There’s no Coup de Ville at the bottom of this Crackerjack Box

Upon the application of certain secured bondholders, including a group of Indiana pension and construction funds that hold Chrysler bonds, the US Supreme Court, by Judge Ruth Bader-Ginsburg, ordered a stay of the sale of Chrysler’s assets to Fiat. Judge Ginsberg’s ruling delays the sale while the Court decides whether it will actually hear the appeal by the bondholders. The bondholders, who are being crammed down into accepting a deep discount on their secured debt are opposing the sale of Chrysler’s assets to Fiat. As part of their opposition to the deal, these secured bondholders have raised an intriguing question in that they ask whether the executive branch of the US Government has exceeded its constitutional jurisdiction in acting to back the Chrysler/Fiat deal under the guise of Congress’ authority granted by ARRA (American Reinvestment and Recovery Act) and TARP (Troubled Asset Relief Plan). While this bailout legislation was initially enacted as a mechanism to inject capital into a financial system that had seen financial institutions effectively shut down their lending capabilities due to the extreme write-downs that mark-to-market accounting rules had on their capital reserves, it was soon called upon to perform other functions. Nevertheless, the bondholders argue that the bailout legislation that has given the Federal Government its expansive authority was designed to aid the financial and banking sector in an attempt to thaw the credit crunch, not as a means for the Federal Government to broker, finance and sheperd a deal for an automaker using the Federal Bankruptcy laws to shed its intolerable debt and unwieldy operating cost structure. The investors in these Indiana funds are teachers, firefighters, and other such Main Street people that loaned their money to Chrysler and were issued secured bonds. The President has stated that these bondholders should accepted the diluted payment being offered to them, that is, to essentially take a sucker-punch for the good of the team. The White House intends to accomplish this underpayment by using the very same bailout legislation that, only a few months ago overpaid AIG employees and repaid Goldman Sachs’ AIG market risk. Is this the way the law was intended to be applied? Can we manipulate our constitution in this way? The answer is yes, most likely we can.

What, however, will the Court say? Well, we do not yet know whether the Court will agree to hear the case, but the speculation on how and whether the Court would answer the above questions is intrigiung to me. Did Congress have a legislative basis to grant such wide-ranging authority to the Executive Branch, or more pointedly, did Congress in fact grant to the White House the authority to act as they have in this Chrysler deal?

These are very weighty issues, the determination of which will have far-reaching effects on the economy, and the White House’s ongoing role in rebuilding and stimulating the economy, the determination of which will be crucial for those of us planning investment strategies in the distressed asset class.

Specifically, the bailout legislation which began under the Bush Administration as a TARP fund intended to invest capital directly into banks, and then expanded under the Obama administration into the ARRA stimulus plan, which has provided capital to the individual States, and to fund the completion of public works projects, has now moved into the setting up of private-public partnerships utilizing the TALF (Term Asset-Backed Securities Loan Facility), which will faciliate capital and liquidity to the owners of other troubled asset classes such as credit card receivables, automobile loans, and other such products. There has also been press speculation that commercial real estate operators have been knocking on doors in Washington seeking support for a financial assistance package should there become a greater inability on their part to refinance the towering levels of debt collateralizing buildings, shopping malls, and industrial buildings that are coming due in the next 1-3 years. These are clearly different applications of bailout legislation enacted to rid the financial system of toxic derivatives tied to the residential housing market, and yet they have naturally morphed from the original legislated solution as the economy has twisted and turned in its attempt to wriggle free of its recessionary malaise.

To me, it seems that in the current economic climate in which legislation has been utilized to buffer the capital of financial instutions in the hope of re-igniting lending and credit activity, and to balance the health of the economy by combating the threats of inflation and federal deficits, the Federal Government’s intervention in a deal that potentially could save the employment and livelihood of thousands of taxpaying citizens, as well as continue the survival of a company that provides transportation to millions of consumers and competition to an industry vital to the national economic psyche would fit into the legislative mandate given by Congress to the White House, and meet constitutional scrutiny, but others may differ. . .

This certainly is a fascinating issue that I think we need to pay close attention to.