The moral of the article: spend less time on punishment, more time on trying to minimize the social cost of the failure.Americans' public attitude toward the bankrupt, however, is not nearly as generous as our law. Every move to make things easier for debtors meets with fierce resistance, not merely from creditors, but from ordinary people who are making payments on time. As this article went to press, the Senate was scrambling to find a compromise on a long-stalled House proposal that would allow bankruptcy judges to reduce the principal of home loans where the value of the property has fallen below the mortgage's outstanding balance. Known as a "cramdown," the idea was popular with most congressional Democrats, but apparently not with the voting public, which was telling pollsters in ever higher numbers that they thought the whole housing-bailout package was unfair.
And isn't it? Most people didn't take out giant loans with tiny down payments or do repeated cash-out refinancings. Yet the cramdown plan would make the sober, steady majority foot the bill for other people's mistakes. First they would pay as taxpayers by helping to subsidize troubled loans. Then, the next time they needed a mortgage, they'd be charged a higher interest rate to compensate for the risk that they might declare bankruptcy and ask a judge to cram down their loan. And maybe they'd have to pay a third time, again as taxpayers, by bailing out banks that got too many of their loans crammed down. Meanwhile, the guy down the street who took out a second mortgage he couldn't afford, to remodel, would be sitting pretty in his $60,000 kitchen.
It isn't fair. But by the time someone is in bankruptcy, the time for fairness is already long past. Bankruptcy is the legal recognition that someone lacks the resources to meet financial obligations. Our system works so well precisely because it mostly sets aside our instinct for just deserts, and instead focuses on minimizing the costs to everyone. It lays out clear and predictable rules for lenders and borrowers, so that they can plan for disaster, and escape as quickly as possible if it arrives. Still, it's plain as day that, in the current crisis, a whole lot of people are getting help they haven't earned. As a result, commentators, academics, and legislators presiding over hearings have diverted much time and energy away from hashing out the ugly details of rescue efforts and toward making the one point on which we can all agree: these relief measures don't seem fair.
Since I wrote that, of course, I've been blogging a great deal about Chrysler. So it seems fair to ask: does the Chrysler deal do that? After all, it minimizes the cost to the unions, the largest group with substantial direct exposure to the collapse.
In fact, bankruptcy frequently does shortchange creditors if a going concern can be gotten out of the ashes. But the Chrysler deal went a little beyond that. It didn't just pay wages on a gamble that a reorganized firm would be worth more than a liquidation; it reaffirmed the union's pension obligations, and, AFAICT, much of the rest of their current contract. This is unprecedented. Moreover, it was not necessary to keep the firm going. Detroit autoworkers do not have a lot of other exciting opportunities to make $40 an hour in compensation. Had the bankruptcy followed a more normal course, most of them would have kept going.
That makes it a pretty straightforward transfer from senior to junior creditors. And that's costly. The seniority rules have no particular moral priority; like traffic rules, they matter because they are the rules. People make decisions based on what the rules are, and if you change the rules without warning, you get nasty accidents.
Right now, senior debt is cheaper than junior debt; secured debt cheaper than unsecured. If you declare that there are no priority rules, because the government will step in and arrange things so its friends get to cut in line, then everyone will have to pay something close to what the most junior unsecured creditors get now. Not only will interest rates go up, but terms will shorten--no one wants to lend into a period when default risk can't be calculated. And companies that are particularly likely to have administration "friends"--union shops, when Democrats are in office; maybe oil companies or defense contractors for Republicans--are going to find it harder to do debt financing at all.
Most people underestimate just how economically valuable the rule of law is. A roughly stable investment environment that doesn't maximize social justice is undoubtedly better than an unpredictible one that tries to--just as the billions of poor people who live in states that have tried to exchange the former for the latter. The winners were not the dispossessed.
This can be exaggerated--markets have memories, but they don't last forever, and robust democracies can survive a fair amount of skullduggery at the margins. But on balance, I doubt that deal maximized utility compared to an alternative where the government stayed out of it and Chrysler made whatever deal it could.
