Justice Ginsburg's Stay of Chrysler Sale Defends Rule of Law

The problem with politicians, whether Democrats or Republicans, is that when the law doesn't suit their objectives, they simply disregard it or try to find around the intent and spirit of the law. When the Democrats believed that the Bush Administration had illegally tortured prisoners at Guantanamo, they expressed moral outrage, demanded hearings and requested the Justice Department to investigate for possible criminal wrongdoing. And they were entirely right to do so despite Republican objections and Dick Cheney's recent attempts to finger the Democratic Congressional Leadership as completely aware of interrogation techniques being utilized there. That is the nature of a system where the law is supposed to mean something -- people are called to account for their actions under the law.

But for all the moral outraged expressed by Democrats concerning the Bush Administration's failure to adhere to "the rule of law", that outrage seemed have dissipated when the Obama Administration chose to abrogate contract law and the entire bankruptcy process in the Chrysler Chapter 11 proceedings. In that case, the President Obama and his Democratic cohorts had no problems labeling legitimate secured creditors as holdouts for a Government bailout and unwilling to make sacrifices commensurate with other creditors despite the fact that by contract they has bargained for a senior security interest in Chrysler's assets in exchange for billions of dollars of loans. Based on the comments and heavy-handed actions of the Obama Administration, unsecured bank debt and UAW claims should either be treated equally with the secured lenders (in the case of unsecured bank debt) or receive significantly better treatment in terms of significant stock ownership in the reorganized Chrysler (in the case of UAW debt). Despite the fact that the Bankruptcy Code and substantial legal precedent did not support or justify any of the proposals of the Obama Administration which, blatantly, trample on the priority rights of secured creditors, there has been virtual silence from the Congressional Democrats about adherence to the rule of law. Conversely, the Republican who generally supported Bush Administration interrogation techniques are outraged by the debasement of the law in the Chrysler case.

So what is the takeaway? Is the rule of law important to Democrats and Republicans all of the time or only when it suits their provincial interests. The evidence to date generally suggests the latter. That is what is particularly intriguing about Justice Ginsburg's decision to stay implementation of the Chrysler asset sale, at least for the moment. Justice Ginsburg is unquestionable a liberal member of the Supreme Court and was appointed to it by Bill Clinton, a Democratic president. Therefore, it cannot be argued that her issuance of a stay was politically motivated and simply a means to carry out the Republican agenda. While more details will certainly emerge in the coming days, her action indicates that perhaps further thought should be given to the rule of law as it pertains to the Chrysler case. That is not to suggest how she or the entire court might ultimately decide the question, but is should give pause to the Obama Administration as to the limits of Executive Branch not only with respect to Chrysler but also with respect to the General Motors bankruptcy.

Justice Ginsburg with the stroke of a pen has implicitly if not explicitly stood up for the system of checks and balances set forth in the U.S. Constitution. For the proper role of the courts is to ensure that the rule of law is upheld despite the expediencies of the political process. Moreover, events have been happening so rapidly that a time to reflect on the long-term legal ramifications of trouncing on longstanding legal rights of creditors and other stakeholders just because the politicians prefer to do it their way.

In a way it is startling that the Chrysler case had to end up before the Supreme Court because the lower courts lacked the fortitude to seriously tackle the obvious legal injustices being perpetuated. This is also quite disturbing because it indicates that President Obama, a constitutional lawyer himself, the Justice Department, the Treasury Department and the Democratic Congressional Leadership and the Judiciary Committees in both the House of Representative and the Senate were willing to sacrifice the rule of law to buttress their political objectives regardless of their nobility.

While it will be interesting to see how Justice Ginsburg and the Supreme Court resolve the stay and the pending appeal of the Chrysler sale order, none of us should feel comforted by the abuse of power at Guantanamo or in the Chrysler case. However, we can take some comfort in the fact that we do have a system of checks and balances between the branches of government and Justice Ginsburg apparently recognized that our very freedoms depend on the judiciary remaining independent and not swayed by the prevailing political winds. For in the end, adherence to the rule of law is all that prevents overreaching by the other separate but equal branches of government.

