We Don't Need No Stinkin' Contracts*

The Obama administration has succeeded in ramming through the courts its restructuring plan for Chrysler that is long on protecting the UAW but is short on honoring the law regarding creditor rights.

The secured creditors of Chrysler are entitled to a higher settlement of their claims against Chrysler than unsecured creditors. This rule on priority is one of the fundamental tenets of our commercial laws. In return for that priority, the secured creditors lent money to Chrysler. Without that security, they either wouldn't have the lent the money, or would have done so at higher interest rates.

But honoring that legal requirement would have meant the UAW, specifically its members' retirement health care benefits, would have had to accept a lower settlement.

So the Obama administration decided that satisfying a key constituent was more important than honoring contractual rights.

The price for the nation will be diminished economic growth going forward, as all investors and lenders now have to demand a higher rate of return on future investments to offset the risk of political expropriation. This higher required return means investors will fund fewer investments and business ventures, which will reduce growth and innovation in our economy.

Since higher growth is the key to improving the standard of living for all Americans, we all became a little bit poorer with this result.

And don't be misled into thinking that if the U.S. Supreme Court didn't overturn the matter, it must be OK. Given the frenzy whipped up by the left and Barack Obama himself on various economic matters that past nine months, it wouldn't be surprising if the justices decided that the astute political move was to avoid upholding the law.

Shame on them for doing so, and even more shame on Obama and the left for deciding that paying off a political ally is more important than following the law and the well-being of the country.

* An ongoing series that looks at the assault on economic rights by the left, with previous articles here and here.

We Don't Need No Stinkin' Rights

Chrysler's secured creditors who are banks, such as Citigroup and JP Morgan, have agreed to accept the government's proposed settlement of their debt - no doubt in whole or in part due to their status as a "tarped" firm. Since they are under the thumb of the Obama administration, they need to do its bidding.

But not all of Chrysler's secured creditors are TARP firms, and they don't like the deal the government has offerred them.

The deal upends the traditional payouts in bankruptcy, because the unsecured creditors (the UAW retirees) are getting a higher recovery rate on their liabilities than the secured creditor (the banks) under Obama's plan.

In a normal bankruptcy, the opposite occurs. This is pure wealth confiscation by the Obama administration, in support of its political ally the UAW.

The bankruptcy judge has to decide if the identities of these lenders need to be revealed, which is a problem, since some have received death threats.

This is just another obscenity that the economic downturn has led to: creditors who have the right to decide for themselves whether to accept a deal being threatened with death for not doing so. Obama's attack on these creditors as "speculators" further inflames passion on the issue, when all they are doing is representing their investors interests - as their fiduciary duty requires.

Along with the death threats made against AIG employees who received contractually agreed bonuses, this shows the naked hatred that exists in the hearts and minds of some.

If you won't speak out in their defense, don't expect anyone to speak out in your defense.

We Don't Need No Stinkin' Contracts

Responding to enormous political pressure, Citigroup is exploring breaking its deal with the New York Mets to pay $400 million over 20 years for naming rights to the new Mets' ballpark.

Politicians have complained that Citi is paying all this money for naming rights when it has received $45 billion in government investment plus additional guarantees.

First, such naming rights are a form of advertising, and while I have no idea if it is a worthwhile investment of marketing dollars, it is in principle no worse than other forms of advertising. In fact, I'm sure Citi's marketing budget dwarfs the $20 million per year cost for naming rights. But if it were a good marketing investment, getting rid of it would hurt, not help, the company and its investors - which now prominently includes the U.S. government.

Killing a good investment is hardly a good idea to help the bank recover.

But there is a more profound problem. Citi has a legally binding contract with the Mets. They can't just walk away from it. Presumably, for Citi to negotiate its way out of the naming rights, it would need to pay the difference between what a new party would pay for naming rights and Citi's $400 million commitment.

The other alternative is that the Mets, who received state and city aid to help fund the construction of their stadium, get additional aid from the government to make up their loss.

Scoring cheap political points is easy. Real leadership requires applying good sense.