Almost a year ago, in a Washington Examiner column on the Chrysler bailout, I reflected on the Obama administration’s decision to force bondholders to accept 33 cents on the dollar on secured debts while giving United Auto Workers retirees 50 cents on the dollar on unsecured debts.
This was a clear violation of the ordinary bankruptcy rule that secured creditors are fully paid off before unsecured creditors get anything. The politically connected UAW folk got preference over politically unconnected bondholders. “We have just seen an episode of Gangster Government,” I wrote. “It is likely to be a continuing series.”
Fast forward to last Friday, when the Securities and Exchange Commission filed a complaint against Goldman Sachs, alleging that the firm violated the law when it sold a collateralized debt obligation based on mortgage-backed securities without disclosing that the CDO was assembled with the help of hedge-fund investor John Paulson.
On its face, the complaint seems flimsy. Paulson has since become famous because his firm made billions by betting against mortgage-backed securities. But he wasn’t a big name then, and the sophisticated firm buying the CDO must have assumed the seller believed its value would go down.
That’s not the only fishy thing about the complaint. Yesterday came the news – undisclosed by the SEC Friday – that the commissioners approved the complaint by a 3–2 party-line vote. Ordinarily, the SEC issues such complaints only when the commissioners unanimously approve.
Fishy thing Number Three: Democrats immediately used the complaint to jam Sen. Christopher Dodd’s financial regulation through the Senate.
You may want to believe the denials that the Democratic commissioners timed the action in coordination with the administration or congressional leaders. But then you may want to believe there was no political favoritism in the Chrysler deal, too. The SEC complaint looks a lot like Gangster Government to me.
The Dodd bill, however, has it trumped. Its provisions promise to give us one episode of Gangster Government after another.
At the top of the list is the $50 billion fund that the Federal Deposit Insurance Corporation could use to pay off creditors of firms identified as systemically risky — i.e., “too big to fail.”
“The Dodd bill,” writes Rep. Brad Sherman (D., Calif.), “has unlimited executive bailout authority. That’s something Wall Street desperately wants but doesn’t dare ask for.”
Politically connected creditors would have every reason to assume they’d get favorable treatment. The Dodd bill specifically authorizes the FDIC to treat “creditors similarly situated” differently.