Sunday, May 3, 2009

Obama’s Chrysler Bankruptcy Proposal Leaves Investors (the REAL Owners) Out in the Cold...

More than six months ago Larry Kudlow asked, “What happens to the taxpayer’s money if these bailed out Corporations go into bankruptcy anyway."

The terminally dumb, saw that as a “dumb question.”

Now, many of those terminally dumb folks are scrambling for answers.

In the Chrysler case, the banks holding much of the debt on Chrysler are TARP banks that the Obama administration was able to squeeze concessions out of, concessions as in, OWNERSHIP CONCESSIONS.”

The Obama plan would give the UAW a whopping 55% ownership stake in Chrysler, the U.S. government about a 20% stake, leaving 25% for Fiat...and the American investors and Chrysler’s creditors (a/k/a “the REAL owners of Chrysler”) out in the cold. The entire proposal violates basic American contract law.

The real fight may come when the fed tries to do the same with GM. There, the loan holders are NOT TARP banks and will not to easy to manipulate or bribe into surrendering either their ownership stake nor their repayment contracts.

As Kudlow astutely notes, “We are witnessing more spending, deficits, and debt-creation than anyone ever imagined. Bailout Nation has run amok. This started under Bush, but Obama is raising the stakes exponentially.

“The latest federal budget would double the debt in five years and triple it in ten. For some perspective, that debt level is higher than the combined debt levels generated under every president from George Washington to George W. Bush. According to the CBO, federal debt held by the public as a percentage of GDP under Obama is projected to rise to 82 percent in ten years. The budget deficit itself never drops below $670 billion and closes the period at $1.2 trillion. That’s nearly a 6 percent share of the economy.

“All of this will certainly lead to large tax-rate hikes that will rob incentive power from entrepreneurs, investors, and small-business owners. Just look at Britain, where the top tax rate has been raised to 50 percent from 40 percent. The Thatcher Revolution is being repealed over there. Unless current trends are reversed, the Reagan Revolution will be repealed over here.

“The Obama budget already will raise taxes on overseas corporate earnings and oil-and-gas companies at home. It will elevate taxes on capital gains and dividends for investors and will lift the top tax rate for successful earners. And more is coming.

“But this is the wrong direction for economic growth. Instead, business tax rates should be slashed — which, by the way, would repatriate corporate earnings for domestic investment. We need a capital-gains tax holiday. We should be flattening individual tax rates across-the-board. And all manner of loopholes and special-interest deductions should be repealed to broaden the taxable-income base.”

Kudlow also notes that “According to Special Inspector General Neil Barofsky, the $700 billion TARP program — which has ballooned to more than $3 trillion in spending, loans, and loan guarantees — is “inherently vulnerable to fraud, waste and abuse.” Barofsky already has opened 20 separate TARP-related criminal investigations and six audits into whether taxpayer dollars are being stolen or wasted.

"Rest assured that they are.

“Economic recovery is still likely in the second half of the year. And President Obama will claim victory for his big-spending policies. But the reality is much different. Massive Federal Reserve pump-priming is moving the economy from deep recession to some kind of recovery. Meanwhile, the combination of deficit spending and easy money increases the threat of stagflation.”

ABSOLUTELY...a repeat of Carter-like policies (and THESE are “Carter-like policies on steroids”) will inevitably deliver the SAME inevitable results.


Z said...

Lots of comparing to Carter lately for obama..I'd say that's a REAL bad sign, huh? Except obama's like carter on steroids.

JMK said...

True enough Z, though Carter followed a dozen years of unbroken Keynesian policies and a period of wild government expansion, Obama follows only about SIX Keynesian years, though they were, as they say, "deuzies."

In their first three months, the Obama administration has quadrupled the deficit and his spending would more than double the National Debt in just five short years.

That's unsustainable.

I expect a very brief recovery, followed by some prolonged agony...the American people haven't felt the worst of this...not by a long shot.

But we will.

Alpha Conservative Male said...

Obama talks about "sacrifice" jmk, yet where is the sacrifice by the auto unions? The bondholders got screwed, and the shareholders got hosed. The banks that lent Chrysler money got shafted. The only people that made out are the people that didn't invest anything into Chrysler to begin with, the unions.

JMK said...

AGAIN, you're 100% right, but it's even worse than that!

What the Obama administration has done is to overturn centuries of accepted contract law, which dictates that the shareholders and creditors are FIRST in line in a financial crisis.

This "deal" arbitrarily gives the UAW a 51% ownership stake in a Company they helped ruin and saves another 25% to 30% for Fiat, with the rest being held by the Fed.

This "deal" does far more than merely put Chrysler's investors "out in the cold", it will have a chilling effect on ALL private equity lending going forward, with would-be lenders now having to take into account that government may at any time and for any arbitrary reason, subvert or even negate their contracted obligations, to benefit others.

Who will lend to Chrysler...or GM, or for that matter ANY major corporate entity, given this current administration's penchant for intervention?

That leaves ONLY government as the last remaining source of credit sustenance for these Corporations, making them, de facto GSEs or quasi-government entities.

Ironically enough, that's what Hitler, Musolinni and Stalin all did!

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