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Under New Management By: David Keene
FrontPageMagazine.com | Friday, May 15, 2009


President Obama and his advisers are determined to turn control of Chrysler Corp. over to the United Auto Workers in spite of the fact that concessions to the union are largely responsible for the automaker’s inability to make a profit. Still, the UAW and other unions were among Obama’s biggest supporters and are ready to collect.

Turning Chrysler over to the UAW, however, hasn’t proven all that easy. To accomplish its goal, the administration is proposing to ignore long-established law, create an economic black hole that could end up costing taxpayers untold billions and, most dangerously, signal to foreign investors that the stability and respect for property rights that has attracted trillions of dollars in overseas capital investment to our shores is a thing of the past.

I find it difficult to believe that a U.S. bankruptcy court will uphold the Obama plan if even one secured creditor has the guts to refuse to go along with the scheme to pay off the UAW. One can only assume this is exactly why the president is trying to force Chrysler and its investors to work outside the bankruptcy framework and why the White House is trying to bully investors into accepting the Obama deal.

It is, after all, settled law that a secured creditor’s rights are greater, when an enterprise fails, than are the rights of unsecured lenders, shareholders and the like. The law does allow the courts some leeway in protecting the rights of employees, but the ability of companies like Chrysler to borrow money at decent rates depends on the lender’s willingness to believe that it will be at least partially protected if things go bad.

When a company goes under and seeks to reorganize or liquidate under our bankruptcy laws, secured creditors may lose some or even most of their money, but they have an expectation that their secured debt will be paid before funds go to others.

This expectation of greater protection persuades investors and institutions to provide their money at lower rates than would otherwise be the case. Secured lenders receive a lower return than those who provide equity money or who extend unsecured loans or credit to the enterprise. This is exactly why an investor buys bonds rather than stock. Such investors can’t expect the best return, but can expect a safe investment and a better night’s sleep.

If Obama has his way, such investors, be they hedge fund managers or widowed pensioners, can forget about getting a good night’s sleep.

A company like Chrysler sells bonds not just to individual investors but to institutions that invest on behalf of their clients. Those who run investment houses, mutual funds and hedge funds are not playing with their own, but with other people’s money. Their investors have a moral and legal right to expect prudent, reliable services and that fund managers will take whatever steps are needed to protect their investments when things go bad.

The fund managers who tried to stand up to the White House were doing just what they were supposed to do. It would have been unconscionable and perhaps illegal for them to simply acquiesce in the White House scheme to steal money from their clients and turn it over to the UAW.

Some Chrysler creditors caved quickly in the face of White House pressure. Some were afraid and others were serving two masters — having accepted TARP money from the government. In a conflict between the interests of their investors and the government, they chose to abide by what the government wanted of them.

Other fund managers didn’t have two masters and stood firm in the face of threats from the White House. The seriousness or specificity of the threats made is in dispute, but there is little doubt that all are under pressure to sacrifice the interests of their clients for what the administration calls “the greater good.”

If they buckle, the U.S. economy will have been altered in ways from which it will be difficult to recover. In a free economy, private concerns and individual investors make their own decisions with the expectation that the government will neither change the rules nor simply steal their money.

In a state-directed economy, there is no such expectation and little certainty. Politicians in such economies can and do force investors and enterprises to make decisions for political rather than economic reasons, change the rules almost on a whim, and steal money from the private sector to reward their political friends and allies.

That’s what politicians in Chicago have done for decades, it’s what Hugo Chavez does today in Venezuela, and it’s what Barack Obama is determined to do on a national scale.

David Keene, chairman of the American Conservative Union, is a managing associate with the Carmen Group, a D.C.-based governmental affairs firm.


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