The Obama rules by fiat By Daniel J Hoban

The Obama it seems has the power to change long held laws simply by saying it shall be so. Recently he has been successful with something called cramdown. This is when lenders are forced to take less than they are owed and less than they are entitled to under the law.

We have seen it with subprime mortgages. There the owners of these notes were told take far less than they are due according to the mortgage that they hold. Its not completely unknown for a bank to write a mortgage and then later to modify the terms but whats different this time is that mortgages have been sliced up and sold off in small parts . There may be 50 part owners all over the world that hold a piece of your mortgage. They have a binding contract with clear terms and US real estate backing it up in the event of default. Cramdown takes their contractual rights and tosses them out the window. There is no vote to modify the terms, no court order, just new terms. Essentially just take less and shut up because The Obama said so.

Now the same thing is happening in the Chrysler bankruptcy. Debt holders are always assigned priority when debt is raised by a company. The best debt is known as senior, then junior and the weakest is called unsecured. Senior debt is often backed by a specific asset of the company like equipment or buildings and real estate. Right now the Obama has declared by fiat that unsecured creditors (unions) shall get first position. This is a banana republic move. It takes long held laws that keep the credit markets working and trashes them for short term political gains. Why should anyone lend if the Obama can simply change the rules at the last minute to protect a small group that he favors. What will other countries think of US contracts if we keep doing this? Lets just write all of our contracts on toilet paper and flush them if we feel its politically expedient. If anyone objects The Obama will publicly ridicule them , call them out by name and question their character and morality.

This will have a chilling effect on lending . Credit will dry up. Foreign lenders who had become accustomed to the strong rule of law in the US will be hesitant to work with our companies. This will cause the cost of borrowing to increase. Essentially this move by The Obama will slow the economy at a time when we are trying to get it going again. It will also damage our standing around the world.
DJH