JOHN LOTT: Thugs In the White House

(Compiler's note: A must read article.)

By John R. Lott, Jr.
Senior Research Scientist, University of Maryland/Author, Freedomnomics.

So much for any hope that the government would uphold rules and abiding by contracts. Instead, we keep getting examples of something else – that when President Obama fails to persuade firms to follow his wishes, he does not hesitate to use threats of financial destruction.

Cliff Asness, the co-founder of the $20 billion hedge fund AQR Capital Management, laid bare the latest attacks with an open letter on Wednesday:

“The President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along.”

This is just the latest in a string of intimidating tactics starting with threatening costly public audits to get compliance. Then there were the threats of firing CEOs who had the audacity to oppose government plans. The very latest is threats to use “ the full force of the White House press corps [to] destroy [the firm Perella Weinberg's] reputation” if it resisted the government stealing their money, according to Thomas Lauria who represented the firm up until last week. ABC News’s Jake Tapper reports that Mr. Steven Rattner, the head of the auto task force, made the threat.

The White House has been pushing hard to nationalize the automobile companies. While bondholders and the government have loaned similar amounts each to GM and Chrysler, the White House feels that the government should get 50 percent ownership of GM and the creditors about 10 percent.

The Wall Street Journal reports that unions are also being given stock that should be going to the creditors – 39 percent of GM and 55 percent of Chrysler.

Most of the financial institutions holding these bonds have gone along with Obama’s nationalization of the car companies for a simple reason – the government has already nationalized them and they do the government’s bidding. As ABC News and the Wall Street Journal note: JP Morgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs have been given up to $100 billion by the government. The irony is that the feds gave these financial institutions money because they were hemorrhaging financially and now the government orders these same institutions to throw away money and take loses that no private company would voluntarily do. Not surprisingly, with this waste, there is talk that Citigroup may need another $10 billion from the government.

As I and others have previously pointed out, the government only obtained ownership of many financial institutions through threats of imposing unnecessary costly public audits and either threatening to replace or actually replacing disobedient CEOs and boards of directors with political cronies willing do Obama’s bidding.

Yet, there are financial institutions that the government still has not gotten control over, and they are fighting this wave of nationalization. So how does the Obama administration control these financial institutions that have avoided being forced to take government bailouts? Why, of course, their standard method: threats. According to lawyer Thomas Lauria in an interview with Frank Beckman on WJR radio, one of his former clients “was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the threat that the full force of the White House press corps would destroy its reputation if it continued to fight. That’s how hard it is to stand on this side of the fence.”

Not surprisingly, as the financial institutions did not cave in, President Obama then followed through his promise and attacked these creditors. During his announcement of Chrysler filing for bankruptcy, he warned, “While many stakeholders made sacrifices and worked constructively, I have to tell you some did not.” Despite the financial institutions offering to give up 50 percent of their bonds value, Obama claimed: “They were hoping that everybody else would make sacrifices, and they would have to make none.” The New York Times and other media have joined in on this attack.

One consequence of the president singling out these creditors is that The Detroit News reported on Monday that some have received death threats and that the threats has been turned over to the FBI.

Finally, we can’t help note that Rattner seems the perfect person to play the enforcer role. In April, The Wall Street Journal reported that Mr. Rattner’s former private-equity firm, Quadrangle Group, is the target of a long-running pay-to-play investigation. Mr. Rattner wasn’t named in the SEC complaint, but The Journal reported that Rattner was “the senior Quadrangle executive the complaint identifies as meeting with a politically connected consultant about a finder’s fee, which Quadrangle later paid after receiving an investment from the New York fund.”

Of course, the administration denies that it has threatened Chrysler’s creditor. This from an administration that denies Obama bowed to the Saudi King despite it being on video tape.

Some creditors, such as Perella Weinberg Partners, have already given in to the president’s threats over Chrysler. But breaking contracts through thuggish threats makes investment riskier and increase the costs as much as any big tax increase. Driving investment overseas is not the way to make America wealthier.