- The more we examine the details of the bank bailouts
and the bankruptcy of Chrysler the more obvious it becomes that this is
all about the government playing favorites--setting insider friends and
companies above others destined to be stripped of their assets and rights.
It is a process of corruption of power of the highest order, a blatant
disregard for due process, and a violation of the principle of equality
before the law. Small banks are allowed to fail each week and yet totally
insolvent giants like CitiBank and Bank of America are being given what
appears to be an unlimited line of government credit. Preferred creditors
are being shunted aside in the Chrysler bankruptcy deal in favor of unsecured
creditors--including the same banks being bailed out by TARP are being
given priority status. The secured creditors in the Chrysler bankruptcy
watched in disbelief as the bankruptcy judge refused to uphold the law.
The consequences will be far-reaching when government undermines the rule
of law. Free markets run on an underlying trust in the administration of
justice and the defense of property and contract law. When trust in law
is gone free markets dry up out of fear. Just as bankers are now afraid
to lend, having lost confidence in the secondary mortgage markets and rating
companies, hedge funds and other investors no longer can trust any "secured
credit" agreement to hold up in court.
-
- Christopher Scinta and Tiffany Kary of Bloomberg News
detail the crucial objection of secured creditors to the government bailout-through-bankruptcy
of Chrysler. "A group of Chrysler LLC's secured lenders is seeking
to block the bankrupt company's plan to sell its business at auction this
month, arguing that the U.S. government is violating federal law to preserve
the automaker. The group, calling itself Chrysler's non-TARP lenders, seeks
to block the proposed sale to an alliance led by Fiat SpA, and block a
request by the U.S. automaker for approval of a $4.5 billion Treasury loan
to finance the reorganization. Secured lenders that agreed to the Fiat
deal, including JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs
Group Inc. [the good-ol-boys], had conflicts of interest because they had
also accepted TARP funds, the group said [It's not just the reception of
funds but the skewed process by which some get money and others get nothing--thus
allowing the favored to be in a position to buy out the "have nots"].
The process is 'tainted' because it was dominated by the government, the
lenders argued.
-
- "'The sale motion should be denied because it seeks
approval of a sale that cannot be approved under the bankruptcy code,'
they argued [The normal timing rules for the bid analysis are being shortened
so that other stake holders (non-insiders) to the government-favored Fiat
deal won't have time to submit competitive alternatives]. The Fiat offer,
to be made from an as-yet unnamed entity [such lack of legal status would
normally be grounds for rejection in a bankruptcy case. I suspect that
the reason the new Fiat consortium is being kept in identity limbo is to
hide the fact that major silent investors in the group are the Morgan-Chase-Citibank-Goldman
bankers who are being given priority over secured credit holders.] formed
by the Italian automaker, Chrysler employees and other parties, will be
the lead bid in an auction, which is typically required for assets sold
in bankruptcy. Chrysler is asking U.S. Bankruptcy Judge Arthur Gonzalez
to approve bidding rules for an auction that would require creditor objections
to the sale to be submitted by May 11, followed by a May 15 deadline for
competing bids."
-
- Because of the huge potential losses to hedge funds who
are invested in Chrysler (if their investors knew, they would certainly
try to pull their money out before the final result), the group challenging
the bankruptcy initially tried to keep their names a secret using the claim
that they had received death threats--not really out of the question given
the track record of the dark side of government in using "persuasion"
to get their way. In fact almost a third of the original petitioners backed
out rather than stay in the fight [now, it is less than half that have
the courage to fight it out]. "Thomas Lauria, a lawyer for the secured
lender group, said some of its members have received death threats...Some
of the lenders have already been identified, including Oppenheimer Funds
Inc., Perella Weinberg Capital Management, LP's Xerion hedge fund and Stairway
Capital Advisors. Perella withdrew its objection last week. Lauria said
the group fluctuates in size based on trading of the debt. Some members,
in addition to Xerion, have left because things are 'too hot,' Lauria said.
-
- "Oppenheimer Funds, said in a statement on April
30 that it rejected the offers because the government 'unfairly' demanded
that the fund's shareholders make greater sacrifices than were being asked
of unsecured creditors. 'Our holdings in secured Chrysler debt are entitled
to priority in long-established U.S. bankruptcy law, and we are obligated
to our fund shareholders to support agreements that respect these laws,'
the company said in an e-mail. The dissidents are part of a group of Chrysler's
secured lenders holding loans with a face value of $6.9 billion, which
Obama plans to pay $2 billion to free up assets for a sale to Italy's Fiat.
That's about 29 cents on the dollar. Chrysler debt was trading at 27 cents
to 28 cents on the dollar as of May 5, according to two people familiar
with the trades."
-
- The news just broke today that the dissenting lenders
gave up the fight, having realized that the courts were not going to obey
the law. To demonstrate how quickly the floodgates of impropriety and cronyism
open in the face of court corruption, Chrysler's law firm Jones Day had
the audacity to ask the judge to give them superiority over claims of all
other professionals involved in the case. "As Chrysler's lead law
firm, Jones Day's fees and expenses could total $114.7 million, out of
$372.4 million in court- approved payments to all lawyers, bankers and
accountants in the Chapter 11 proceedings... 'I have never seen a request
for super-priority under Section 364 for a professional,' said bankruptcy
law professor Stephen Lubben at Seton Hall University's law school."
