Over at Asia Times I have been maintaing a financial blog called Inner Workings. Most of the material is technical, but I posted a Jeremiad today about the end of the rule of law in American business that is generally relevant.
Don’t zombies come from places where they grow bananas?
Over a year ago (in a “Spengler” essay) I characterized Barack Obam as a third world anthropologist profiling the United States:
Obama profiles Americans the way anthropologists interact with primitive peoples. He holds his own view in reserve and emphatically draws out the feelings of others; that is how friends and colleagues describe his modus operandi since his days at the Harvard Law Review, through his years as a community activist in Chicago, and in national politics. Anthropologists, though, proceed from resentment against the devouring culture of America and sympathy with the endangered cultures of the primitive world. Obama inverts the anthropological model: he applies the tools of cultural manipulation out of resentment against America. The probable next president of the United States is a mother’s revenge against the America she despised.
Was that an exaggeration? We will find out, but Obama has gone a lot further than any of his predecessors toward making America a banana republic. I spent part of the late 1980s and early 1990s globe-trotting with the notion that the Reagan economic revolution could be exported. My then business partner, the late Jude Wanniski, had coined the phrase “supply-side economics” to characterize Robert Mundell’s economic recovery plan. Jude had sold the plan to Jack Kemp, as I wrote last week at the First Things blog after Jack’s sad passing.
We set out spread the supply-side gospel everywhere. I spent months in Mexico and Russia, and shorter visits to Peru, Nicaragua and other venues. For the most part it failed miserably: what was lacking was the rule of law. Contracts mean nothing in banana republics, or rather, they mean what the top honcho says they mean. No-one wil commit capital except on the basis of a political deal that establishes a monopoly. That’s why telephone calls in Mexico cost several time what they do in the U.S., and one of the world’s two or three richest men (telephone czar Carlos Slim) comes from a poor country.
Obama is proceeding on the banana republic model. As Edward Jay Epstein wrote last week at the Vanity Fair blog, “the Czar’s rules apply.”
Consider the sad case of Chrysler. Its troubles became manifest in 2007, when it was owned by the German auto giant, Daimler, and it was unable to come to terms with the United Auto Workers labor union (UAW). Rather than suffer more losses from an unfavorable union contract, Daimler decided to rid itself of Chrysler by handing over 80 percent of its ownership to Cerberus Capital Management, a private equity fund named after the mythical creature guarding the doors of hell…
Chrysler then borrowed $10 billion from a banking syndicate, led by J.P. Morgan Chase, Citigroup, and Goldman Sachs, to fund its operations. The loan was secured by mortgages on Chrysler’s real estate, manufacturing plants, patents, and highly profitable brand licensing rights. (Jeep alone earned $250 million a year licensing its name to toys, clothes, and other products.)
The lenders assumed (incorrectly, as it turned out) that their secured loan, which was senior to any other Chrysler debt, would be protected even if Chrysler went bankrupt, since the iron rule of bankruptcy held that secured loans get fully paid before unsecured loans. Without this rule, financiers would be reluctant to lend money to corporations on their assets.
What these lenders had not reckoned on was the political power of the UAW, especially after the 2008 Democratic landslide.
[snip] The solution that…the administration endorsed involved dividing Chrysler into two companies—an old Chrysler, which would be saddled with the debts, and disappear, and a new Chrysler, to which all the valuable assets would be assigned, including those that had been mortgaged to the senior secured creditors.
The major banks, of course, backed the administration. They are able to issue debt guaranteed by the FDIC at rates just slightly higher than the Treasury itself — a quarter of a trillion dollars worth to date. They have the TALF plan to unload securitized assets, and the Fed providing a backstop bid in the trillions for structured product. They remain profitable thanks to the administration, which in effect dictates how profitable they can by telling them how much capital they need to old. They look very much like banana-republic banks operating under a government subsidy.
What about the other secured lenders to Chrysler? As Michael Barone wrote in today’s Detroit News,
But my sadness turned to anger later when I heard what bankruptcy lawyer Tom Lauria said on a WJR talk show that morning. “One of my clients,” Lauria told host Frank Beckmann, “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.”
Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the President Barack Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.
Non-cooperative lenders (that is, lenders not part of the big banking monopoly) received death threats. The White House is not making death threats, to be sure — only threats of destroyed reputations — but when the President of the United States denounces lenders as “speculators” in the midst of a painful economic downturn, he helps to create an atmosphere in which violence is not unimagineable.
It isn’t just Chrysler, of course. As I’ve reported before, loan modification, cramdown and so forth have destroyed investors’ confidence in the viability of collateralized mortgage lendng.
Nothing like this happened under Roosevelt, let alone Jimmy Carter. Obama has traded the loyalty of captive commercial banks for the rule of law in capital markets. It will take many, many years to undo the damage.
May 11th, 2009 |
I agree, and the sad part is that the commercial banks are mistaken in aligning their interests with Obama. Sooner or later he will find a way to to do them in along with GM and Chrysler. These banks are sacrificing their long term interests for a mess of Obama porridge.
As to Obama himself, he rather smokes his own leftist dope. Should he win his current policy agenda, we will end up as just another sclerotic government centered social democracy on its way to banana republicdom, though I’m reasonably confident that the independent voters will catch on to him by 2010 and ’12. If not, eight years of Obama will prove disastrous, though Thomas Sowell argued that he preferred a potential disastrous government with McCain to a catastrophic one with Obama.
May 11th, 2009 |
Spengler: It will take many, many years to undo the damage.
You need to force yourself to consider the possibility [really, in all likelihood, the probability] that “it” will NEVER be undone.
And after you square yourself with the idea that these things cannot be undone, you then need to start asking yourself what it is that can be done.
May 11th, 2009 |
Lucius, I hope you are wrong. In that event the US is condemned to distinctly poorer prosects.
Peter, the commercial banks (at least some of them) had no choice. Without federal assistance Citibank wouldn’t have survived, and its failure would have shut the capital markets to everyone else. The administration had to act in some way. The problem is that it is abusing its power. And under crisis conditions there is no cure for that.
May 11th, 2009 |
David, I had no problem with the commercial banks accepting TARP money from necessity.The problem is their recent actions that indicate a caving in to the Obama regime that in the long run will adversely affect their long run interests.
May 11th, 2009 |
David, LV,
I must disagree with your analysis of the situation. I think there is less historical damage to the American contracts than what you might think. I’ll begin by quoting Benjamin Graham in 1934:
“In cases where the mortgaged property is actually worth as much as the debt, the bondholder is rarely allowed to take possession and realize upon it. It must be recognized that the procedure following default on a corporation bond has come to differ materially from that customary in the case of a mortgage on privately owned property. The basic legal rights of the lien holder are supposedly the same in both situations. But in practice we find a very definite disinclination on the part of the courts to permit corporate bondholders to take over properties by foreclosing on their leins, if there is any possibility that these assets may have a fair value in excess of their claim. Apparently it is considered unfair to wipe out stockholders or junior bondholders who have a potential interest in the property but are not in a position to protect it. As a result of this practice, hondholders rarely, if ever, come into an actual possession of ther pledged property unless its value at the time is substantially less than their claim. In most cases they are required to take new securities in a reorganized company.”
Courts have been doing what the President has been doing, while admittedly less Peronist in inclination, for a long time. The difference is that a judge in a small district hasn’t the reach of the Chief Executive. This tells me that the problem isn’t necessarily legal, but political.
Americans are a law-abiding people by nature. Once they figure out that Obama is the political equivalent of a tattoo-covered gangbanger I think they will put a Congress in office to check his power, just as the framers intended. Then what will follow will be the usual investigations and incriminations or as I like to say, the sweet sound of gridlock.
May 12th, 2009 |
Ehud, again: I hope you are right and that LV is wrong. But what remains is that Obama has broken some glass, and done so for the first time. A lot of investors I know are really shocked and will change their behavior as a result. And they range from hedge funds to big insurance companies.