Rules? Law? Objectivity and transparency? bah, humbug.
...adherence to precedent and rules of construction and interpretation will only get you through the 25th mile of the marathon. That last mile can only be determined on the basis of one's deepest values, one's core concerns, one's broader perspectives on how the world works [e.g., Who will help reelect me] , and the depth and breadth of one's empathy.
Senator Obama
Although I often find muself agreeing with you, in this case, I completely disagree with everything you've said. As to homeowners, i think you've misconceived the issue. The defaulting homeowners are not being denied a forgivness of the debt they mistakenly incurred; they can still be forgiven, not punished, they just have to give up what they mistakenly bought. The mortgage modification idea goes beyond forgiveness of debt, and lets them keep the asset and create equity in it. It's a windfall to the imprudent. I think you have also improperly evaluated the social costs - the short-term costs to certain neighborhoods and the economy would in my opinion be far outweighed by the long term costs on all homeowners.
On the auto company, you posit a plan they could have put together without government help. But it has negative cash flow from operations - as it was running out of money and unable to raise more, it would have liquidated if left alone. The government plan put no one in a worse position than if the government had remained on the sidelines. The intervention there was less harmful than mortgage modification would be.
This is untrue in many ways. Yes, Chrysler was cash flow negative and would have remained so -- assuming the bankruptcy court would have required the company to honor its existing labor contracts. In general, bankruptcy courts DON'T do that. In addition to lowering the company's labor costs, the bankruptcy court would have looked at lowering the interest rate charged on existing debt and/or discharging some of those debts. With new, lower, labor and interest costs, Chrysler might have been able to make a profit. We won't know because Obama and his team interfered with the normal bankruptcy process. This is one of the primary purposes of bankruptcy, to give a company time to restructure and become viable -- it that's possible.
Another purpose of bankruptcy is the orderly liquidation of a company's assets if it's not possible to keep the company alive. This would have been the most likely outcome for Chrysler. There may not be enough of a car market to keep Ford, GM, and Chrysler alive. Chrysler, the least healthy of the three, was the most likely to fail. Still, Obama's interference with the bankruptcy process has changed who will receive what out of the liquidation. Instead of the normal ordering -- secured creditors first, followed by unsecured creditors, and then preferred and common stockholders -- Obama has moved unsecured creditors (the United Autoworkers pension fund and health care fund) to the head of the line. Secured creditors may receive $billions less than they would have under the normal rules. So it's simply not correct to say that no one is in a worse position than they would have been had government remained on the sideline. I am in a worse position. My retirement plan has been asked to subsidize the autoworkers retirement plan, by virtue of my plan's investment in an S&P 500 index fund (which includes shares of many of the banks Obama forced to write down their secured debt) and by virtue of the plan's investment in a bond index fund (which holds Chrysler bonds). So, if you want to put a face on who's harmed by Obama's interference, I am and so is virtually every investor in the US.
I don't see how that is accurate from the facts before us. The administration is not offering a fair price for Chrysler and just moving the junior creditors ahead, as you and Ms. McArdle allege. It is paying the highest price of any willing bidder for Chrysler and then paying a huge additional amount because it wants to protect the Unions. That's not a great deal, but it is not what is being alleged here.
In total, the government is putting almost $10 billion into this deal (detailed below). Could the company be sold for anywhere close to this in liquidation in this environment, presuming that the company wouldn't have already been sold in a fire sale due to a cash crunch without the government's help? If not, then, for at least some of the money, the administration is not moving the Unions ahead of the senior creditors. Instead, it's adding additional money to the deal which would not be there in liquidation.
