The Administration to lenders: Go along or else.
You have probably never heard of Thomas Lauria. I never had until yesterday. But if he is to be believed (and I believe him), then our government has taken a huge step toward gangster-style thuggery and we should all, Democrats and Republicans, be very afraid.
Thomas Lauria is a lawyer who represents a number of investment banks that hold the senior commercial paper of Chrysler Corporation. Senior commercial paper is what you and I would call a loan. It’s money that is lent to large corporate borrowers. But instead of coming from a bank, as is the case when you or I borrow money, it comes from funds put together by investment bankers for the purpose of loaning large sums to large borrowers. In this realm, such loans are called ‘commercial paper.’
It’s called ‘senior’ commercial paper because it is secured by certain assets of the company and it stands at the head of the line to be repaid.
Your mortgage on your house is ‘senior’ to the home equity loan you took out. If you sell your house, the mortgage lender gets all of the proceeds from the sale until the mortgage is paid in full. If the house sells for less than the amount of the mortgage, your home equity lender gets nothing.
Knowing where you stand is critical to any lending decision. If your mortgage lender weren’t confident that in the case of your default he would be repaid ahead of your home equity loan, he would be dramatically less likely to loan you the money.
It was on this basis that 46 lenders, including names like JPMorgan Chase, Citigroup and others, loaned money to Chrysler. In the vernacular of this type of lending, they are said to have, “bought Chrysler’s commercial paper.” At the time they loaned the money, they reasonably believed that if Chrysler went bankrupt, as it now has, their senior position put them ahead of other parties including employees and other creditors.
But this is 2009 and there’s a new sheriff in town and things no longer work that way.
The Obama Administration, which is now effectively running the U.S. auto industry and was seeking a deal favorable to the unionized workers at Chrysler, went to the senior lenders and demanded that they take 29 cents on the dollar. That’s a pitifully small percentage. But nonetheless, about half of the lenders agreed.
But about half held out – not for payment in full – but for about 50 cents on the dollar. And here’s the most interesting part. The lenders who agreed had all taken bailout money from the government’s Troubled Asset Relief Program or ‘TARP’. Those that held out, did not take TARP funds.
Enter attorney Thomas Lauria. He represents some of the ‘non-TARP’ lenders, And he says in a story reported by Jake Tapper at ABC News that the hold-outs were threatened by Obama administration officials with serious reprisal if they didn’t go along. (More on this story here.)
The administration, of course, denies Lauria’s allegation.
But my problem is that none of us should have to worry that any administration has overstepped. And the fact that the allegation could even be credibly raised is chilling.
With respect to the $5,000 you owe the bank or the $5 billion that a company owes on its commercial paper, we have laws and rules and procedures and precedent for sorting things out when those loans go bad. Those laws and rules have served us well.
Did the administration bully the hold out lenders? Did the lenders who received TARP bailout money go along because they know the administration has them by the you-know-whats? Is bare-knuckle Chicago-style politics now the politics of the U.S. government?
And most significantly, if you run a company that needs to issue commercial paper, what do you think is now going through the minds of the potential buyers of that paper? How will companies that need to borrow money in the future find willing lenders?
This is not arcane high finance. This is as basic as it gets. Do we have a free economy and a government that we need not fear or do we have an economy under the command and control of a government with very sharp elbows?
If it’s the latter, God save us. Such systems stifle creativity and enterprise.
The Obama Administration has in a few weeks aggregated tremendous power over our institutions and industry. I am thus reminded of James Madison when he said, “All men having power ought to be distrusted to a certain degree.”