I try to avoid being overtly political here on TRB, but something foul is afoot in our capital markets that needs to be addressed.
The treatment of institutional and hedge fund bondholders in both the Chrysler and General Motors situation has one very apropos historical parallel that comes to mind, the Anglo-Norman invasion and conquest of Ireland.
In the year 1166, a deposed Irish king, desperate for help in his efforts to reclaim his lands and position, sought the assistance of King Henry II of France and England (of the Plantagenet Dynasty).
They don’t make ’em smarter than King Henry…he sent Richard Le Clare along with an army of Welsh bowmen to aid the Irish king in the reclamation of these lands with an eye toward the future.
Le Clare, who would become known as Strongbow as a result of his archers’ lethal arrow attacks, would ultimately become the ruler of a great swath of Ireland, including Dublin, which lead to a mass colonization of the Emerald Isle by the British. Once Strongbow had sufficient control, Henry II showed up in Ireland personally, intimidating Strongbow back into submission and naming himself Lord of Ireland.
What does this have to do with Barack Obama and the auto industry? If you’ve managed to stay awake during my ad hoc history lesson, you will have surmised by now that I mean to compare Obama to Henry II.
Henry, you see, owed a lot of Norman and Anglo-Saxon noblemen big time for their help and loyalty in the endless series of wars they fought for him. Henry meant to bestow these long-overdue rewards in the form of land and titles in Ireland.
He was somewhat judicious and respectful toward the local Irish gentry in his redistribution, but by the time his haughty son Prince John came along, lands pretty much got confiscated left and right, with absolutely no regard for the indigenous population whatsoever.
It is in this way that I see the creditors of the auto companies being treated by the Obama administration and his henchman, Car Czar Steve Rattner (who in this analogy, would be Strongbow). Contracts are nullified by the sheer fact that they can be, and forced offers of pennies on the dollar to classes of bondholders that would normally be at the top of the queue are the status quo in these “negotiations”.
Obama’s staunchest backers during his presidential campaign were the unions, the United Auto Workers being the most powerful and prominent. They are being made whole on healthcare benefits and being awarded with the dominant equity ownership in the restructurings much the same way that the Planatgenet king awarded vast farmlands to the adventurers who helped conquer much of France, England, and Ireland.
Ancient Irish clans like the O’Byrne’s and the O’Neill’s, some of whom could trace their ownership of these lands back to a time before the Roman Empire, were eventually cowed into tenant-at-will status, which transformed them from lords and princes to sharecroppers and peasants almost overnight. GM and Chrysler bondholders, many of them investment firms and hedge funds, have gone from being called creditors to predators, liquidity providers to “speculators”.
Henry II and his staunchly Roman Catholic English lords were able to pull this land grab off legitimately, by turning the Pope in Rome against the Celtic Church, and by extension, Irish rule itself.
The Pope was informed that the Irish Church was still sanctioning un-Roman Catholic practices such as priests getting married, legal divorce and men marrying their own brothers’ widows. When the English vowed to reform the Celtic Church, the Pope consented to the takeover.
In my analogy, the Pope would be Oprah Winfrey, who’s support of Obama was more important to his election efforts than any other single factor. Pope-rah Winfrey clearly approves of the making-whole of the unions and their health benefits, lack of public comment notwithstanding.
By calling the hedge funds and other bondholders speculators, Obama’s been able to wield the new form of populism as a weapon against them, even though under the law, they should be senior to any union concerns. This is no different than the English calling the Irish Church heretical as a precursor to the taking of Leinster and other regions of the country. Obama’s rewarding of his union supporters with way more than they deserve under the rule of law echoes the rewarding of English and Norman lords by Henry II with Irish lands.
The danger for American business is clear. My comparison has a proper cautionary coda, the ugly result of this type of make-up-the-rules environment:
The old-line Irish clans retreated into the hills and spent the next several centuries as trouble-making outlaws; rebelling, looting and plundering whenever the urge came over them. They generally withdrew from the English society that developed in Dublin and the surrounding area.
In fact, Dublin and it’s suburbs became known as the “English pale” and the wild lands of the Irish outside of it were referred to as “Beyond the Pale“. We still use this phrase today to describe areas over which we have no influence or control.
We need to ask ourselves a very simple question: Do we really want our liquidity providers and creditors retreating from our capital markets, no longer participating in the system and remaining beyond the pale?
I don’t think so.