It has been said that politics is all about punishing your enemies and rewarding your friends. If so, the WSJ has lost the plot in the Chrysler bankruptcy:
The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”
The Obama administration’s behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors — entitled to first priority payment under the “absolute priority rule” — have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.
The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.
Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.
In the WaPo, George Will demonstrates that he too is bewildered by the magnificence of the federal, and remains shackled to the value structures of the bourgeoisie:
Anyone, said T.S. Eliot, could carve a goose, were it not for the bones. And anyone could govern as boldly as his whims decreed, were it not for the skeletal structure that keeps civil society civil — the rule of law. The Obama administration is bold. It also is careless regarding constitutional values and is acquiring a tincture of lawlessness.
In February, California’s Democratic-controlled Legislature, faced with a $42 billion budget deficit, trimmed $74 million (1.4 percent) from one of the state’s fastest-growing programs, which provides care for low-income and incapacitated elderly people and which cost the state $5.42 billion last year. The Los Angeles Times reports that “loose oversight and bureaucratic inertia have allowed fraud to fester.”
But the Service Employees International Union collects nearly $5 million a month from 223,000 caregivers who are members. And the Obama administration has told California that unless the $74 million in cuts are rescinded, it will deny the state $6.8 billion in stimulus money.
The bible instructs us that all things are possible for God, and if it’s possible for Him, then oughtn’t it be possible for His angels here on earth? And what do you need laws for, when you’ve got people of good will running things from Washington?
Anyway, like the paying of taxes, the rule of law only applies to the little people.
There aren’t too many people (creditors included) lining up to provide debtor-in-possession financing for a Chrysler in bankruptcy. Without that financing, Chrysler is worth just about nothing. Ever try to sell a few billion in assets over the course of ~6 months? That’s what would happen (fire-sale at crazy al bargain basement prices) w/o DIP financing, assuming you could even get someone to buy a car plant in this economic environment.
The provider of DIP financing is always the one with the most power, and the one who gets to dictate terms. This time the government is the only entity dumb enough to put more money into the smoldering hole that is Chrysler.
These creditors are lucky to be getting anything and they know it…
Anon is right about who dictates the terms. I have been waiting to see the aftermath knowing that only the government was able to handle the DIP financing for Chysler and presumably GM.
But since the government derives it’s financing from us it is more than a little disturbing that a few make the rules as to who is secured and how much they will get.
You don’t get what you deserve, you get what you negotiate, apparently. It’s obvious that the administration used it’s size to exert it’s will at the expense of the creditors
So now the administration is using stimulus money to tell the states how to arrange their own houses. Big surprise there, they’ve been making banks and automakers dance for their dinners for months now. Why not the states too?
It sure makes those governors who tried to turn down the funds look a lot less stupid than they were made out to be. It seems turning down the money is the only way to retain freedom of action.
If the federal government is the DIP and gets to dictate terms then they could have simply asserted that right in a lawful bankruptcy court. Instead they sought to threaten and intimidate senior creditors to give up their positions outside the jurisdiction of a bankruptcy judge. They did this so they could reward the “Friends of Barack”.
If you think finding financing was hard in January, well, wait until some unionized business tries to get a loan now. The union being on the “Friends of Barack” list. No discount for offering assets as security since the administration has tossed out the idea of a secured creditor having priority over an unsecured one.
And yes, I know that if loans are not given, the government will confiscate the cash to fund loans themselves, but that only works once. After that, they’ll have to turn on their friends since everyone else will be broke and trying to make over the wall into Mexico.
The founders gave us law to avoid what barry is doing to Chrysler and its creditors. It doens’t matter what they would have gotten in court, the union was just one more creditor and they need to get in line behind the secured creditors.
That they were friends of Barry was the main thing, and Lex’s point should be well taken. Say goodbye to much of US industry after this, particularly in union states. Right to work states, which have been industrializing like crazy when the rust belt industry has moved, may have an easiuer time. The north, however? Rottsa ruck fellas. Played that game once, ain’t doin’ it again.
The left wingnuts have cut their own throats again. They never learn or forget.
One point which is probably not widely understood here is that the holdout creditors were vulture investors. They bought the Chrysler loans for pennies on the dollar when it was blindingly obvious that only a government bailout could save the company and enable it to honor its debts. The vulture investors essentially gambled that a bailout would allow them to realize a profit on their purchase of the debt.
If they turn out to be right, an obviously horrible incentive would be established – a creditor doesn’t need to pay attention to the fundamental solvency of a company: he just needs to predict whether he can make money off the taxpayer in a government bailout. This is probably not the type of situation that the Constitution was meant to enable.
Don’t feel sorry for the holdout creditors here. These people are blood suckers, not victims.