Riding Herd on the Financial Range - #6
A federal government that puts senior debt at the bottom of the heap jeopardizes capitalism.
6.10.2009
For those of you who have been following the news on the sale of Chrysler, you can put a note on your calendar that this may very well have been another day the “Music Died” as Justice Ginsberg lifted the stay on the sale of Chrysler to Fiat, choosing not to hear the case. We can only hope the courts are now flooded with suits by investors to find udges willing to stop this abuse of power by our Federal Government. And we better pray it starts soon.
For those you who are still trying to understand what this was all about, here’s my version.
It started with an emergency appeal by Indiana to the Supreme Court to stay the sale of Chrysler to Fiat. Disregarding whether it is prudent for Indiana pension funds to be lending (buying bonds of a bankrupt car company in October of 2008), this cram-down rush to "solve" Chrysler's problems is a very significant case.
The petitioner, Indiana, had several hurdles to overcome, not the least of which is "standing" or the challenge upheld in the lower court to the Treasury's authority to use TARP money allocated by Congress for a car company. It was argued that there has been no Congressional authority for such largess given that the approval was for financial institutions - not car companies.
“Because Article III of the Constitution limits the federal courts to ruling on actual “Cases or Controversies,” a would-be court challenger must show that there is a live dispute; that is they must show that they would be hurt, that the other side is responsible for that harm, and that a court ruling in their favor would cure it. If they can’t make those points decisively, the court has no authority to hear their complaint."
U.S. Bankruptcy Judge Arthur J. Gonzalez ruled on May 31 that the Indiana benefit funds could not challenge the Treasury’s use of “bailout” (Troubled Asset Recovery Program) funds to pay for a makeover of “old” Chrysler into “new” Chrysler. The judge found Indiana could not prove they were harmed by the way the Chrysler deal treats the collateral that stands behind the loans that the Indiana group and others provided to Chrysler. According to the judge, the manager (whoever that is) of that collateral had the authority to decide the collateral’s fate and did not object to the deal. Furthermore, all top-priority lenders were bound by that decision under an existing agreement.
In a final blow to Indiana’s “standing,” Judge Gonzalez concluded that whether the Indiana groups were hurt or not, any injury they might suffer could not be laid at Treasury’s door. In this situation, the Treasury was only acting as another lender; actually the judge said no other lender was available. “The Indiana funds’ grievance was with the plan, not with the lender,” the judge said. Furthermore, “they would be protesting the plan even if the lender were a private entity. “
Because Indiana had no “standing” on this issue, the judge concluded, he had no authority to rule on Treasury’s role. Taken together, the challenges had other hurdles and the Supreme Court obviously did not want to stand in the way of an arrangement devised by the political branches that its supporters say will save thousands of jobs. But the applications also pointed out that if the high court did not intervene, a deal that raises major questions relating to bankruptcy law and the power of the executive branch will go un-reviewed and the questions unanswered.
Bankruptcy law has been around a very long time, and well respected in case law, to say nothing of the Constitution's regard for property rights. These seem to have been pushed aside by the government in favor of paying off the unions and reordering the rights of creditors. It will be interesting to see where this leads us.
If the government can come into any company and rewrite contracts, and/or move investors in senior debt to the bottom of the pile in preference to someone else, the implications regarding whether any laws would be sacrosanct could be far reaching. In my opinion, this will create uncertainty in so many fields and potentially lead to the destruction of our capitalistic system.
Other tidbits today include the European Parliamentary elections which produced heavy losses for Social Democrats and Liberals. Folks this is the good omen for the future. (Boy do I wish we had a Parliament and the vote of no confidence sometimes.) The conservatives won handily. In the UK don't imagine Gordie is sleeping well either. I think half his cabinet has resigned as of last week, and the Liberal rats are abandoning ship. Look for Mr. Brown to go soon as predicted.
Except that it went unreported, I guess it also wasn't news that Sarah Palin was acquitted of all 14 ethics charges leveled against her during the campaign. Wow really?
A few Treasury comments: Treasuries were lower as there were no major economic reports on Tuesday’s economic calendar while awaiting news later in the week regarding retail sales and release of the Fed's Beige Book. The yield curve continues to flatten, with the yield on the 2-year note rising 14 bps to 1.43%, the yield on the 10-year note advancing 7 bps to 3.90%, and the yield on the 30-year bond gaining 1 BP to 4.64%. Pay attention folks. The Treasury is auctioning off $65 Billion in long term bonds this week. If the Fed ends up buying them all because no one showed up, look for a huge downdraft. We have heard Helicopter Ben already ringing the warning bell that interest rate hikes are on the way. This will kill any green shoots out there.
Your humble editor, Russ
About Russ Magarity
Jackson, Wyoming Distressed Patriot Russell Magarity and Chris Janelli, Chief Distressed Patriot, have been business associates and close friends since working together at Chase Manhattan Asia in Hong Kong. Russ grew up in Cuba and Panama and graduated from High School in Peru. He received a BA in International Relations from the University of Oklahoma (Norman), an M.B.A. from the Universidad Autonoma de Guadalajara (Mexico), and a Masters in International Management (with Distinction) from the American Graduate School of International Management (Thunderbird).
Russ spent his career with Chase running countries and managing corporate finance businesses in Brazil, Mexico, Hong Kong and throughout SE Asia. Prior to joining Chase, he served in the US Navy for 9 years first as a Midshipman and Naval Aviator. As a carrier pilot, he served 3 tours in Vietnam and flew over 250 missions.
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