The senior creditors are getting ~$2 billion in the bankruptcy deal. Could they get more in liquidation? I don't know, but that's why we have a bidding process for 363 sales, and no bidder is stepping up. Indeed, the company was on the block for months and nobody stepped up to make an offer under any conditions, bankruptcy, union contracts or not. On the likely liquidation value Business Week had a full article last week, making the points that there's no money out there in general, there's especially no money in the car industry, and there's a bunch of premium brands out there for sale. So, while the components of Chrysler may be worth more in a good market, it's highly doubtful that they could get "billions more" in this market. If so, in any case, one would have expected to hear at least murmurs of possible interest. We've heard nothing, and yet it is pretended here that there were other bidders waiting around to offer billions more. There may have been, but I don't see how you can allege this with any confidence.
On the $10 billion, Fiat is not putting a dime into the deal, so all of the money that is being received by the secured creditors is being put in by the government. This includes $3.2 billion lent to Chrysler last week to keep them running through bankruptcy - a loan which the administration immediately forgave - the government's $4.7 billion contribution to the "new Chrysler," and a commitment to provide another $1.5 billion before the end of 2010. That's $9.4 billion provided by the government just in this sale - not including any of the previous stimulus money. For the contention here to be true that the administration has just moved the unsecured creditors forward, Chrysler would have had to been able to obtain that mount on the open market, and that, frankly, is laughable.
Mechanically you could argue that viewed separately, i) the government's credit bid / cash bid for Chrysler assets and ii) distribution of significant value to a junior creditor are two individual events. The former occurs under the auspices of the bankruptcy court, the second is none of the court's business (but certainly is one of the taxpayers).
But the courts are supposed to look through this sort of recovery gerrymandering and call BS. this is a canonical sub rosa plan of reorganization. In a formal bk process to fairly arbitrate recoveries, the debtors must distribute a disclosure statement, so all parties understand the score, and provide opportunities for creditors to vote or participate in the process. The government is circumventing the above fair process by demanding an emergency sale before these issues can be considered by all parties. After all, what's the urgency? Chrysler has scads of unsold inventory and will be shut for production for weeks regardless of the 363 sale.
Debtors ram through section 363 sales approximating PORs all the time, but not when you stiff senior creditors for the benefit of junior classes. that's something courts have beef with.
Regardless, the dissidents have lost their case. I would recommend first, they sue the government for interfering with their contractual rights by conspiring with junior creditors to deprive the senior lenders out of their rightful recovery. Damages plus punitive. Second, I would recommend they petition the bankruptcy court to recover the common stock of new Chrysler from the UAW. Probably not legal, but anything goes these days. Third, the dissidents should sue the agent banks (ie TARP banks) for putting the agents' interests ahead of those of the dissident lenders, thereby violating their fiduciary obligations. By winning any of the above, the dissidents will heroically reaffirm the rule of law, create a landmark case in creditor rights, and make much much much more money than a par recovery on Chrysler loans ever would. The potential punitive damages, well, I can't count that high. Ideally they would win #1 outright and use #3 as a cudgel so that the TARP banks relinquish any claim on litigation recoveries, leaving a magnified payout for the dissidents.
Audacity of hope folks, think big.
"Better off" is a complicated term. I'm sure you've seen the research showing results like most people would prefer to live in a $200k house when everyone else has a $100k house, rather than a $300k house when everyone else has a $400k house. We all care about more than material possessions: if I feel like a sucker, a fool, someone who has spent months of my life working to pay taxes to support the irresponsible, it probably doesn't matter to me that I can buy a slightly nicer car as a result.
That may be what people say they prefer on surveys, but it's not what they actually prefer when they make housing decisions. We know that because the value of a house is enhanced by being in a neighborhood surrounded by more expensive houses and harmed by being surrounded by cheaper houses. If people really preferred above all else to lord it over their neighbors and hated it when neighbors had nicer houses, the reverse would be true.
Now you're bringing in the school effect, though (other cofounders, too, but that's the big one if you rely on actual real estate sales data).
... Moreover, it was not necessary to keep the firm going. ...
Government help was necessary, Chrysler is not viable without it. And that was the price of government help. The senior debtholders have no case unless they are going to get less than they could have expected from liquidation which I have not seen convincing evidence for. Or what Mark T said.
