Are we finally seeing the potential for sanity in response to Obama's arm-twisting?
June 2 (Bloomberg) -- A bankruptcy judge who approved the sale of most of Chrysler LLC’s assets to a group led by Fiat SpA said the carmaker may take a creditors’ appeal of his decision directly to a federal appeals court to save time.
The appeal was made by a group of Indiana pension funds. The request to skip a usual stop at U.S. District Court in New York was made by Chrysler and Fiat. Turin-based Fiat can walk away from the sale if it isn’t completed by June 15, not counting a one-month extension for any antitrust approvals.
So what? Expediency is usually a code-word for "we're going to screw somebody, and we want to make sure this is all wrapped up before you figure it out."
The problem in the original opinion denying the petitioner's motion is here:
The U.S. and Canada “have made the determination that it is in their respective national interests to save the automobile industry, in the same way that the U.S. Treasury concluded that it was in the national interest to protect financial institutions,” Gonzalez said in a 47-page opinion.
It doesn't matter what The US and Canada have determined is in their national interest if that national interest requires violating black-letter law, and it certainly appears that it does in more than one area.
If Congress wants to change the law they're free to do so, but absent a specific law that changes preference in bankruptcy this move is a problem.
Hopefully, with the appeal now going into a court where the judges have a lifetime appointment and thus cannot be retaliated against by The Administration, we will see this thing called "justice" show up!
Another Bloomberg article laid forth part of the problem - bondholder "sacrifice":
The government’s approach to the bankruptcies of General Motors Corp. and Chrysler LLC illustrates how this new, unstated policy works: Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group.
The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations.
That's part of the problem - but only part.
Another is what appears to be a rank violation of ERISA, the black-letter Federal Law that prohibits companies from dipping into employee pension funds - except when The Obama Administration wants to re-write that law to favor certain constituencies from the executive office!
The ERISA problem ought to scare everyone; it was put into effect as a direct consequence of prior abuses where pensioners had their retirement funds withheld from their paychecks literally stolen by their employers. ERISA put a stop to that with black-letter law making clear that once pension or other retirement funds are withheld they are segregated and belong to the employee, with the employer having a fiduciary duty. Now that's under attack as well - not through Congressional action in the form of a new law, but rather by a lawless taking orchestrated by the executive!
Think about this possibility, as raised by David Einhorn:
“When teachers and firefighters are losing jobs and benefits, will municipal bondholders be asked to share in the collective sacrifice?” he asked. “Might the shared-sacrifice theory eventually extend into the U.S. Treasury market during a crisis?”
Yep.
One of the reasons that I bailed off on municipal investments over a year ago was not just the default risk. It was the risk that the government would meddle with preference if there was a default so as to peddle favor to certain constituencies. My fear was that such preference would of course be extended to municipal employees with overly-fat employment agreements that are grossly out of line with private industry and which would be reviewed or even canceled in a review that came out of a municipal insolvency.
But with the government willing to ignore black-letter preference rules and in fact the rule of law when it comes to creditors, who knows what could happen?
Municipal "GO", or general-obligation, debt is widely thought of as nearly completely-safe, even without a coveted "AAA" rating or "bond insurance." Why? Because it is backed by the taxing authority of a state or other government arm, and that's about as good as it gets.
But if the government can (and will) re-write the priority rules from the executive office then there's a problem - I can no longer count on the black-letter rule of law that has (and should) protect me from capricious actions, and my investment is no longer safe.
As I have repeatedly noted this is a new risk that nobody had agreed to take when they bought these investments:
“The UAW gets a recovery of five times the bondholders’ under reasonably upbeat scenarios,” CreditSights Inc. analyst Glenn Reynolds wrote in a research note. “This is just the fact.”
So bondholders now know how the Obama administration’s “shared-sacrifice” policy will work out for them. After GM, they can’t say they weren’t warned.
Yep.
So you want to buy some bonds eh? Better think again.
Disclosure: No positions material to the issues within.
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