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"Is Michael Steele here? Michael, I don't care how many times you ask, the Republican Party does not qualify for bailout.  Rush Limbaugh is not a troubled asset."

                                                                -President Obama, White House Correspondents' Dinner, May 9th 2009

President Obama hosted his first White House Correspondents' Dinner this past weekend to much fanfare.  While much of the dialogue seemed to be fairly predictable, the line above actually garnered a great deal of applause and is a very insightful point. 

In fact, the Republican party is currently in trouble and does have a bit of a Rush Limbaugh problem.  While Rush may not be a troubled asset, the Republican Party does need a bailout, or at least a massive makeover.  We recently heard from a contact of ours who is a major conservative fundraiser and he wrote us the following:

"I was on the Hill this past Thursday. Very discouraging. Republicans seem exhausted. The party will take years to recover."

Installing Michael Steele as the Head of the RNC and the recently completed listening tour by Jeb Bush, Mitt Romney, and various other Republican leaders are certainly steps in the right direction in reinventing the face and energy of the Republican party, yet this process is in its early days.  In the meantime, the Democrats are consolidating power and President Obama's polling numbers continue to improve, while the Republican Party is trading at cents on the dollar.

In the past, we have quoted the Rasmussen presidential approval rating as a proxy for how President Obama is doing in terms of popularity.  We use this poll for consistency purposes and also because Rasmussen has been rated as one of the most accurate pollsters over the last decade. For the last five days, Obama's approval index has been in the +7 to +9 range (this is the difference between Strongly Approve and Strongly Disapprove), this range is at its highest since the first week in April.

While that poll is interesting and indicates a shift up in approval for President Obama, an even more interesting poll is the right direction / wrong direction poll.  Currently, 38% of likely voters believe the country is headed in the right direction.  While this does not seem like a large number, it is a five year high and is the highest number of the Obama Presidency.  In fact, it is up 11 points from his inauguration and 17 points from when he was elected.  President Obama has inspired a view among likely voters that he is getting this country back on track and with this popular support will come even more political capital.

On April 28th we wrote the following in a note about Senator Specter's decision to change parties:

"Make no mistake about it, the balance of power in the United States has officially swung to the left and as a result we should analyze both risk and reward accordingly with this new geo-political input."

In that note we made the call out that one way in which we could see this power shift manifest itself was on unionization and the potential that Senator Specter would reverse his view on Employee Free Choice, which relates to voting on union representation.  This shift in national political influence with the consolidation of Democratic power in the Senate and increasing popularity of President Obama, combined with the view that he is leading the country in the right direction, will also manifest itself in more subtle ways.

Specifically, the recent capitulation of bondholders in the Chrysler bankruptcy has the appearance of a situation whereby the bondholders are deferring to the strengthening power of President Obama and the Democratic Party.  According to the Boston Globe, "The group eventually came to the conclusion that there wasn't enough of them to withstand the enormous pressure and machinery of the US government." 

Obviously the bondholders are likely attempting to promote their own interest to the media, so the quote must be taken in context.  Nonetheless, the context is concerning.  Bondholders have rights and fiduciaries responsibilities, and in this situation chose to acquiesce to the government rather than aggressively pursue those rights.  Clearly, part of the decision making process on the side of the bondholders was that they were not only facing off with the U.S. government, but one that has a popular executive branch combined with a consolidated legislative branch - so would be difficult to beat.  

While this was a loss for the bondholders of Chrysler, it was also likely a leading indicator of future events.  These capitalists had clearly weighed the risk / reward and decided that based on the potential for future interactions with the government, according to simple game theory analysis, the best outcome was to acquiesce on their position quickly and quietly.  That said, not all  investment managers have walked away from this situation quietly.  In fact, Cliff Asness wrote the following in an open letter:

"Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It's not always a pretty process . . .the above is how it works in America, or how it's supposed to work."

Indeed.

Daryl G. Jones
Managing Director