Keeping Chrysler viable was not necessary
It was necessary in the sense that it would be useful to test out pre-packaged bankruptcy before using it on GM, which is bigger and more important.
The liquidation price is a moving target. In this market, where this is more capacity to build cars than demand to buy them, I have a hard time believing that Chrysler's assets would be worth all that much.
I agree. I think Chrysler should have been liquidated. But if the government chooses to bail some of the parties out it is not obligated to observe the same priorities as the bankruptcy code.
I would agree with you, if Obama was doing this with his own personal fortune, but he is using taxpayer money for this.
This is one of many government expenditures that I don't like. However, unlike McArdle, it doesn't matter much to me that the senior debtholders aren't getting more of the loot.
One thing we should ask if ... if taxpayers are throwing billions into Chrysler (rightly or wrongly), shouldn't taxpayers reap the benefit of that investment? So why is Obama handing all the equity rightfully belonging to taxpayers to the UAW and Fiat? There's not much left equity for the government to recoup its massive investment.
So regardless of whether you think the heavy-handed bankruptcy mechanics are proper, as a taxpayer you have to ask what the hell is happening with the equity split. It's basically a transfer of wealth from taxpayers to UAW and UAW retirees.
And how are the white-collar (ie salaried, nonunion) retirees being treated by the government? Or are their retirement benefits not getting bailed out with an Obama windfall?
For all the ballyhoo over the TARP, the taxpayer is actually getting something of value from the banks (AIG, FNM, FRE, and FDIC receiverships are empty black holes though) -- real stock, real value, real investment, probably getting repaid. That's highly atypical stewardship; usually the govt hands out total freebies.
Why is the default position that the intervention was necessary? The burden of proof to show that everyone is better off is upon those seeking to change the rules. The bondholders do not shoulder the burden to prove they are unharmed because they have, by the rules of the game, the spot at the front of the line.
I believe the rule is the secured debtholders are entitled to the liquidation value of their claims but are not entitled to block reorganization unless they are paid in full.
No. The secureds are entitled to recover all value from their collateral (the full value thereof) until their claim is paid in full. When you repay them in full you can shut them up. Now, clearly most people think that the enterprise value of Chrysler (proxy for value of collateral) only partially covered $7bn of first lien debt, so in theory all value should be directed to them. However, the Obama plan is circumventing the laws of bankruptcy and diverting that value to a junior class.
According to this secured debt holders are entitled to liquidation value only. No value is being diverted to junior creditors (at least arguably) as all the money going to the junior creditors is a gift from the government.
read the rest:
"On top of liquidation value, the whole class of secured creditors is entitled to the fair value of their claims for any deficiency portion not satisfied by the value of the security. Usually that value is greater than liquidation value ..."
Every projection I've seen showed the secured debt being paid between 50 cents and 70 cents on the dollar. The Obama team tried to cut that in half to 29 cents on the dollar. (No, I won't do the Google search for you.) If the hedge funds holding the secured debt were going to get the same amount under Obama's plan as they expected to get from a liquidation, why would they balk? Bankruptcy is expensive. Every dollar of the company's cost of going through bankruptcy will be paid (in the normal case) by the secured debtholders if there is not enough value to full cover the secured debt plus costs. (If there is enough value to cover the secured debt, then the cost of the bankruptcy is borne by the unsecured debt, etc.) If the cost of bankruptcy could have been avoided without altering who was going to get what, Obama's interference would have been good for everyone. The fact some are squawking fairly loudly is a good indication that someone's toes have been stepped on fairly heavily.
Every projection I've seen showed the secured debt being paid between 50 cents and 70 cents on the dollar ...
Here (huge pdf file) is an analysis filed with the bankruptcy court projecting 9-38 cents on the dollar. Of course this analysis may be biased but hedge fund whining is biased as well.
"Most people underestimate just how economically valuable the rule of law is."
This apparently includes all of the economic and financial experts employed by the current administration.
