The Obama administration and its car-czar group appear to be intent on teaching someone who got in their way a brutal lesson.

If there's another way to interpret what is going on involving the "Old Chrysler," the company's first-lien secured lenders, and the US Treasury, I want to know what it is.

Readers may recall that in early May the car-czar group, in what columnist Michael Barone accurately characterized as "an episode of Gangster Government," bullied those same lenders into accepting payment well below that to which they were entitled. At the time, attorney Tom Lauria, representing a group of what he called "non-TARP lenders," told Detroit talk host Frank Beckmann that his group was willing to accept 50% payment of their claims (despite their entitlement under contract law to 100%) to avoid forcing Chrysler to liquidate.

The government had already convinced Chrysler's first-lien TARP lenders (so named because these lenders are among those forced by Hank Paulson in October 2008 at figurative gunpoint to accept government "investment") to settle for 29%. Treasury and Barack Obama's car-czar group insisted that the non-TARP lenders do the same, in the interest of giving unsecured creditors, principally the United Auto Workers union's health care trust (whose rights under contract law were junior to those of the secured lenders) a bigger share, much of which was converted into stock of "new Chrysler." Under what Lauria described to Beckmann as an atmosphere of direct threats and intimidation, most of the holdouts buckled. After unsuccessful court appeals, the deal giving secured lenders $2.0 billion of the $6.9 billion involved went through.

That should have settled the matter; but as you'll see, it didn't.

Secured creditors' claims stayed in the "Old Chrysler," which was stripped of most of its value. The ownership structure of "New Chrysler" that emerged turned out to be the following, according to this September 4 Bloomberg report -- U.S. Government -- 9.85%; Fiat Motors -- 20%; Canadian government -- 2.46%; the UAW's health care trust -- 67.69%. Secured creditors have no stake in "New Chrysler."

An inherent assumption in all of this was that "Old Chrysler" would not repay the government bailout money that was "lent" to it, as described in this CNNMoney.com item from early May ("Chrysler LLC" is "Old Chrysler; "New Chrysler" did not yet exist):

Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing.

This revelation was buried within Chrysler's bankruptcy filings last week and confirmed by the Obama administration Tuesday. The filings included a list of business assumptions from one of the company's key financial advisors in the bankruptcy case.

Some of the main assumptions listed by Robert Manzo of Capstone Advisory Group were that the Treasury would forgive a $4 billion bridge loan given to Chrysler in the closing days of the Bush administration, a $300 million fee on that loan, and the $3.2 billion in financing approved last week by the Obama administration to fund Chrysler's operations during bankruptcy.

An Obama administration official confirmed Tuesday that Chrysler won't be repaying the loans ....

"Old Chrysler" is still in bankruptcy, and in the process of liquidating. The proceeds from that liquidation, up to $2 billion, are supposed to go to the secured lenders first. But guess what? The same Bloomberg article by Linda Sandler and Erik Larson referenced earlier tells us that the government apparently now wants the $3-billion plus in bankruptcy financing back (bolds are mine):

The U.S. Treasury has sent the bankrupt remains of Chrysler LLC a default notice, saying the company failed to pay back a loan due June 30.

Treasury sent the notice of default on Aug. 13, said old Chrysler, now known as Old Carco LLC, in a bankruptcy court filing today. The U.S. government lent Old Carco $3.34 billion to complete its bankruptcy, according to the filing.

Old Carco said it was negotiating with Treasury to “address” the default. The best assets of the old company were sold to a group led by SpA. Old Carco has now reported an $11.8 billion loss on the Fiat sale, leading to a net loss of $10.2 billion in June, court records show.

The company’s private creditors, who lent Chrysler $6.9 billion and expected to get about $2 billion back from the Fiat sale, might get nothing if the Treasury demanded payment of its loans, said the lawyer for a group of creditors who tried to block the Fiat deal earlier this year.

“Having stripped Chrysler’s first lien lenders of $5 billion in connection with the sham sale of Chrysler’s assets to a shell corporation, Treasury is now trying to make it difficult for the lenders to recover any of their losses from the scraps that were left behind,” said Thomas Lauria, who represented the group, in an e-mail today.

Treasury spokeswoman Meg Reilly declined to comment.

‘Nothing at All’

“Neither Chrysler nor the government could have expected the loan would actually be repaid that quickly,” said Lynn LoPucki, who teaches bankruptcy law at the University of California, Los Angeles and Harvard.

“What they must have intended was that the bankruptcy estate of old Chrysler would be at the mercy of the government. In the current negotiations, the government will decide how much, if anything, it will leave in the estate for other creditors of Chrysler -- including the professionals working in the case. That can be nothing at all,” he said.

The new automaker run by Fiat, Chrysler Group LLC, would be unaffected by a Treasury demand for payment ....

A Google News search on "Chrysler Lauria" (not in quotes) shows no other press coverage of these developments other than Bloomberg's Friday before a holiday weekend report. A similar search on "Chrysler default" has very few items. A Detroit Free Press article reporting the government's default notice makes no mention of the potential disappearance of what secured lenders thought they would receive.

It would appear that both the TARP and non-TARP lenders will be equally affected if Treasury carries out what is from all appearances an outrageous $2 billion double-cross. But the compliant TARP lenders are big money-center banks who are at the tender mercies of Obama administration and other government regulators. Perhaps they've been told that going along with a complete washout is in their best long-term interest ("nice bank you have there; it would be a shame if something were to happen to it").

The non-TARP lenders, on the other hand, as Lauria described them back in May, are "pensioneers, teachers’ credit unions, personal retiree accounts, retirement plans, college endowments." If it occurs, a zero-out will likely devastate many of these people and entities. It's hard not to think that from the government's point of view, a wipeout would teach them, their uppity lawyer, and more importantly anyone else who might want to challenge the omnipotent Uncle Barack & Co., that there will be a terrible price to pay for standing in their way.

It's hard to see how anyone knowing the facts and sordid circumstances of the Chrysler bankruptcy and its aftermath can defend buying a vehicle from "New Chrysler."

Cross-posted at BizzyBlog.com.

—Tom Blumer is president of a training and development company in Mason, Ohio, and is a contributing editor to NewsBusters