Posted on 06/12/2009 3:05:02 PM PDT by Painesright
"Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week’s events demonstrate that the phrase now more aptly describes our own country.
On Monday, the Supreme Court refused to hear an appeal from Chrysler’s secured creditors based on the government’s argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.
When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.
The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That’s precisely why we have contracts.
Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?
Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.
The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa’s body.
As if this wasn’t bad enough, testimony on Thursday from former Bank of America CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from B of A shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.
Again, the justification for the interference seemed to be the “greater economic good” the merger would serve. The right of B of A shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.
More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.
As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments. However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat. The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness.
Who in their right mind will be willing to invest in debt instruments where amorphous "needs" and political influence supercede the concrete security of contractual agreements? Why put money at risk with no guarantees?
Like the Doomsday Clock of the Bulletin of the Atomic Scientists, there should be a 2nd Amendment Clock of the Notes of American Citizens.
Push eventually comes to shove.
Could someone post the law that made them secured creditors.
ROFLOL, the degree of risk is suppose to be the determining value to establish the rate of interest. An investment with no risk should return a zero interest.
It doesn't always. Divide and conquer -- a whole lot of folk won't stand up for others when the system comes for the others and when it comes to their turn... it will be too late.
America -- a great idea, didn't last.
If you realize both parties in Washington think our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut a few taxes and spend a few trillion and jump start the economy, and get our lost money back, this list is not for you.
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How stupid do our officials have to be? Are people so ignorant of basic economic principles? Contracts and property rights are essential for capitalism and a free society.
“where amorphous “needs” and political influence supercede the concrete security of contractual agreements”
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I have to strongly agree here. Who is going to want to invest in anything, when the admin can come along on a whim & take it over...or break a contract?
You missed my point which was in the context of being a secured creditor whose has lost the normal protections afforded to bond investors by arbitrary decisions. I was not talking about the rate of interest.
Thanks for the ping.
“interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring”
No doubt the very people who voted in the skinny little racist kid.
“How stupid do our officials have to be? Are people so ignorant of basic economic principles? Contracts and property rights are essential for capitalism and a free society.”
They’re not stupid or ignorant. These people know exactly what they are doing.
I think it would be fair to say that many consider those of us who advocate for a return to limited government under law as kooks, cranks and eccentrics. The idea that the government itself is under the law (and God) is a foreign concept to many.
The moral and legal relativists who have no use for the Constitution and rule of law (other than as abstract academic concepts and answers to Trivial Pursuit) may soon discover that a government under the law is far more respectful of their pocketbooks than a government above the law. When a nation embraces moral and legal relativism, all bets are off.
Check the Uniform Commercial Code. Secured Instruments. Over 6,000 years of legal precedent for taking property as security for the repayment of a loan. Read The Book of Proverbs. It talks about holding your neighbors cloak as security for a loan. If ya don;t get paid back, ya git to keep the cloak. Until this past week. Now, you loose your money and the Unions get the cloak!
BWAHAHAHAHAH! BOOHOO BOOHOO. If it weren't for the destruction of our constitution and legal system I'd be laughing my butt off. This is what happens when the underclass assumes power. The majority gets screwed (if not killed) and the minority class sets the minority rules. The majority is horrified and, hopefully, elects competent representatives and senators in 2010. Or, gets wiped out...
Don't tell anyone but we are secreting the Gulch offshore before its too late. Let the losers pay for their stupid programs. Our country is now governed by the loser class. And the rules are now loser rules. The civilized are leaving.
Asset based lenders are apoplectic this week. Good old fashioned collateral don't mean diddly if the debtor files for Chapter 11. So, who WON'T file for Chapter 11 to bone the bank? Money is now very expensive because of the added risk. Just wait until inflation heats up...
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