Why were the “secured bondholders” disregarded by the Supreme Court? Legally binding contracts were ignored! Are we not a country that abides by the “rule of law” anymore? As unbelievable as it is, it’s beginning to look like the White House strong armed this deal against the secured bondholders disregarding contract law.

White House puts UAW ahead of property rights

Tom Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.

This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors — those who lended money only on the contractual promise that if the debt was unpaid they’d get specific property back — get paid off in full before unsecured creditors get anything. Perella Weinberg withdrew its objection to the settlement, but other bondholders did not, which triggered the bankruptcy filing.

After that came a denunciation of the objecting bondholders as “speculators” by Barack Obama in his news conference last Thursday. And then death threats to bondholders from parties unknown.

The White House denied that it strong-armed Perella Weinberg. The firm issued a statement saying it decided to accept the settlement, but it pointedly did not deny that it had been threatened by the White House. Which is to say, the threat worked.


Supreme Court Screws Chrysler Bondholders

The pension fund of the state of Indiana and a few other brave souls decided to defy the United States government and challenge the White House’s remarkable intervention and engineering of the Chrysler bankruptcy filing.

Chrysler went bankrupt for several reasons, but the bottom line is that they had accumulated massive amounts of debt which they could not possibly repay.  The process of going through bankruptcy can be complicated for a large company, but there is a method to the madness.  In general, the assets are sold off to the highest bidders and the money recovered is then distributed to the creditors.

A company raises capital by selling debt.  A common way to sell debt is by issuing bonds.  The purchasers of the debt are the bondholders.

Not all creditors are created equal.  There are a long line of people trying to get their money back, and the bankruptcy law specifically stipulates who has the highest priority.  At the front of the line are the “secured” bondholders.   At the back of the line are the holders of common shares.  Somewhere in the middle are preferred share holders.

The White House intefered in Chrysler’s bankruptcy.  Legally binding contracts were ignored.  The secured creditors were given the message,

“Sorry but this is how it is and we really don’t care what the law is.  We are the law and we can do whatever we want.”

Most of the secured creditors caved in to the pressure from the White House, but a few, such as the Indiana State Pension Fund and the Indiana State Teacher’s Retirement Fund decided to assert their legal rights and took it all the way to the Supreme Court.

At first it seemed the Supreme Court would do the right thing when they issued a temporary a “stay” to the government’s bankruptcy filing.  Then they ruled that the bankruptcy filing could go forward.

Did the Supreme Court cave in from White pressure?  Whatever happened to our system of “checks and balances”?  The Supreme Court had the opportunity to block the inapropriate abuse of power by the president, but they did not.

Why is this story of presidential power run amuck not blaring from the front covers of the New York Times and Wall St. Journal?

Why is this story not on the cover of Open Salon (Hint, Hint).