<Article>Property Rights Take a Hit

silverharp

A good summary of the way the current administration seem to be making arbitary decisions wrt property rights, so for example auto unions versus teacher unons pension funds.



Property Rights Take a Hit

by Peter Schiff, Euro Pacific Capital | June 12, 2009


“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.

Copyright © 2009 Peter Schiff

Black Swan

silverharp wrote: »

A good summary of the way the current administration seem to be making arbitary decisions wrt property rights

"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."

It was a US "Supreme Court" decision, not "arbitrary decisions" by the "current administration?" Is this the same court with a chief justice and other conservative Bush appointees that decided not to hear the case?

Is this not part of a larger issue? The sale of bankrupted Chrysler to Fiat? "The parties each argue that the New York bankruptcy judge who approved the sale last week misinterpreted the law." The Obama administration may have been arguing in favour of the sale, but it was first a "bankruptcy judge" followed by the US "Supreme Court" that made the decisions?

Source: http://www.foxnews.com/politics/2009/06/08/chance-block-chrysler-deal-lands-supreme-court/

Manic Moran

The FIAT/Chrysler thing has raised my eyebrow, though. FIAT has basically acquired Chrysler and its liabilities, has a larger stake in the corporation than any other organisation or individual, yet the Government has decided to take the majority position on the Board. Seems a little inequitable.

NTM

jank

So Win, Win for the US point of view?

silverharp

Blue_Lagoon wrote: »

The Obama administration may have been arguing in favour of the sale, but it was first a "bankruptcy judge" followed by the US "Supreme Court" that made the decisions?

Thats the point though No? if the administration doesnt want to be seen to favouring say the UAW over legitimate creditors, then their plans should be above board?

Black Swan

silverharp wrote: »

Thats the point though No? if the administration doesnt want to be seen to favouring say the UAW over legitimate creditors, then their plans should be above board?

Not according to the White House briefing 10 June 2009, two days before the Peter Schiff 12 June 2009 news article cited in the OP. You don't have to read between the lines to see the White House's position. Like it or not, the administration's position is quite clear and not hidden. For example:

"We understand, as I said yesterday, that people are entitled to their day in court if they have grievances about some situations surrounding the bankruptcy. But the President and the Auto Task Force strongly believe this gives car companies, communities, workers, and investors the best opportunity -- and taxpayers -- the best opportunity moving forward. It's what's kept plants open; it's what's kept people on the job. And I think we are heartened by what happened at the Supreme Court and hope to see the same follow for General Motors."

Source: http://www.whitehouse.gov/the_press_office/Briefing-by-Secretary-of-Commerce-Gary-Locke-and-Press-Secretary-Robert-Gibbs-6-10-09/

To reiterate, the current administration did not make the "arbitrary decisions" as suggested in the OP (which is misleading), although they argued in favour of the sale. Two courts made the decisions.

Manic Moran

In fairness, the courts take a very hands-off approach when it comes to that sort of thing. It's very rare that they ever get involved, usually major issues regarding the sale/transfer of company assets are dealt with by the government entities such as the ICC.

NTM

Black Swan

Manic Moran wrote: »

In fairness, the courts take a very hands-off approach when it comes to that sort of thing. It's very rare that they ever get involved...

Indeed! But two courts did get involved, or rather, a lower court rendered a decision, and the US Supreme Court decided not to consider the appeal. Two court decisions by a completely different branch of US government, and not "arbitrary decisions" by the Executive Branch as claimed in the OP?

silverharp

Blue_Lagoon wrote: »

, the administration's position is quite clear and not hidden. For example:

"We understand, as I said yesterday, that people are entitled to their day in court if they have grievances about some situations surrounding the bankruptcy. But the President and the Auto Task Force strongly believe this gives car companies, communities, workers, and investors the best opportunity -- and taxpayers -- the best opportunity moving forward. It's what's kept plants open; it's what's kept people on the job. And I think we are heartened by what happened at the Supreme Court and hope to see the same follow for General Motors."

This is what people like Schiff have a problem with. His argument is that the property rights (in this case the bond holders) should not be sacrificed for the perceived national interest. I heard him say in another interview that property rights should not be overriden even if it does hurt the economy.

Manic Moran

Blue_Lagoon wrote: »

Two court decisions by a completely different branch of US government, and not "arbitrary decisions" by the Executive Branch as claimed in the OP?

I've not been tracking it, but did the two lower courts actually interfere, or did they just order that the situation be left as the Government has decreed?

NTM