General Motors: The Failure of Government Policy

While the management of General Motors over the past quarter century or more doesn't deserve any awards for stellar performance, I do view the GM bankruptcy filing as just as much, if not more, a failure of patchwork, inconsistent and irreconcilable Government policies during that time span. From the second highest corporate tax rate in the world to the lack of a unified health care system, the Government has time and time again interfered with the ability of GM to remain competitive. While the Government has continually imposed standards on the auto industry to improve mileage and reduce pollution, however well-intended, these policies have never been well thought out. As a consequence, GM, in order to cover its ever-expanding financial and regulatory obligations, was left with little choice but to manufacture a greater proportion of larger vehicles with higher profit-margins to help pay the cost thereof than otherwise would have been necessary with a more enlightened Governmental approach. Stated differently, Government policy caused GM to concentrate its manufacturing operations on a narrow focus of the automobile market as opposed to developing a more complete and well-rounded portfolio of products.

Over the years, the Government has also thwarted efforts to drill for oil offshore or in Alaska due to exaggerated environmental concerns. The result: America became more and more reliant on foreign oil. Meanwhile, the rest of the world continued to exploit their oil resources wherever located, onshore or offshore. So, in effect, this country unilaterally withdrew from the oil exploration business in the most promising areas for development.

What would have happened if the United States had promoted its own oil industry until the transition to alternative energy was possible? One benefit would have been a significant reduction of billions of dollars paid to Saudi Arabia and other OPEC members and a corresponding salutary effect on the U.S. dollar as balance-of-trade deficits would have been significantly lower. Perhaps the original Gulf War, principally fought to preserve the flow of reasonably-priced oil from the Middle East, would not have occurred or at least in a more more limited form. Instead of striving to become energy independent from OPEC and to build up our own oil output through proven reserves, we chose to defend oil fields far away with American lives because environmentalists preferred pristine coastlines to economic independence. The environmentalists bear culpability for relegating our nation's overall national security to their provincial interests.

Of course, we would all prefer as little environmental impact as possible while achieving energy independence, but difficult choices sometimes have to be made. We have now seen what happens when this country is beholden to foreign interests for our energy consumption. We have turned the MIddle East into a bastion of radical Islam by the very fact that we and other Western democracies have funded the oil producers instead of controlling our destiny without them. The billions of dollars dispatched to the Middle East, instead of being used by the OPEC countries to advance their societies economically, educationally and politically, have been used as hush money to covertly fund terrorist groups intent on destroying America to preserve the concentration of power and wealth in despotic regimes. More recently, the wars in Afghanistan and Iraq over the past eight years likely would have been quite different as well. Had we developed our energy resources properly, our involvement in the Middle East would have been significantly lessened and Islamic terrorism and hatred against the U.S. would have had fewer seeds upon which to grow.

In addition to failing to develop our own natural resources, the Government has failed to develop a coherent policy to deal with social security and medicare. Every year, employers face increasing costs as these programs are headed for certain bankruptcy. The demographics simply do not support a system where in the not to distant future only two workers will be effectively supporting one retiree. In the initial stages of social security the ratio was 16:1. That ratio, by definition, had to decline unless U.S. population growth surged beyond any reasonable prognostication of birth rates. Moreover, increases in life expectancy continues to put a further economic strain on funding. But, the failure to adequately address this time bomb even now has certainly imposed great economic strains on businesses, particularly those which manufacture goods and are more subject to international competitive pressures.

I am not advocating a reduction of current retiree benefits, but I am advocating that the system has to be redesigned to maintain its solvency. Already, the retirement age is slowing increasing, but that should have been done years ago. The social security tax is like a quasi-flat tax with one glaring deficiency -- it is only assessed against a portion of an employee's personal service income. There is no reason for this. If social security taxes had been assessed against the entire portion of an earner's income from inception or gradually increased to that level over time, the system would be significantly more financially secure today. It is frankly outrageous that people earning hundreds of thousands, if not millions, of dollars are paying the exact maximum social security taxes of people earning a fraction of their incomes. Moreover, proportionally shifting the social security and medicare tax burden to the people who earn the most is not only logical but fair (to the extent one believes a flat tax is fair). Such a policy could also be structured to cap an employer's contribution per employee regardless of income level.