Indeed, but now it's a whole new world out there and anything goes!
-
- MORE BAILOUT SHENANIGANS
-
- The more one scrutinizes dealings between the Fed, the
US Treasury and the nine favored big banks, the more one finds cronyism,
favoritism and corruption. This week Stephen Friedman was forced to resign
as chairman of the board of the Federal Reserve Bank of New York, amid
a controversy about his dual roles as a director of the regional Fed bank
and a director and shareholder of Goldman Sachs. This was a direct conflict
of interest given the NY Fed's policy of favoring Goldman.
-
- In other news, the NY times reported "The government
has told Bank of America it needs $33.9 billion in capital to withstand
any worsening of the economic downturn, according to an executive at the
bank, a determination that could make the United States the controlling
shareholder in the bank. Executives sparred with the government over the
amount, which is higher than executives believed the bank needed. But J.
Steele Alphin, the bank's chief administrative officer, said Bank of America
would have plenty of options to raise the capital on its own... 'We're
not happy about it because it's still a big number,' Mr. Alphin said. 'We
think it should be a bit less at the end of the day.' Because Bank of America
has already received $45 billion in federal assistance from the Treasury
in exchange for preferred shares, it could satisfy regulators' demands
simply by converting the non-voting preferred shares to common stock."
-
- I think Alphin is fibbing. He and other insider bank
leaders know they are insolvent and will need a continual flow of bailout
funds to stay alive, but they are intentionally downplaying the numbers
and playing optimistic in order to milk the public out of more money gradually.
Here's the real story by Karl Denninger of Seekingalpha.com:
-
- "The 'rumor' floating over the weekend as well as
yesterday morning was that some of the banks might need $10 billion under
the 'stress' scenarios [it appears now that the stress tests were designed
to merely justify more money for the large insider banks]. That they might
be able to raise, and it has been part and parcel of fueling the rally.
The S&P Monday afternoon stuck virtually the entire sector on Credit
Watch Negative and that was just the start.
-
- "There are now some independent analysts out there
with their own numbers on 'required capital', and they're ugly. Friedman
Billing Ramsey came out and said they believed that Bank of America (BAC)
needs $60 billion all on its own, while Egan-Jones piped up and said the
number was $100 billion! SNL Financial, a research firm, thinks the number
is $50 billion each for Citi (C) and Bank of America - minimum - and might
be closer to $70 billion for Bank of America. Nor does it end there. Wells
Fargo (WFC) is projected to need $66 billion and JP Morgan (JPM) needs
$33 billion, according to these folks. But if you think those numbers are
a horror show, the real ugliness isn't found there. It is in fact found
in all the foreclosed-but-unsold and not-yet-foreclosed 'but will be' housing
stock. Through the nation I am getting reports, some hard and some anecdotal,
that lenders are sending out NODs (default notices) and then sitting on
the process intentionally [in other words, withholding the bad news to
distort reality]."
-
- Why is Bank of American in such bad shape? I think it
comes from absorbing both Countrywide and Merrill Lynch. Bloomberg News
revealed that there was a lot of ugly pressure applied (and probably hidden
promises as well) in order to get the deal done. "Federal Reserve
Chairman Ben S. Bernanke testified he never asked Kenneth Lewis, chief
executive officer of Bank of America Corp., to refrain from publicly discussing
losses at Merrill Lynch & Co. before the merger. 'I absolutely did
not in any way ask Mr. Lewis to obscure any disclosures or to fail to report
information that he should be reporting,' [a bald faced lie] Bernanke said
today in testimony to the congressional Joint Economic Committee. Lewis
in February told investigators for New York Attorney General Andrew Cuomo
that he was pressured in December by Bernanke and former Treasury Secretary
Henry Paulson to complete the Merrill acquisition amid mounting losses
at the brokerage firm [I believe Lewis]."
-
- As Oliver Garret of the Casey Report said, "Ken
Lewis has been sacked as chairman of the board at Bank of America, even
though he might well have been the only conscientious and honest player
in this scheme. And now the sharks have started to turn on each other:
according to Cuomo, Paulson 'largely corroborated Lewis's account' and
informed the attorney general's office that he 'made the threat at the
request of Chairman Bernanke.'"
-
- Karl Denninger continues: "Bank of America acquired
the brokerage on Jan. 1. Lewis and the board were criticized at the bank's
annual shareholders' meeting last week for not disclosing before a Dec.
5 merger vote that New York-based Merrill's fourth-quarter loss was spiraling
toward $15.8 billion [including a whopping payout of executive compensation
of $8 billion, which BofA ended up having to cover]. Shareholders voted
to force the company to have an independent chairman, prompting Lewis's
removal and promotion of director Walter Massey to the post.
-
- "NY Attorney General Andrew Cuomo released Lewis's
testimony last month after gathering the information during his investigation
of the distribution of $3.6 billion of bonuses to Merrill employees. Lewis
said he was instructed by federal officials not to disclose Merrill's losses,
his desire to back out of the deal or about the intervention of regulators,
according to a letter Cuomo released April 23 to lawmakers including Senate
Banking Chairman Christopher Dodd. Paulson may have threatened to remove
the management and directors of the Charlotte, North Carolina-based bank
if they didn't comply, Cuomo wrote."
-
- End Excerpt
-
-
-
- World Affairs Brief - Commentary And Insights
On A Troubled World
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