The question many Wall Street executives are asking themselves—and the single most important question to come out of the whole affair—is whether last December’s undisclosed pas de deux between Lewis, on the one hand, and Paulson and Bernanke, on the other, represents a onetime event or whether, in the post-TARP world, both Wall Street and Main Street should expect to see the long arm of the government interfering with business deals and private contracts on a more regular basis.
“As a legal matter, the sanctity of contracts is fundamental,” said Cohen, who has been a legal adviser to many of the banks that faced recent crises. “And I don’t know how you go much beyond that, because once you destroy that foundation, then it starts to affect the underpinning of all business relationships—which assume that contracts are enforceable.”
As the crisis has receded this year, the government has remained aggressive, seeking business outcomes it finds desirable with some apparent indifference to contractual rights. In Chrysler’s bankruptcy negotiations in April, for example, Treasury’s plan offered the automaker’s senior-debt holders 29 cents on the dollar. Some debt holders, including the hedge fund Xerion Capital Partners, believed they were contractually entitled to a much better deal as senior creditors holding secured debt. But four TARP banks—JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs—which owned about 70 percent of the Chrysler senior debt at par (100 cents on the dollar), had agreed to the 29-cent deal. By getting these banks and the other senior-debt holders to accept the 29-cent deal and give up their rights to push for the higher potential payout they were entitled to, the government could give Chrysler’s workers, whose contracts were general unsecured claims—and therefore junior to the banks’—a payout far more generous than would otherwise have been possible or likely. Essentially, the government was engineering a transfer of wealth from TARP bank shareholders to auto workers, and pressuring other creditors to go along.
On April 30, when President Obama announced the bankruptcy, he forcefully stated the White House position: “While many stakeholders made sacrifices and worked constructively,” he said, “I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them. I stand with Chrysler’s employees and their families and communities.”
In the face of this kind of political pressure, Perella Weinberg, the owner of Xerion, backed down. “In considering the President’s words and exercising our best investment judgment,” the firm said in a statement, “we concluded that the risks of potentially severe capital loss that could arise from fighting this in bankruptcy court far outweighed any realistic potential upside.” Tom Lauria, an attorney who was representing the firm during the negotiations, said in a May 1 radio interview that his client had been told by the administration that the White House press corps would destroy Perella Weinberg’s reputation if it continued to fight the deal. He later told ABC News that Treasury adviser Steven Rattner had made the threat. (The White House denied making any threats, and Perella Weinberg denied Lauria’s account of events, without elaboration.) Lauria said, in his radio interview, “I think everybody in the country should be concerned about the fact that the president of the United States, the executive office, is using its power to try to abrogate that contractual right.”