AMERICAN capitalism is a house divided.
On one side are those corporations and financial firms dependent on government support, and thus eager to obey the diktat of their political minders. They are part of Obama, Inc., a vast public-private entity pursuing a vision of a greener, more constrained and politicized capitalism.
On the other are those firms that aren't on a government lifeline and thus can pursue the traditional capitalist imperative of maximizing value for their shareholders and investors. They constitute the liberated economy, but can be forgiven for sometimes feeling as embattled as the forces of the Free French circa 1941.
Consider the self-described "Committee of Non-Tarp Lenders" in the Chrysler bankruptcy negotiations. They are those creditors that loaned funds to Chrysler -- the government-supported automaker -- without themselves taking government bailout funds like Chrysler's other, much larger lenders.
When the Obama administration came to Chrysler's creditors and told them to accept a deal giving the United Auto Workers 55 percent of the company while they took a bath, all the banks that had accepted TARP funds duly said "yes."
Citigroup and Goldman Sachs, which wouldn't exist but for the generosity of Hank Paulson and Timothy Geithner, knew they were expected to salute smartly. The smaller, non-TARP lenders -- mostly hedge funds -- stood by their contractual rights as "senior creditors" to be paid back first if Chrysler went under.
Wrong answer. A lawyer for the non-TARP creditors says that during negotiations, the leader of Obama's auto task force threatened one of the lenders with exposure and attack by the White House press corps. The administration denies the story, although the gist rings true.
When negotiations fell through and Chrysler headed to bankruptcy court, Obama angrily denounced the non-TARP lenders: "I don't stand with them." Michigan Rep. John Dingell called them "rogue hedge funds" and "vultures."
The real vulture is the UAW. In a neat trick that any scavenging bird would envy, it bankrupted Chrysler through the years and now will be awarded whatever is left of the carcass. Providing ground troops for the president's election and giving his political party $25 million during the past decades makes the UAW effectively the senior creditor at every government-sponsored negotiation. It will own a company making government-approved environmentally correct cars.
The offense of the hedge funds was only to lend Chrysler the money it wanted to try to keep itself afloat and then insist their contracts be honored. Such is the roguish, out-of-control behavior of firms that haven't sucked up billions in taxpayer funds to cover over their massive business miscalculations. The number of holdout non-TARP lenders dwindled from 20 to nine as the date for their public revelation -- and yet more presidentially approved obloquy -- neared. Intimidation works.
Democrats pride themselves on their independence from business, but industrial policy depends on working hand in glove with industry. The more government regulates, subsidizes and intervenes, the more subject it is to capture by economic interests and vice versa.
Is it a coincidence that two of the actors that have arguably benefited most from government activism in the past year -- the auto unions and Goldman Sachs -- are extremely well-connected players in Washington?
The just-released stress tests of the banks present an opportunity. The tests draw a line between healthy and still-rickety financial institutions. The healthy ones should be urged -- no, required -- to give back their TARP funds as quickly as possible. Meanwhile, a mechanism should be created to seize and unwind those shakier institutions that can't raise the necessary new capital on their own.
It's not last fall, when it seemed another collapse of a major financial institution might take the financial system with it. If bankruptcy is good enough for Chrysler, it should be good enough for Citigroup.
The alternative is for the marginal banks to stumble along as government-supported zombies and as slush funds for crony capitalism. Let them go, and instead increase the ranks of the liberated economy.
Rich Lowry, NY Post, 5/9/09
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