Consumer Confidence Perception v. Economic Reality

Funny how economic statistics sometimes mean something and sometimes don't -- even when released on the same day and appearing to be somewhat inconsistent. But apparently perception is more important that reality because the Consumer Confidence Index (a simplistic measure of consumer sentiment and perception) rose to 54.9% in April from 40.8% in May whereas the S&P/Case-Shiller National Home Price Index fell at a record annual pace of 19.1%. Stated simply, home prices continue to decline at the fastest rate in history with no relief in sight. We have perception unsupported by behavior, on the one hand, versus a report detailing actual, not supposed or possible behavior, on the other hand. Stock market reaction: positive perception sounds better than negative reality ... let's rally on karma.

Aside from slumping real estate values, consumer credit continues to shrink and unemployment is expected to crest somewhere over 10% but not until next year. Sounds like eroding buying power to me, but I tend to prefer economic indicators based on facts, not unrealized fantasy. So how can consumer confidence rise so dramatically when home prices are falling so dramatically? A very good question but I doubt they asked it to the 5,000 households comprising the Consumer Confidence Index.

But let's try to look at this dispassionately. Where is consumer buying power going to come from as credit card debt limits contract and new credit card debt will likely carry higher interest rates at least once the just passed Credit Card Bill of Rights goes into effect. Moreover, home equity lines are no longer available at anywhere near the dollar level (we're talking trillions here) before the current financial crisis as 30% of the homes in this country already are underwater on their mortgages. So, who is going to fund the recovery when the statistical recession ends. The increasing number of unemployed and those who fear for loss of their jobs as well? Or others without access to credit?

Have you seen the empty stores lining the malls, at least in the malls that are not yet shuttered? Apparently, that doesn't matter to the bulls either because unemployment and lost real estate values are already factored into the the stock market. The bulls say, "it can't get much worse." Does that Orwellian thinking equate to additional dollars at the cash register or make you feel "confident"?

The market, say the perma-bulls explicitly or by implicaton, is discounting all of the actual negative news because there are people saying that they are more confident about the economy. I don't buy that Twitteresque status report. Rather, I think this rally is nothing more that a "ponzi" scheme of sorts. The Wall Street gang keeps telling everyone that the sky isn't falling so the retail investor, directly or indirectly through increased inflows to mutual funds, will buy stock even though there is very little, if any, real reason to do so. Finally, when the over $1 trillion of bonds supported by cratering real estate craters, the stock market will follow suit.

Have we learned nothing in the last year? Inflated real estate values, coupled with egregious underwriting standards and ill-conceived governmental policy, led to the real estate bubble. Now, the same robber-barons that levered us into this mess are trying to suck everybody back into the game. And the Obama Administration and the Federal Reserve are all adding to this frenzy. The FED is printing money with reckless abandon and buying back the Treasury Bonds it issues to finance the debt. In other words, the FED is buying back the debt it issued with phony money. The debt that the Chinese and the OPEC countries no longer want to purchase without assurances that their investment won't be flushed down the toilet with all the toilet paper being manufactured by the FED.

We are issuing debt in this country as if we don't have to pay it back or with the assumption that people will buy it and agree to be paid back with dollars that are worth less in the future. We are headed for inflation armageddon unless we can somehow snooker foreign investors back to the casino where they lose no matter how they play. What do I mean by that? If they continue to finance the U.S. debt unabated, they will surely lose value on their investment as the dollar is devalued due to gargantuan future U.S. debt obligations. If they stop buying U.S. debt, the FED still continues to crank out bogus money now (as opposed to later to pay back debt in the former scenario), thereby destroying the value of current debtholders' investments in U.S. bonds and currency.

But everything is rip-roaringly fine according to the same characters who didn't think they could lose with 30 or 40 to 1 leverage. Yet, they did. How's that consumer confidence going for you now?

Obama's Blame of Hedge Funds in Chrysler Affair Sends Ambivalent Message

In announcing the collapse of negotiations to stave off a Chrysler bankruptcy filing, President Obama yesterday squarely blamed a "small group of investment firms and hedge funds" for the impasse. After commending the efforts of Chysler's management, the United Auto Workers, the Task Force of Autos and the substantial majority of lenders, he singled-out the hold-out creditors that were unwilling to accept the Government's offer to resolve approximately $6.9 billion of outstanding loans for $2.25 billion. In doing so, he chastised the recalcitrant lenders for failing to act in their own best interest and those of the other parties who had contributed and sacrificed to achieve a global resolution.

