The WSJ’s "USA Inc" series continues today with detail on how the US got secured lenders to abandon their fight to get paid more than 30% of their claims, as against giving more than half the company to unsecured workers.
Keep in mind that the secured have a contractual right, given qualified protection in bankruptcy, to their claim to the firm’s assets. To be sure, as the WSJ notes, “if Chrysler had to liquidate, they and other lenders would have to try to recover their money by selling closed auto plants and other assets that are little in demand.” In other words, the assets are worth less if they’re not needed to make cars. But the workers arguably have more to lose than the bankers in this battle for the excess of the going concern over the scrap value of the assets.
The administration could exert several types of leverage in shrinking the share of going concern value the secured lenders could hold out for – the ability to use the bully pulpit to ensure that already unpopular banks would be “blamed for Chrysler's demise;” threats against banks that got TARP loans; and threats of more regulation of hedge funds, as I noted last week.
As for the TARP threat, the article notes that “Rep. Gary Peters, a Democrat whose Michigan district includes Chrysler offices, wrote to the bank CEOs listing their TARP loans and asking them to extinguish most of Chrysler's debt.”
The article concludes:
A lawyer for holdout firms, Tom Lauria, accused the White House of threatening to destroy the reputation of Perella Weinberg. * * * “The overarching sense of political pressure," Mr. Lauria said, "remained out there till the end."
As the government takes over more of the economy, these pressures on formerly free markets will intensify. The problem for government is that it is running out taxpayer money for buying the economy. The sources of private money will long remember what happened to Chrysler's lenders.
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