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Monday, May 04, 2009


politics continuing to trump law and process

via clusterstock and zero hedge -- perella weinberg's interest in chrysler debt put it at the forefront of the obama administration's hamfisted efforts to cajole creditors into restructuring out of bankruptcy. through perella weinberg relented under political pressure from the administration, others did not and chrysler ended up in bankruptcy.

The dissident creditors said they had a fiduciary responsibility to seek the best possible returns for their own investors — which, the group said, include teachers’ unions, pension funds and endowments.

“The government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades,” the group said in a statement Thursday. The creditors suggested banks that had received bailout money were being strong-armed by the administration, a view some of the bankers privately said they shared.

now it's coming to light exactly how the administration's car czar, steve rattner, pursued his goal.

"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg," Tom Lauria, the head of the bankrutpcy department for top New York City lawfirm White & Case, told a WJR 760 radio host.

john carney:

The suggestion that the adminsitration would direct the White House press corps, composed of newspaper reports and other journalists who cover the Whtie House, to ruin the reputation of holdouts is sure to raise the ire of people who prize media independence. It's not clear whether this was an idle threat or whether the White House believes it exercises this level of control over the journalists asigned to cover it. It harkens back to the dirty tricks tactics of past administrations, and suggest a cavalier attitude toward the exercise of political power to control the actions of private citizens.

One test of whether the White House press corps is as compliant as the White House seems to believe will be how they handle Lauria's charge.

finem respice goes one further, though not without cause.

It is my deepest wish at this point that there is nothing about this latest bit of Car Czar thuggery even remotely based in fact- as this would mean that this country has truly and unarguably descended into fascism.

I use this term, "fascism," quite deliberately. I also use it well aware that many will consider it needlessly inflammatory. Be this as it may, I submit there is simply no other term that properly describes the style and tenor of government emerging both in public and behind once closed doors.

While it has seemed fashionable in past to brand the leanings of the current administration towards the left-biased "socialism," or even "communism," neither of these definitions withstands simple scrutiny. Nothing about these goings-on rises to the level of sophisticated argument required to sustain a claim that the state should a priori own the means of production. Nor does the present administration seem to harbor this as a goal. (It is not entirely clear if this is the result of philosophical or practical limitations, though I suspect the latter). Instead, the rhetoric flashing about commands subservience to the state, particularly by those industrialists and financiers whose acquiescence is required to maintain the machinery of commerce and the illusion of normalcy.

i would agree wholeheartedly.

both the obama administration and perella weinberg are predictably denying everything.

but those standard denials ring quite hollow. it is hard for me to sympathize much with perella itself -- recording loss amid carnage is often the result of speculation. but infinitely more troubling is the observation that the current administration, similarly to the previous one, seems to show little deference to process and law when the objectives are thought to be sufficiently imperative, with little consideration given to nuance or unintended aftershocks. this is how we got into this mess; it may not be much help in getting out.

the clear evidence now accruing in the record is that the long degeneration of american ruling principles in the face of avarice has in no way reversed with the inauguration of a new imperial presidency.

what has changed, however, is the framing. the former administration often appeared to be motivated by simplistic ideological zeal, with flighty think-tankers of the proper flavor being put in charge of real-life bureaucratic operations well beyond their ken. persistent failure was the predictable and oft-repeated result. the current adminstration instead is seen as hardheaded pragmatists; indeed my view is that they ran largely on an multifaceted appeal to sensibility and realism, and it worked very well indeed. though it is early days, it does seem very much that empiricism is again playing a much larger role in policymaking. that is very welcome.

but changing the frame does not perhaps change the picture. the common thread remains a tattered legal framework that most often serves simply as an instrument to be bent (or broken) to please the will of the administration, rather than as the circumscribing retaining wall it was intended long ago to be. in that sense, the obama administration has tusfar been little better than the bush administration -- it is taking its place as yet another in a long line of executives contributing to the dessication of the traditional structure of regulation in our society in favor of reckless radicalism, and again using perpetual crisis as the justification for doing so.

