As the crisis has receded this year, the government has remained aggressive, seeking business outcomes it finds desirable with some apparent indifference to contractual rights. In Chrysler’s bankruptcy negotiations in April, for example, Treasury’s plan offered the automaker’s senior-debt holders 29 cents on the dollar. Some debt holders, including the hedge fund Xerion Capital Partners, believed they were contractually entitled to a much better deal as senior creditors holding secured debt. But four TARP banks—JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs—which owned about 70 percent of the Chrysler senior debt at par (100 cents on the dollar), had agreed to the 29-cent deal. By getting these banks and the other senior-debt holders to accept the 29-cent deal and give up their rights to push for the higher potential payout they were entitled to, the government could give Chrysler’s workers, whose contracts were general unsecured claims—and therefore junior to the banks’—a payout far more generous than would otherwise have been possible or likely. Essentially, the government was engineering a transfer of wealth from TARP bank shareholders to auto workers, and pressuring other creditors to go along.
On April 30, when President Obama announced the bankruptcy, he forcefully stated the White House position: “While many stakeholders made sacrifices and worked constructively,” he said, “I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them. I stand with Chrysler’s employees and their families and communities.”
In the face of this kind of political pressure, Perella Weinberg, the owner of Xerion, backed down. “In considering the President’s words and exercising our best investment judgment,” the firm said in a statement, “we concluded that the risks of potentially severe capital loss that could arise from fighting this in bankruptcy court far outweighed any realistic potential upside.” Tom Lauria, an attorney who was representing the firm during the negotiations, said in a May 1 radio interview that his client had been told by the administration that the White House press corps would destroy Perella Weinberg’s reputation if it continued to fight the deal. He later told ABC News that Treasury adviser Steven Rattner had made the threat. (The White House denied making any threats, and Perella Weinberg denied Lauria’s account of events, without elaboration.) Lauria said, in his radio interview, “I think everybody in the country should be concerned about the fact that the president of the United States, the executive office, is using its power to try to abrogate that contractual right.”
A somewhat similar story played out during GM’s bankruptcy—the government again put together a deal that looked to many like a gift to the United Auto Workers at the expense of bondholders, who were pressed hard to quickly take a deal that would leave them with 10 percent of the equity of the reorganized company (plus some out-of-the-money warrants) when they likely would have been able to negotiate for more in a less well-orchestrated bankruptcy proceeding. The Obama administration also famously browbeat AIG employees, who had a contractual right to some $165 million in bonuses, to void that right. (In the face of the government’s pressure and the public outcry, some 15 of the top 20 recipients of the retention bonuses agreed to give back a total of more than $30 million in payments.) Curiously, the government has put no pressure on Merrill executives to return their $3.6 billion in bonuses that were paid out in December 2008, even though the company had suffered those huge losses.
“The rules as to how the government will act are not what we learned,” explained Gary Parr, the deputy chairman of Lazard and one of the leading mergers-and-acquisitions advisers to financial institutions. “In the last 12 months, new precedents have been set weekly. The old rules often don’t apply as much anymore.” He said the recent examples of the government’s aggression are “a really big deal,” but adds, “I am not sure it is going to last a long time. I sure hope not. I can’t imagine the markets will function properly if you are always wondering if the government is going to step in and change the game.” One former Treasury official in the Bush administration told me he believes that the Obama administration has been disturbingly heavy-handed with the automobile companies and those who have lent to them. “It’s very easy, when you’re holding all the cards, to impose your will,” he said. “And when you are the only source of financing, forget it.”