Chrysler Cut-Up's Contract Killers

'I'm saying that when the president does it that means it's not illegal," shouts Frank Langella's Richard Nixon at Michael Sheen's David Frost in "Frost/ Nixon."

He was wrong, and so was President Obama when he said last week that he'd override the contractual and legal rights of Chrysler's senior lenders and carve up the company between the government and the United Auto Workers.

Typically, lenders who make money available to a company in return for a first claim on the company's as sets get about 80 cents back for every dollar they lend should it hit the rocks. Others to whom the company owes money, but who have no claim on the assets -- workers, suppliers, junior lenders -- get much less.

Yet Obama forced the senior lenders to take something like 30 cents for every dollar they'd lent Chrysler. Many lenders -- the big banks who'd taken federal bailout money -- rolled over. But some hedge-fund managers pointed out that they have a legal, fiduciary responsibility to do the best they can for their investors (which include pension funds) and decided to take their chances with a bankruptcy judge.

Never mind that this is their long-established legal right. Obama is furious with these "speculators," and hinted that he knows where they live and will get even when the new financial-industry regulations are drafted.

Unfortunately for the president, the ball is now in Judge Arthur Gonzalez's court, literally. This former New York City school teacher, shaved-head, in-the-office at 6 A.M. jurist sits on Manhattan's federal bankruptcy court, and already has the nasty and complicated Enron and WorldCom bankruptcies under his belt.

I'm no lawyer, and so have no idea how Judge Gonzalez will decide to distribute what remains of Chrysler. He might auction off parts of the company; he might decide that the claims of the senior creditors take precedence over the unions and the government; he might decide that the president's solution is in the best interests of all the creditors.

But one thing is certain: Even as Obama wants a quick decision, Judge Gonzalez, known as a careful jurist, will decide on a schedule long enough to give everyone a fair hearing but not so long as to threaten a further devaluation of Chrysler.

Obama is pressuring the some 20 "speculators" who are holding out to accept the crumbs that he's offering. But there is more here at stake than the money immediately involved. As George Schultze, managing member of Schultze Asset Management, a hedge fund, told The Wall Street Journal, "This is about contract and bankruptcy law, and upholding agreements -- which is important in the grand scheme of things."

It certainly is. For one thing, the president is counting on some of these "speculators" to partner with the Treasury and take a big stake in the toxic assets that are preventing the big banks from resuming normal lending. Unprotected by a rule of law, these investors will sit on their assets, rather than partner with a government that might some day decide, after the fact, that they made too much money, or should bear a larger portion of any losses than they had signed on to do.

More broadly, if lenders know that any deals they strike can be overturned by a president who, like Langella/Nixon, can do things that are otherwise illegal because he decides "they are in the interest of the nation," they'll raise the price they charge for their money -- and not only when lending to the government.