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It's shades of 1994 as the administration negotiates the bankruptcy of Chrysler and the potential bankruptcy of General Motors. Back in the early days of the Clinton administration, pressure from bondholders led to a focus on deficit reduction at the expense of the progressive parts of the new president's agenda, leading adviser James Carville to remark that "I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 basball hitter. But now I would like to come back as the bond market. You can intimidate everybody."These days, they're trying to intimidate Obama with considerably less success. Dean Baker explains how their business model is premised upon their ability to get the administration to agree to a better deal for them than other investors, but the president has thwarted their ambitions by allowing a bankruptcy judge to restructure Chrysler's financing.Now, of course, a predictable backlash from Wall Street. Bloomberg reports that bondholders see Chrysler as a trial-run for GM and are worried about the precedent of giving unions greater equity stakes than bondholders. One source says the following:
This confirms the fear, which right along has been that the Obama administration is more sensitive or beholden to the unions than the bondholders. It makes it clear that GM bondholders aren’t likely to be able to work out anything outside of bankruptcy.When you can't win in a negotiation, the next best thing is to stir up class anxiety, I suppose. Funnily enough, that source is the head of a "New York-based credit investment firm," that is, someone who invests in bonds for a living. It's unclear if he owns any debt from the automakers, but his criticism comes at a time when bondholders are lying low -- despite the president's criticism of the recalcitrant bondholders in the Chrysler deal, the administration, out of an abundance of tact, didn't name them, and the bondholders themselves refused to be identified. Perhaps they're embarrassed? It will be fun to watch the machinations in the GM deal and see if bondholders have learned their lesson about negotiating with the administration, or if they're willing once again to let a bankruptcy judge make decisions.
-- Tim Fernholz