It will be interesting to see how receptive the debt markets are to the "new" Chrysler and GM when they go to try to find financing. The sad thing, and broadly similiar to the homeowner example above, is the plight of Ford. Their thanks for NOT taking a Federal Government subsidy is a labor contract with the entity that owns its domestic competition and signficantly higher borrowing costs.
I'm sure such arguments were offered when the Clean Water Act and Clean Air Act were adopted, too. I've since heard many in industry complain of the problems uncertainty will cause for their currently profitable operations.
But you cannot argue that we're worse off because of the uncertainty caused by those two pieces of environmental legislation, not if -- like me -- you grew up on one of the most polluted rivers in the country. When you've screwed things up and made a mess, cleaning it up can be expensive.
Given that the whole point of the bailout of the financial industry and stimulus was to stem economic decline and stop job loss, and given the workers involved (not just at Chrysler, but at the supply chain which would have impact far beyond the reach of the auto industry) I'd argue that there's reason to create this instability -- and suggest that the notion that corporate America, including finance, can't trash worker's contracts so easily.
UAW workers did not bankrupt the company and they did not sign Chrysler's lending agreements; they went to work and built cars as instructed. (Note: I'm no fan of unions, and believe they have serious problems with balancing their mission to protect jobs while letting companies be profitable so that they can provide jobs, but fixing unions is another topic.) They had a contract for their pension and health care, and as you say, there's no moral right that says they should be second to senior lenders. Despite the objections to the uncertainty of changing rules, I see a moral obligation to the UAW workers.
If our experience with environmental legislation is any indicator, finance will recover just fine. And perhaps the notion that lenders need to stand behind workers might make lenders less inclined to prop up failing businesses for so long.
zic, no one is saying Obama and his team didn't have any reasons for what they've done. They might even have the better side of the argument. Maybe society is better off with this kind of ad hoc response rather than the orderly and structured system required by law.
However, Obama hasn't been making that argument. Instead of rationally explaining why we should abrogate the written rules, he's chosen to demonize the bond holders who refused to go along with his power grab. He might have demonized his opponents because he realizes few would agree that the secured debt should shoulder most of the cost of his plan. If, as you and he seem to think, society is better off with Chrysler producing cars no one wants to buy, why shouldn't society, as a whole, pick up the tab? Obama hasn't rationally explained his approach because it would force him to answer that question. His approach is to make it seem any costs are paid for by the villains in the story -- which allows him set the policy without having to pick up the tab.
Doesn't seem odd that fixing unions is a topic unrelated to the Chrysler bankruptcy, while the Clean water act is directly related?
strawman argument; nobody's saying chrysler should continue building cars people don't want (though I know a lot of people who's transportation needs are met by purchasing cheap, used Chryslers. So someone must buy them when they're new.) I think that's the purpose of the Fiat sale.
Not being privy to the agreements, I'm still of the opinion the majority of secured debt holders who would not agree to the terms and forced the bankruptcy will benefit from CDS either on the current Chrysler configuration or from the previous incarnation with Daimler. Why settle when you'll get your money from taxpayers through the back door?
So reverse the question: should finance get to set the terms of policy via credit default swaps? Particularly when that policy may provide a crippling economic blow by undermining the industrial supply chain?
Hey, if that's true, let Obama make that argument. He's not arguing the merits of the case. He, and his allies, are arguing either that the arrangement will not alter who gets what or that the only persons harmed are people who deserve to be harmed because they are greedy speculators.
If there really is a good reason why group A should get more and group B should get less, let Obama make that case in detail. Until that time, I'll refuse to believe it's not a mere coincidence that those who are getting more under Obama's plan are groups who support Democrats. But then, why not? He won, right? That makes it alright for him to use government power to take from those he disfavors and give to those he favors. That's the Chicago way.
Didn't you just argue that society is better off keeping workers employed than unemployed? And by employed, you do mean building cars, right? The same cars that aren't selling? And they are not selling because no one wants to buys them, is that correct? So where is the strawman argument again?
