Hoosiers vs. Crony Capitalism - How Indiana took on the federal bailout machine and restored the rule of law

Hoosiers vs. Crony Capitalism. By MITCH DANIELS
How my state took on the Obama bailout machine and restored the rule of law.WSJ, June 04, 2010

June 10 will be a silent anniversary, but one worth noting by those alarmed at the past year's assault on free institutions. It was last June 10 when the federal government tossed aside the option of proven, workable bankruptcy procedures in order to nationalize Chrysler on behalf of its union allies.

In order to provide preferential treatment to its cronies, the Obama administration confiscated the property of those creditors who had lent money to Chrysler in good faith, believing that their interest was legally secured and that they stood at the head of the line in the event of the auto company's failure.

The shock wave through the economic markets from this arbitrary redefinition of "secured creditors" rights was profound. Could centuries of crystal-clear law really be overthrown by executive fiat? Apparently, yes. The Supreme Court declined to intervene in the takeover. The cost of corporate borrowing was clearly headed upward as the U.S. for the first time imitated those Third World despotisms where economic rules can be changed without warning at the ruler's whim and convenience.

Equally profound was the message sent to the legal community, which quickly began to cite the "Chrysler precedent" as the now-acceptable judicial model for stripping secured creditors' rights in the name of expediency. Just days after the decision, the Phoenix Coyotes of the National Hockey League invoked the Chrysler case in an attempt to undermine secured creditors' rights and hasten bankruptcy.

Those brave few who protested the brute force taking of their money were attacked by administration apparatchiks for the sin of doing their fiduciary duty to their investors and shareholders. Calls went out from the White House, encouraging submission and warning of the consequences of opposition. One by one, potential plaintiffs surrendered.

The one effort to stop the Chrysler cramdown was launched by three Indiana pension funds. Believing they were making both a wise investment and a gesture supportive of a longtime state employer, Hoosier retired teachers and state policemen had purchased some $19 million in Chrysler's secured debt. The market consensus at the time was that, at 43 cents to par, the bonds were well below their value if bankruptcy ultimately came.

Bankruptcy came, all right, but in a new, extra-legal form run by the federal government. The United Auto Workers, who owned no interest in the company, were simply handed a 55% interest, a gift valued then at $4.5 billion. When no one else wanted to buy the firm, Fiat was given a 20% stake for free to take it over. After this looting, the legitimate creditors were told to be happy with the remnants. For Indiana's retired teachers and state policemen, this amounted to 29 cents on the dollar, a loss of $6 million versus the purchase price and millions more below the expected value in a standard Chapter 11 proceeding.

When, alone among the victims, Indiana retirees went to court, they caused a lot of discomfort but no change in the outcome. The Second District U.S. Court of Appeals declined to overturn the cramdown, but the judges refused to go within a mile of the merits. How could they? The law calls certain instruments "secured" credit for a reason, and there was absolutely zero precedent for the Chrysler confiscation.

In an article by Zach Lowe published last fall in the Am Law Daily and the American Lawyer magazine, UCLA Law School Prof. Lynn LoPucki said of the cramdown: "What happened . . . was so outrageous and illegal that until March of this year [2009], nobody even conceptualized it." The Second Circuit opinion, like the Supreme Court's refusal to stay the nationalization, went out of its way to state that the ruling did not reach the substantive issues raised.

Aided by incensed counsel donating much of their time pro bono, Indiana returned to the Supreme Court with a slim hope of recovering its pensioners' assets, reinstating traditional American property rights and making secured credit secure once more. It seemed to some an exercise in futility: The judge in the Coyotes case commented from the bench that the "poor pension manager from Indiana . . . was kind of like the gentlemen in Tiananmen Square when the tanks came rolling."

On Dec. 14, 2009, in the under-reported news story of the year, the Supreme Court granted the request of Indiana pensioners and took the case. The Court immediately ruled from the bench to strike down the decision of the Second Circuit Court of Appeals, eliminating it as a possible precedent in any future proceeding. Our retirees are still out the $6 million but enjoyed the small vindication of being awarded the court clerk's costs at Chrysler's expense.

The nation is not safe from crony capitalism. In the past year we've experienced the nationalization of the student loan industry and the passage of national health-care and financial-services regulation, each of which is rife with new opportunities for government favoritism and preferential handouts to favored corporations like Chrysler.

But thanks to a quiet correction by the Supreme Court—and a little Hoosier stubbornness—the rule of law has been re-established. The greatest benefits will accrue not to lenders and borrowers but to all those whose jobs are created because investors once again can trust that the money they've risked is safe from seizure by the state.

Mr. Daniels, a Republican, is the governor of Indiana.