UPDAATE: finem respice clarifies that his reference is not to perella weinberg -- meaning that more than one of the dissident owners of chrysler debt was faced with the threat of political vengeance and regulatory annihilation if it did not submit to the pleasure of the administration.

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Let's re-acquaint ourselves with something approximating reality.

We have a company that is days away from bankruptcy, in an industry that is flat on its back, during what your own blog warns us is a major economic disturbance.

Now is not the time to play pull-my-finger with a bunch of self-absorbed fund owners who think they can hold out for a few more cents on the dollar because all the other parties are in far worse straits. There are jobs at stake, communities at stake, the future of an entire company at stake, and the government is mandated and empowered by both law and social contract to ACT.

Yes, there should be an established rubric for when a government will intervene, and broad, flexible, but transparent rules for how it will manage industry in such times. The fund managers do have standing, and should be compensated a reasonable amount, if possible. But to suggest that this should be the focus, or even of major concern, raises the question of whether these fund managers have lost perspective on their role in society.

Dr. Spock is dead. Let's recognize that, shall we?

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i agree that investment returns are not the goal of society, anon. but i would argue that now is PRECISELY the time to play this game, as these are the only conditions under which the game is ever played. companies go bankrupt every day; we don't destroy the legal and contractual foundations of debt subordination structure for any of them. indeed that basic structure is the product of a lot of trial and error, including many bankruptcies. why are we doing so here?

please note -- some of the creditors are hedge funds, true -- but they are also banks, pension funds, insurers and other entities who are undercapitalized, distressed and being helped by government. many also own significant exposure to GM debt, and chrysler should i think be seen as a dry run at GM.

in other words, if we decide to push losses onto the creditors in contravention to the legally established capital structure for 'optics', political expediency and rewarding special interests which supported the administration and will do so again in 2012 -- and please, let no one attempt to make the obama administration out to be unusually altruistic -- the losses are still very much ours to bear. the net potential gain to us all is likely zero. this is about rewarding friends and playing populist.

one of the things about this crisis that many do not seem to wish to accept is that there are few 'others' -- bogeymen onto which we can heap not just culpabilty but retribution and damage. far more realistic and productive is an understanding that we are all in this boat together. we accrued benefits collectively in the boom; losses will be borne collectively in the bust.

i am among those who believe that this crisis has some of its roots in the long decline of real wages. but while it may seem to some that reallocating spoils to (for example) UAW in order to reward that constituency, the result is quite possibly to force further systemic deleveraging from weak players further weakened as some of the biggest debtors head into reorganization with the government having every presumption of legal fixity in the capital structure thuggishly upended at possibly the worst imaginable time. the damage could be vastly greater than any benefit accrued to line workers.

that's quite a risk to run in order to achieve more favorable optics.

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I am no big fan of the hedge funds, but think the collapse of the rule of law is more serious. We are seeing the rise of Mussolini-style corporatism.

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from perrone: gm, this:

"we accrued benefits collectively in the boom; losses will be borne collectively in the bust"

stands rather at ironic odds with this:

"i am among those who believe that this crisis has some of its roots in the long decline of real wages"

no? in some sense, benefits accrued collectively, I suppose, but the relative gains of nearly all wage and salary earners were paltry in the extreme. many of us believe (and you yourself suggest) that's at the heart of the development and onset of this crisis. in so many ways. so can't we assert that any guiding strategy meant to confront and reverse this trend is far more than mere "optics?"

hey, btw, re: your "market dispersion" post, I'd be interested to know how important you feel all this quant stuff is in terms of the likelihood of trauma/dislocation for equities in the near term.

keep up the good work, man, you're the cat's meow.

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I apologize for the acidic tone of my comments.

My fear is that we are flirting with very real danger because the government is overly chastened in its response to various facets of this economic crisis. Government's stance is either out of idealogical fealty to free market dogma, or being in hoc to their donors, or both. It seems we hear a lot of great sounding rhetoric, but when the din dies down there has been no change whatsoever. And you're certainly right when you say that the bill comes due eventually. No argument there!

However, I do want the goverment to go in and take over. There can be a small board out of Commerce that is specifically chartered to re-organize the industry, and I see no reason why it shouldn't be privatized after meeting enumerated, pre-established criterion. Nationalization-in this case temporary nationalization-is a valid tool in the tookit.

