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Above the Law By: Steven M. Cohen
FrontPageMagazine.com | Tuesday, May 05, 2009


"But seeing they that make the laws in commonwealths are but men, the main question seems to be how a commonwealth comes to be an empire of laws and not of men. . . .”  

                                      --  James Harrington, The Commonwealth of Oceana, 1656.

John Adams took Harrington’s phrase and incorporated it into the Massachusetts Constitution, Bill of Rights article 30, in 1780.  Centuries earlier Plato, Aristotle and Socrates reflected on the subject throughout their writings.  Yet it’s taken the Obama administration scarcely more than a hundred days to ordain that established laws, specifically those related to property rights, can be casually cast aside in the interests of radical ideology or political convenience. 

The new president has an impressive resume of legal credentials, as we are constantly reminded by worshipful journalists, among them editor of the Harvard Law Review and professor of law at the University of Chicago.   Just today one of his greatest admirers, the New York Times, featured on its front page a picture of Mr. Obama in his teaching days, earnestly leaning over the table towards his students, shirtsleeves rolled up, presumably illuminating some important legal principle.  

How to explain, then, the president’s astonishing disregard for long-settled contract law and legal precedent?  What accounts for his abject disdain for property rights?  The cavalier, almost offhand manner in which these bedrock legal principles were simply waved aside is breathtaking. 

According to the new administration, mortgage contracts are merely informal agreements, the terms of which are subject to revision at the discretion of a bankruptcy judge.  For that reason Mr. Obama was the major proponent of the so-called “cramdown” legislation that would permit judges to reduce the principal amount on mortgages to reflect a home’s diminished market value.  Perhaps none of his advisors considered how the measure would destroy incentive to lend in an already moribund mortgage market.  Why on earth should any lender agree to provide a mortgage when at some point in the future the borrower can appeal to a judge to rework the terms in his favor?  Perhaps it didn’t occur to anyone in the administration that the value of real estate fluctuates, so that this proposal would turn a binding contract into an elastic, malleable, and ultimately meaningless arrangement. 

In an increasingly rare exercise in common sense, the Senate voted down the administration’s cramdown proposal.  Even Democrats recognized it as an unprecedented intervention into private business, governmental intrusion into the arms-length relationship between lender and borrower.  But that was only one White House excursion in confiscatory politics. 

Mr. Obama and his auto task force evidently decided that the secured lenders, who should have been at the front of the creditor line, will be left holding the bag in the Chrysler bankruptcy.  These senior lenders, who advanced $6.9 billion in loans to the automaker, secured by a first lien on its assets, will receive about 29 cents on the dollar.  Ordinarily the secured lenders in a bankruptcy recover at least 80 cents for each dollar loaned.  No matter, apparently, to Mr. Obama and associates. 

The UAW retiree health fund, on the other hand, will get 55% of the equity in the restructured company as well as a promissory note representing about 40% of the monies owed to it.  This is the same union whose benefits for current employees and retirees helped make Chrysler vehicles uncompetitive in price compared with foreign rivals.  It is also the same union that gave its all for Obama the candidate.   

Fiat will clean up under the plan as well, receiving 20% of the equity in the restructured company as soon as it emerges from bankruptcy, with a promise to award it with an additional 15% based on undisclosed “performance metrics.”  Fiat will not put up one penny of its own money. 

The secured lenders foolishly thought that their bond indentures, requiring company assets as collateral, would protect them.  This quaint notion was based on centuries of bankruptcy law and did not factor in the dynamics of the brave new world ushered in by the Obama coronation.  For their trouble they received the public condemnation of the new president, who branded them “a small group of speculators” whose demands “endanger Chrysler’s future.”  Mr. Obama apparently expected the secured bondholders to be good sports and merely agree to write off nearly $5 billion they thought was guaranteed by liens on company property.  For the transgression of having actually loaned money to Chrysler, they were singled out and reviled by the president, who made it clear that “I don’t stand with those who held out” for a larger recovery. 

Chrysler is but prologue to a GM restructuring plan Rube Goldberg would have been proud of.  Here it’s the unsecured creditors who will be taken to the woodshed, with the UAW again cutting ahead in line and coming out comparatively unscathed.  Under the task force plan the government will receive half the stock of the new GM as well as $8.1 billion in debt, a recovery estimated as high as 87 cents on the dollar.  The innocent bystander UAW retiree benefit fund will get 40% of the company along with another $10 billion in cash, a package estimated at about 76 cents on the dollar.    

Alas, the plan makes only bleak provision for the unsecured creditors.  As the Wall Street Journal pointed out in an April 30 editorial, these are “mutual funds, pension funds, hedge funds and retail investors who bought them directly through their brokers.”  For surrendering $27.2 billion of unsecured bonds, these creditors will receive 10% of the stock of a restructured GM.  Their recovery:  about five cents on the dollar.  And if they don’t take it like good soldiers, they can expect public censure similar to that meted out to the recalcitrant Chrysler bondholders. 

These are the actions of an administration unrestrained by humility or introspection, one that believes there is no need to create new laws when you can simply ignore the existing ones by executive fiat.  They are policies in precise alignment with Mr. Obama’s campaign pledge to “spread the wealth” and in perfect discord with the nation’s traditions of justice, fairness, and the rule of law.   

Americans will soon lose their ardor for the politics of confiscation.


Steven M. Cohen has spent more than 25 years in the hedge fund business. His articles appear on Frontpagemagazine.com. as well as on his own blog site, buyselljump.com.


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