Treasury bondholders better than they ve treated Chrysler bondholders? asked University of Tennessee law professor Glenn Reynolds.

The Chinese government, the largest foreign purchaser of Treasury securities, evidently doesn t think so. Treasury data for January and February indicate the Chinese have cut back substantially on their purchase of bonds. If those bonds go unsold, it isn t only Chrysler and General Motors that face bankruptcy.



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