Press Briefing

Jun 04, 2010

Consensus Achieved at Critical Nuclear Nonproliferation Conference
http://blogs.state.gov/index.php/site/entry/nuclear_nonproliferation_conference_consensus

Hoosiers vs. Crony Capitalism - How Indiana took on the federal bailout machine and restored the rule of law
http://online.wsj.com/article/SB10001424052748703561604575282412364326230.html

Capital Gains Taxes and the Recovery - Long-term investments should be rewarded with lower rates
http://online.wsj.com/article/SB10001424052748704025304575284440473588862.html

The Gaza Blockade and International Law - Israel's position is reasonable and backed by precedent
http://online.wsj.com/article/SB10001424052748704025304575284210429984110.html

'To Be Fair' - When does the statute of limitation run out on blaming George W. Bush for all the world's problems?
http://online.wsj.com/article/SB10001424052748704025304575285032699457228.html

Federal Spending by the Numbers 2010
http://www.heritage.org/Research/Reports/2010/06/Federal-Spending-by-the-Numbers-2010

New Treatments Needed to Alleviate Growing Burden of Alzheimer's Disease
http://www.innovation.org/index.cfm/NewsCenter/Newsletters/Newsletters?NID=183

Could More Cancer Be a Good Sign?
http://www.acsh.org/factsfears/newsID.1487/news_detail.asp

iRobot Demonstrates New Weaponized Robot
http://spectrum.ieee.org/automaton/robotics/military-robots/irobot-demonstrates-their-latest-war-robot

Turkey's Radical Drift - The Islamic charity behind the Gaza flotilla and its links to terror
http://online.wsj.com/article/SB10001424052748703561604575282423181610814.html

Wireless Heart Pressure Monitor Promises Revolution In Coronary Care
http://spectrum.ieee.org/riskfactor/biomedical/devices/wireless-heart-pressure-monitor-promises-revolution-in-coronary

Tom Vilsack’s Unconvincing Case for Farm Subsidies
http://yglesias.thinkprogress.org/archives/2010/06/tom-vilsacks-unconvincing-case-for-farm-subsidies.php

Obama and the Oil Spill
http://blog.heritage.org/2010/06/03/morning-bell-obama-and-the-oil-spill

Press Briefing

Jun 03, 2010

Health and Safety Tips for Your Summer Vacation (Update 2010)
http://www.acsh.org/docLib/20100528_summer_tips_2010.pdf

How Far Will the Gulf Gusher Spread? - Trapped in water pockets, the oil from Deepwater Horizon will ride the Gulf Stream across the Atlantic. In years to come, some will even wash up on European shores
http://online.wsj.com/article/SB10001424052748703561604575282420254222384.html

Central bank co-operation and international liquidity in the financial crisis of 2008-9. By Richhild Moessner and William Allen. Working Papers No 310. June 2010
http://www.bis.org/publ/work310.htm
The financial crisis that began in August 2007 has blurred the sharp distinction between monetary and financial stability.It has also led to a revival of practical central bank co-operation. This paper explains how things have changed. The main innovation in central bank cooperation during this crisis was the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency-specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the role and effectiveness of swap lines in relieving currency-specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.


India’s Future Aircraft Carrier Force and the Need for Strategic Flexibility
http://www.idsa.in/idsacomments/IndiasFutureAircraftCarrierForceandtheNeedforStrategicFlexibility_irehman_010610

Entitlement Reform and the Global Budget Crisis - Putting Social Security on a sustainable path isn't nearly enough. But it would do a lot to convince markets that Washington can be serious
http://online.wsj.com/article/SB10001424052748704269204575270702838532246.html

Introducing U.S. Cyber Command, by William J Lynn III, Deputy Defense Sec
http://online.wsj.com/article/SB10001424052748704875604575280881128276448.html
More than 100 foreign intelligence agencies and militaries threaten U.S. defense networks.

Iran's Nuclear Progress - Even the U.N. now says Iran has enough fuel for two weapons
http://online.wsj.com/article/SB10001424052748704875604575280783424640448.html

Pacific Partnership Arrives in Vietnam
http://blogs.state.gov/index.php/entries/pacific_partnership_vietnam

Maybe the constitutional case for ObamaCare isn't so open and shut: Justice Needs More Time
http://online.wsj.com/article/SB10001424052748704596504575272882527805408.html

Taiwan’s Unending Dialogue over ECFA. By Jagannath P. Panda
http://www.idsa.in/idsacomments/TaiwansUnendingDialogueoverECFA_jppanda_010610

The Blue Dogs Roll Over - How they abet Pelosi's spending agenda
http://online.wsj.com/article/SB10001424052748704875604575280260628776940.html

Erdogan and the Decline of the Turks - When I asked the prime minister about stories alleging a U.S.-Israeli murder and organ selling scheme in Iraq, he could not bring himself to condemn them
http://online.wsj.com/article/SB10001424052748704875604575281392195250402.html

Remarks Before the Ministerial Meeting at the Alliance of Civilizations Rio Forum. By Esther Brimmer, Assistant Secretary, Bureau of International Organization Affairs. Rio de Janeiro, Brazil, May 28, 2010
http://www.state.gov/p/io/rm/2010/142493.htm

Rethinking Darfur, by Marc Gustafson
http://www.cato.org/pub_display.php?pub_id=11862

Remarks by the President After Meeting with BP Oil Spill Commission Co-Chairs
http://www.whitehouse.gov/the-press-office/remarks-president-after-meeting-with-bp-oil-spill-commission-co-chairs

BP Oil Spill: Who's Your Daddy?, by Gene Healy
http://www.cato.org/pub_display.php?pub_id=11859

Breast Cancer Vaccine (For Mice)
http://www.acsh.org/factsfears/newsID.1486/news_detail.asp

Obamacare’s True Costs Coming to Light
http://blog.heritage.org/2010/06/02/morning-bell-obamacares-true-costs-coming-to-light

ObamaCare's Ever-Rising Price Tag - Voters will understand plenty about the hidden costs of the law by November
http://online.wsj.com/article/SB10001424052748703561604575282482320389198.html