The Market Ticker

Ok, so The "Big Bad Government" did the deed, and Chrysler is going into Chapter 11.

Let's deal with the facts first, then I'll get to opinions (and boy, I've got some):

• The Government absolutely did have the right to do this.  There were no contracts abrogated.  Chrysler agreed to a "call option" on their note from the government when they first took assistance.  They were unable to meet the call, ergo, into Chapter 11 you go.
• It appears (now that we've had a few hours to let the news settle out) that The Government will not attempt to "jump" other secured creditors.  Good for the rule of law, bad for the Taxpayer - our "contribution" to them was in fact just that, and not a loan.  We will get zero on the previous investment.
• Bankruptcy is the right thing to do.  It was in the fall and it is now.  Period.

Now on to the opinions.

President Obama's attempt to "demonize" those who refused to play ball is not only curious, its outrageous.  Let's take his words:

President Barack Obama said Chrysler LLC lenders who turned down his buyout offers are a “small group of speculators” who forced the automaker into bankruptcy.

“A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout,” Obama said today in Washington before Chrysler filed for bankruptcy protection.

In bankruptcy, the company can now compel the dissidents, all secured creditors, to go along with a plan to create a more viable carmaker in partnership with Italy’s Fiat SpA.

No, in bankruptcy the company can compel exactly nothing.  The company can suggest, but it is the judge who compels, and he or she (in theory at least) is supposed to be impartial.

These other lenders apparently thought they were getting a raw deal.  That's up to the judge to decide.  If he decides that the deal offered originally is fair, he can cram down the capital structure and force everyone to take it.

But he can also find that the negotiation was arbitrary, capricious, unjust, unfairly slanted in terms of who it favored, or simply throw the whole thing in the trash can, rip it up and start over.

You can bet these 20 lenders will ask to be heard on those points, and they should if they feel they were being treated unfairly.

The cute part of this will be to see if they do.

See, some of them may have been playing with CDS too, and if so, they might have a reason to see Chrysler go into BK simply on that basis.  That is unlikely to find much sympathy with the judge.

My problem with this so-called "pre-structured" deal is this:

Banks including JPMorgan Chase & Co., Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc. lent Chrysler $6.9 billion, reselling some of their secured loans at discounts to investors. Chrysler took a $4 billion bailout loan from the U.S. Treasury and was racing to reduce debt in order to meet a government deadline today for more aid, after workers agreed to give up $10 billion in future pension benefits.

Is there a "side agreement" in here somewhere - or worse, some arm-twisting?  We don't know, but I bet in a bankruptcy, with aggressive creditors who feel they got the Chrysler Building stuffed somewhere painful, we will find out.

Here's the problem as described by Oppenheimer:

“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.

That is sort of correct.  Priority is sometimes overridden by a bankruptcy judge, who has pretty close to plenary authority.

If President Obama tried to ram something down their throat that was clearly inequitable then this should become apparent in due course.

The objections from the group of lenders also drew criticism from Michigan lawmakers, including Democratic Representatives John Dingell and Sander Levin.

“The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury -- firms I label as the ‘vultures’ -- will now be dealt with accordingly in court,” Dingell said.

Yes they will Mr. Dingy, and it is entirely possible that they'll get far more fighting this than they would playing "nice-nice."

It is of course expedient for everyone to take the cheap shots within the government when they want to demonize people.  I prefer to see the evidence, and from where I sit the jury is out on whether priority was respected at all along with whether there was some unseemly (or worse) arm-twisting going on with TARP'd banks that "agreed".

I'm reserving judgment on the acts, but I call BS here and now on the rhetoric. 

Not that I'm surprised by any of it.

So now we have a "new" credit card bill:

April 30 (Bloomberg) -- The U.S. House of Representatives passed a so-called credit-card bill of rights after adding a provision requiring banks to apply consumers’ payments to balances with the highest interest rates first.

The legislation, which also imposes limits on card interest rates and fees, passed today by a vote of 357-70. President Barack Obama supports the measure, and it may be taken up by the Senate next week.

Well, it at least changes the payment priority.

As for "imposing limits on card interest rates and fees", not so much.  And it does nothing to reverse the most egregious issue of all, the so-called "Bankruptcy Reform Law" passed under President Bush (and on which President Obama, as a Senator, voted "No".)

Why not?  Good question.  Why doesn't President Obama tell us why the bill that he thought sucked enough to vote "No" on should be law today?

The problem with that law is that it makes so-called "unsecured" credit not really unsecured if your income is over the median, as you can find yourself unable to file bankruptcy and discharge the debt.  Instead it is forcibly restructured and your wages garnished.

Unsecured?  Hardly.

The American Bankers Association is out there pushing misleading statements too, the most egregious of which is:

“It is vitally important to maintain access to credit at this difficult economic time,” Yingling said. “This is especially true for credit cards, which serve as a driver of economic activity and are relied on by consumers and small businesses as way to bridge short-term financial gaps.”

Baloney.

If they were bridging "short-term financial gaps" outrageous interest rates would not be required, as the card balances would be paid off.  If they were "cash management tools" (as I and some other people use them) in the main, there would simply be no issue - I get the bill, I cut a check.

The problem is that the banking industry has granted "credit" to people without concern over whether they can pay the bill or not.  They do this by statistically modeling the entire population of their card users and then applying whatever rate they need so that those who can't pay and go boom end up having their cost of credit carried by those who can pay in the form of insane interest rates and fees.

This is exactly backward.  The proper thing to do with people who can't pay is cut them off.  They're not going to pay anyway; you're doing nobody any good at all by letting them drive up the cost for those who can cover the bill!

This sort of "magical thinking" is part and parcel of how we got into this credit mess, but nobody is thinking of it in the logical fashion.  Not our bribed lawmakers and certainly not the bankers.

President Obama got it right once, when he said "No" to the Bankruptcy Reform Bill. 

Why does he now find it impossible to get it right a second time?

What's going on here?

Allen Stanford, the Texas billionaire facing civil fraud charges, attempted to turn himself in at the federal courthouse in Houston on Thursday, but was turned away because there is no warrant for his arrest, his lawyer said.

Right.  No warrant, so how do you turn yourself in - and why?

Being sued isn't a criminal matter.  So what's up here?

Speculation: Mr. Stanford has been the recipient of some sort of threat (or a multitude of them) and he's attempting to obtain what amounts to protective custody.

This may also be some sort of bail gambit, as is speculated in the press.  I doubt it; even Madoff was granted bail - sort of, even though his movement was restricted - and Stanford already surrendered his passport.  He's not going anywhere if and when he is indicted.

This will be interesting to follow.... more as we all learn it!