If your point is targeted specifically to how the government compensates various owners, then absolutely, their should be a fair and open process. I welcome your education of us on the specifics of the law, as well as your own view of what that process should be.

I just don't want a handful of recalcitrant investors damaging all other parties...I don't see how there is any other remedy than the general thrust of the government's approach...and it seems like a lot of people have sacrificed to give it a chance to work.

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the relative gains of nearly all wage and salary earners were paltry in the extremep, i'd suggest that -- while clearly economic inequality has become so endemic in the united states that it has eroded not only the financial but political and moral underpinnings of american society -- the middle and lower classes did very much participate in the boom.

did they get rich? no.

did they, however, benefit from the general increase in economic activity -- the growth of credit, money supply and deposits -- that was the very definition of the boom? absolutely yes. indeed in many respects i think the influence of the boom masked for many (or allowed them to deny) just how severely their situation has actually deteriorated over the last couple decades.

this is one of the underreported aspects of the boom and now bust, in my view. the credit bubble was a tide that lifted all boats, including boats like mine own -- i never made use of credit lines, owned a condo only briefly and paid cash for all big-ticket consumer durables. easy financing had no direct benefit to me. but the indirect benefit -- in wages, in investment income, in financial security -- was massive.

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We are seeing the rise of Mussolini-style corporatism.i fear so, ia. it's been in development for some time, but seems in crisis to be reaching full flower.

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lol -- civilized acidity is fine, anon! we're human. no apology necessary.

Nationalization-in this case temporary nationalization-is a valid tool in the is valid of course, anon, but i think one must use it extremely carefully. most people think (rightly) of a temporary nationalization as a means to equitize the capital structure by government fiat.

but who holds that structure? not nefarious villians generally, but in the main endowments, pension funds and insurance companies -- in other words, us! wiping out a few too many creditors will result first and foremost in the need for a creeping bailout of the american insurance industry -- which is probably why too many such steps are not in the cards. government will probably prefer zombie banks, in particular, and correctly (though the political opposition will hammer them ceaselessly for it, in spite at least the smarter of them knowing the correctness of the position).

i don't think it's been well enough advertised -- largely out of an unwillingness to make the depth of the crisis public and possibly engender further panics -- the degree to which the capital structure of large obligors (including the autos) interlinks and couples the entire american financial superstructure. a debt crisis, such as we apparently have, really does have the capacity to sink the ship of state.

therefore, measured steps have to be the order of the day. and changing the rules of debt subordination on the fly by political edict is a massive and radical leap! should it be perceived as something other than a one-off, tectonic capital shifts could be touched off with highly unpredictable consequences.

instead, i would suggest simply playing by the time-honored rules. the obama administration wants this to be a fast and painless process for political reasons; but to be done properly, it can't be either. creditors, unions and suppliers should be allowed to sit at the table and hammer out their own agreement -- or, failing that, run chrysler through a standard bankruptcy with government financing.

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i might further note, ia -- if you really want to see the fruit of nascent corporatism in action -- follow the update link to zero hedge to read the comment filed by NASDAQ against the SLP provisions implemented by the NYSE with the blessing of the SEC. goldman sachs has been handed a dandy little kickback scheme for supplying 60% of the trading on the NYSE. this is what bill gross ought to mean by "shaking hands with the government".

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from perrone: "indeed in many respects i think the influence of the boom masked for many (or allowed them to deny) just how severely their situation has actually deteriorated over the last couple decades."

what you mean is the influence of "easy" credit, right? but was that helpful, productive, lasting -- or in fact a malignant ploy that just allowed the rich to get richer (and they in fact keep most of what they made) while now those middle and lower classes get their knees busted, and they lose what they thought they had?

I'd assert that far too often, _purposefully_, credit was NOT the friend of the wage and salary owner since we ushered in rule of the supply side. it was a trick and a trap, to prolong complacency and for the rich to grab more and more of the pie from the rest of us. I'm sorry, but really. what were all those subprime refinancings about, anyway? a blatant plot to steal from the poorer. and that's just one of the most obvious examples.

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