May 12th, 2009 |
Your analysis of Barack Obama as a reverse (perverse?) anthropologist who despises America is right on, as is your depiction of his plunging America into Banana Republic status. Sadly, so few Americans have any clue of what he’s doing to our nation and, as you note, to our laws. After this assault on capitalism will come assaults on the Second Amendment. We’ve already seen assaults on the First Amendment through an orchestrated demonizing of Rush Limbaugh and, by extension, anyone with a contrary opinion to the ruling Obamacrats.
Everyone should read George Will’s column in which he quotes de Tocqueville about the future of America under someone like Obama (actually, not like, but Obama in reality). The Frenchman predicted almost two hundred years ago that our government would become “the only agent and sole arbiter of that happiness…” and the people would resemble “a herd of timid and industrious animals, of which the government is the shepherd.”
Now I lay me down to sleep…the sleep of unfreedom.
May 12th, 2009 |
Indeed, any sensible investor needs to take note of Obama’s reckless fiscal policy and glass shattering tactics with GM and Chrysler bondholders. He is involved in classic armed Left doctrine. While the economy itself shows signs of recovering, the Obama policy initiatives will dampen the recovery.
Amity Schlaes in her book, The Forgotten Man: A New History of the Great Depression shows how most able investors headed for the sidelines during the Depression when the Roosevelt administration toyed with the economy and harassed the capitalists, thus extending the Depression for about six or seven years. Obama is following this pattern; we shall pay for it. The best place for capital today is on the sidelines. Andy Kessler writes today in the WSJ, that this recent equity market rally is a Cinderella one for suckers.
The question is whether the American people will continue to fall for this nonsense; I rather suspect and hope that they will catch on and give St. Obama a comeuppance in 2010 and ’12. If not we will all be in deep yogurt.
May 13th, 2009 |
Instead of “Oh, say, can you see by the dawn’s early light,” we will sing, “Daylight come and we wan’ go home.”
http://www.youtube.com/watch?v=iMTNT_BzkdA
May 14th, 2009 |
The silence we hear is the sound of corporate board members around the world easing their fortunes, support and strategic planning expertise away from all sorts of formerly entrepreneurial enterprises. I consider the O’Presidency has more likely declared war on “capitalism” than “America” – though the result could be the same. Either way the “banana republic” symbolism is spot on. Spengler was on target with analyses last year, and remains so now. Thank you.
May 17th, 2009 |
Spengler, brilliant!
You provide a great economic education, thank you.
During the Depression FDR intimated that the central gov’t might seize/confiscate private property, which prolonged the Depression. It appears the Big O has already done that. So we have moved one step, at least, farther than the American socialists of the 1930′s. What’s the next step? And, cutting to the chase, how close are we to revolution?
May 17th, 2009 |
Robert,
I don’t have a clue. We are in a new kind of situation. Back in the late 1970s, we had Jimmy Carter. That wasn’t nearly as bad. Carter was a patriot (he had commanded a nuclear submarine, after all). Carter loved America, misguided as he was (and is) — I don’t believe that of Obama. On the other hand we had the Soviet Union ready to step into the breach, and that was really dangerous — we have no such competitor today. We have a much older population than before with a huge retirement issue. Old people are less entrepreneurial and more timid than young people. And we have a young generation with a petulant sense of entitlement as never before. From an economic standpoint I see a long stagnation. How the American people will respond to it is unclear to me. We don’t even have a Republican leader willing to address the fundamental issues. Which top Republican is all over the airwaves denouncing Obama for destroying the rule of law in the US?
May 17th, 2009 |
Spengler,
Well, you do have a way of focusing me in on the issues and thanks for that. There, of course, are no GOP leaders at hand, and as long as the Neocons control the party I’ll have nothing to do with it.
As you pointed out, how corrupt/moribund/or ignorant is a political party that won’t take advantage of an opposition that, in the grand Stalinist fashion, is “destroying the rule of law in the U.S.?”
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