Friday, May 15, 2009

A High Stakes Game of Chicken

Remind me never to play poker with President Obama. I have a feeling he's good.

After receiving $25 billion in taxpayer-funded TARP funds, greedy J.P. Morgan Chase decided to play hardball with the auto task force when it came time to negotiate over debt recovery before and during the Chrysler bankruptcy. According to the WSJ:
President Barack Obama's auto task force heard a blunt message early this spring from J.P. Morgan Chase & Co., the largest lender to Chrysler LLC. In any deal to remake the troubled auto maker, Chrysler would have to repay its lenders all $6.9 billion it owed.

"And not a penny less," said James B. Lee Jr., vice chairman at the bank, in a call to auto task-force boss Steven Rattner on March 29.

The next day, Mr. Obama called the banker's bluff. The president stepped before a podium to announce that Chrysler could face a disorderly bankruptcy or even liquidation. His meaning was clear: If that happened, the lenders would get nowhere near $6.9 billion.

A few hours later, Mr. Lee called Mr. Rattner back. "We need to talk," he said.

The banker's about-face was a vivid example of the government's tightening grip on a humbled financial industry. Pulling a trick from the hedge-fund playbook, the government used its leverage as the sole willing lender to Chrysler, either in bankruptcy court or out, to extract deep concessions from some of the country's biggest banks.
h/t to Epicurean Dealmaker who explains that the WSJ made it appear that almost all the lenders involved understood exactly what type of game they were playing:
Many of the lenders believed the administration wouldn't let Chrysler file for bankruptcy. "The plan was to call the government's bluff. The game was to game the government," said a manager of a distressed-debt fund.
Gaming the government is essentially the same as gaming the taxpayers. The good news according to E.D. is that the system worked exactly as it should.
The government simply did what any hedge fund driven by fiduciary duty and self interest would have done if it held the reins: it dictated the terms it wanted to see, and it told the creditors to pound sand if they didn't like it. The creditors, on the other hand, seemed to sally forth onto the field of battle without fully considering who was supplying their reinforcements (the Treasury), where they were fighting (in the forum of public opinion, as well as the arena of commerce), and the outside chance that their primary opponent might be smarter than a bag of hammers (and therefore realize and exploit its advantages). In return, they got schooled, but good.
Oh, yeah, he also had a comment for the whiners complaining about the government's involvement in economic affairs:
Deal with it. Buck up, and move on. Find a less lopsided game to play in.

Because I can guarantee you the government and 95% of the people who elected it to power don't give a rat's ass that you're going to lose money on your Chrysler bonds.

(Cross-posted at Blogging for MI.)


abi said...

Don't you love it when a pol stands up to big moneyed interests? Does my heart good. ;-)

K. said...

Hear hear!

Anonymous said...

Hey! I read your post and thought you might be interested in CNBC's TV show today "Street Signs," where James Lee Jr., Vice President of JP Morgan Chase, will be interviewed. The show airs at 2:15pm but if you miss it you can watch the video after 4pm on CNBC's website,