Tom Suhadolnik explains how Barack Obama is simply setting aside conventional bankruptcy law in order to nationalize the automobile industry while moving simultaneously to nationalize the financial system using existing regulatory powers combined with intimidation.

How many Americans who pulled the democrat lever last November really intended to vote for Marxism?

At the end of April the Obama administration tested its ability to take direct control of the US financial system. The test was a success. There is a revolution underway which would impress Chavez or Castro. If you were like most people, you did not realize it happened.

As the details of the GM restructuring plan emerged, on Monday, April 27th, Lawrence Kudlow was one of the first to sound the alarm as secured lenders and bond holders were being given a fraction of the amount owed to them under long established bankruptcy law.

What is going on in this country? The government is about to take over GM in a plan that completely screws private bondholders and favors the unions. Get this: The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock. Huh? Did I miss something here? And Uncle Sam will have a controlling share of the stock with something close to 50 percent ownership. And no bankruptcy judge. So this is a political restructuring run by the White House, not a rule-of-law bankruptcy-court reorganization. …

To understand the gravity of the events you need a basic understanding of bankruptcy laws. The pecking order of bankruptcy claims is supposed to be:

1. Debtor in Possession (DIP) financing which is loaned to the restructuring company
2. Secured Lenders – creditors whose loans are backed by assets such as real estate or equipment
3. Unsecured Lenders – creditors such as bond holders, vendors and the UAW
4. Equity Owners – shareholders

When a company files for bankruptcy the claims that are superior (represented by a lower number) in the pecking order are paid first. Claims with equal status are treated equally; those claims are almost always paid on the same pro rata basis. It is an explicit goal of our bankruptcy system is to treat all creditors equally. …

In the case of GM, the UAW and bond holders are both unsecured creditors with equal rights under bankruptcy law. As The Cleveland Plain Dealer reported Monday April 27th, interim GM CEO Fritz Henderson contends a 2007 deal between GM and the UAW gives preference to unsecured claims of the UAW. The bond holders never explicitly agreed to have their claims subordinated to the union so that contention is certainly open to debate in bankruptcy court.

Considering GM owes the UAW $20 billion (Henderson says the figure is closer to $30 billion) and bond holders $27 billion, they should receive a similar ratio of shares in the restructured GM. The deal announced by Henderson gives roughly 40% of the stock in a reorganized GM to the UAW, 50% to the government and 10% to the bond holders. The math does not make sense even if you accept Henderson’s contention that the UAW is owed $30 billion. …

The Chrysler reorganization details are more bizarre. At Chrysler the institutions owed $6.9 billion by Chrysler are secured creditors. As a matter of law, the secured claims would be superior to those of the UAW in bankruptcy court.

Putting the Chrysler deal in terms of household finances, the secured creditors would be the banks holding the mortgage and car note. Instead of the car and house going back to the bank in bankruptcy, the Chrysler deal calls for the car and house to be shared with unsecured creditors like credit card companies and the cable company. That is not how the system is supposed to work.

These bedrock principles are codified in our bankruptcy laws. …

Obama has made it clear he is willing to use his political muscle on the banks as well. …

The Obama administration will be able to make a plausible argument that nationalization of the banks was forced upon the administration by capitalism run amok. Given the type of patently absurd statements made by politicians of all stripes, this rather nuanced position will pass without a second thought.

In summary, the mechanism to nationalize the US financial system is now in place. All the levers are controlled by the executive branch. Here how it works:

1. The government determines various loses have eroded a particular bank’s balance sheet and regulatory intervention is necessary.
2. The bank is ordered to raise additional capital to maintain the proper asset ratio.
3. Increasing government activism causes private capital to avoid investing in banks.
4. The government is “forced” to loan more money to the bank in exchange for more stock and control via loan conditions like those found in earlier TARP loans and legislation.
5. As government acquires more power they force the bank to accept loses to benefit key constituencies of the administration (like the UAW) or the sale of toxic assets to firms like Pimco.
6. If the government does not own the majority of the bank’s stock return to step 1and repeat.

On May 5th, Fox reported as many as 10 of the top 19 banks in the country will need to raise additional capital following the stress tests. The troubled asset auction program is expected to start within a few weeks. If the administration chooses to do so the largest banks in the country can be nationalized by the end of summer.

There is no additional legislative action required to allow the executive branch to continue on this path. The regulatory framework was reviewed and approved by the judicial branch decades ago. The public at large may not even notice what is happening. Anyone looking for strutting fascists will be disappointed; this revolutionary change will be brought about by clean cut men and women in pinstripes.

Not only can it happen here, it is happening here.

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