What Obama failed to mention is that the supposedly "unwilling" creditors consisted of 20 lenders owed $1 billion possessing the highest secured interest in Chrysler's assets and are first in-line to be paid in the event of liquidation. So, what Obama was really saying is that even if, in actuality, a not-so-small group of creditors negotiated an arm's-length lending arrangement with Chrysler granting it a superior right of repayment, such creditors should voluntarily relinquish that right because everyone else would be better off it they did. This is a shocking statement, fundamentally contrary to property and contract rights and to principles of capitalism and smacks of Western Europe's Socialist tendencies.

Let's take a basic "garden-variety" secured transaction for comparison's sake. A person buys a home or other piece of real estate, subject to financing. The lender, after reviewing the credit-worthiness of the borrower and the underlying assets to be financed, agrees to loan the balance of the purchase price secured by the property. In the event, the loan is paid according to the terms negotiated, the lender continues to receive payments during the life of the loan until satisfied in full. On the other hand, if the borrower is unable to make the required payments, the lender is able to foreclose its security interest in the property, become the owner of the property and to sell it to satisfy some or all of its remaining debt. Without such a financing mechanism, the vast majority of people would never be able to afford a home or only be able to purchase a home up to the amount of his available cash resources. In that instances, the value of real estate and the corresponding market would collapse due to a lack of qualified purchasers.

The same is true of commercial finance. Many borrowers would not be able to obtain loans to finance inventory, payroll and other operating expenses without granting a lender a security interest in its assets. Other loans may be made on an unsecured basis, but usually at a higher rate of interest than a secured creditor because of the increased risk of non-payment. Such lenders understand the increased risk is due to the fact that there is senior lender ahead of them that must be repaid before they receive anything. So, when Obama was complimenting the "majority of lenders" going along with a debt-reduction repayment plan, this was nothing more than pure political posturing. Essentially, Obama was complimenting lenders who agreed to receive more than they had otherwise initially negotiated to receive when making loans to Chryslers, being fully aware of their junior payment priority status. He, instead, chose to criticize the very lenders who negotiated for a higher priority of repayment in the event of default.

Why is this troubling? Because our entire commercial financing system is based upon a basic understanding of borrowers and lenders as to what rights they possess in the event of non-payment of a loan according to its contract terms. The lenders understand how they will be treated in relation to other lenders and price the risk via the interest rate charged on the loan plus any additional fees such as up-front points on a typical home mortgage. The borrower also understands that certain lenders have a priority right of payment and others may possess a lower priority security interest and still other may not possess any security at all for their loans. In the commercial world, as pointed out, these greater or lesser risks of repayment are priced according to relative risk.

Suggesting that the senior creditors agree to receive a lower amount than they would be entitled to in the event of liquidation or, worse yet, an amount equal to or similar to the rate of return of junior creditors, has no basis in the law. It was merely an attempt to demonize creditors for exercising their rights, where their rights were substantially superior to other lenders. Vilification should be reserved for unconscionable or abhorrent behavior fundamentally at odds with acceptable moral behavior, none of which is even remotely present here. It should be used even more rarely as a political tactic especially by The President of the United States.

We are a country of laws and for someone to exercise his rights, especially those rights no one has seriously challenged as of yet as valid, is alike to purposely poisoning a jury pool before a trial begins. This is not behavior to be celebrated; rather, it should be scorned. For if anyone is bludgeoned into foregoing his legitimate rights due to political pressure or for the betterment of the "whole", we are taking a great stride away from the premises upon which our legal and financial system depends.

While President Obama may have been disappointed in the outcome forcing Chrysler into bankruptcy court, a substantial portion of the work to reorganize the company has already taken place. He and his administration and the other parties contributing to those efforts should be praised. But, now is the time for the court to decide the legitimacy of the claims asserted by the unfairly castigated lenders. If they succeed in the end, they deserve an apology, not only because they will have been right but because they correctly resisted intimidation coming from the most powerful person in the world.

Whether the actions of these lenders will have adverse political consequences on hedge funds or the like in the form of increased regulation or tax policy should be judged on their merits. But it would truly unfortunate to penalize a group of individuals or entities simply because they chose to exercise their rights as every American citizen should feel equally free to do.

May 1, 2009 (Updated)