And back to the CDS argument. Unless the majority of Chrysler debt is covered by a CDS, its really rather mute, isn't it?
Fleet sales to car rental companies. Not very profitable, alas.
Meanwhile, on CDS, from what I understand, there's no evidence hte government backstopped any Chrysler CDS; AIG doesn't seem to have written any.
There were NO (L)CDS contracts written against Chrysler CarCo being widely quoted in the lev loan markets. Chrysler Finco, yes. Ford loans, yes. Single-name loan CDS, particularly for a name as hairy and illiquid as Chrysler right off the bat, is hard to find. Therefore, drop the CDS conspiracy theories for cryin out loud
Of the 20 funds involved, 9 have filed as "non-tarp lenders," and disclosed they have no hedge.
That does not mean the others have not hedged their loans; and they may well have withdrawn from this group because of their hedges.
From Bloomberg:
How did the Studebaker or American Motors bondholders do?
Michael, the Studebaker and AMC bondholders got what the law provided at the time. The question before the court of public opinion is why Chrysler's bondholders should receive less than the law currently provides. Bondholders understand that the money lent is subject to market risks and those risks are priced into the bonds. If the Studebaker bondholders did not receive full payment on their bonds, they understood that risk when they invested.
Should bondholders also be at risk to a Presidential whim? Suppose we are at a casino and I place a bet on "red" at the roulette table. If the ball settles on another color, my friends might feel a tad sorry for my bad luck, but they'd tell me I'd lost fairly and squarely and I shouldn't complain. On the other hand, if, after the ball settled on a red number, Obama strode up to the table and declared the bettors on red were nothing but greedy gamblers (In a casino, shock!) and that he was going to take half my winnings and give it to the casino's wait staff because that was a better, fairer, more equitable and socially just result, my friends and I might feel I had a right to decry the result.
Bleah, so says you. Guess what, a person who ideology is highly suspect of public vs private actions in cases like these thinks maybe the government should have stayed out of this. This what I see in all the endless navel gazing on Chrysler, including the comments on these thread, if you prefer private solutions to public ones, you hate Chrysler, other wise you dont. Fine but my big complaint on all this is that you and many of your fellow travelers seem to think that the senior debt holders being hard asses and getting all they can even if they wipe out Chrysler in the process and everyone, unions and juniors lose, is fine but the government comes in and the union gets something and the juniors get something and seniors loose something, well that is just terrible. Why? The law was not broken in this.
What I see is that for a long time, the biggest dicks in the room belonged to Wall Street and they pushed people around and got what they wanted. Now they are no longer the biggest dicks in the room and they are having a hard time adjusting to it. Tough. This is what happens in secular bear markets. The rules change, the overlords get overthrown. You dont have to like it, in fact no one gives a shit how you feel about it. This is how it is going to be done.
I want to apologize for this, I realized after I wrote it that it reads completely different than I intended. I meant that Wall Street does not have to like it, that nobody cares how Wall Street feels about it but I realize that it reads as if I am saying it about Megan. Obviously Megan blogs opinion that I read and care enough to comment on so I do give a shit about how Megan feels about things, well somethings anyway.
Megan's argument and yours is that the counterfactual to Obama is better. Is it not right to ask what that counterfactual might be? And what the bondholders got in those deals might then inform us. We have a cultural tradition in inspecting the value of someone or something to take a 'devil's advocate' position. I may think that Ignatius Loyola deserves to be a saint; but, somewhere along the line before he got to be one, a trial was held and a devil's advocate argued against it. Similarly, what Obama is doing may be wrong but you aren't arguing that it is money foolishly spent, you and Megan are arguing that, beyond that, in his intrinsic action in this bankruptcy process he is doing harm. I believe inspecting that idea deserves an 'angel's advocate' position for Obama.
Megan's argument is that the ordinary bankruptcy process would have been better for the senior debt holders. That might get to be the case if the contracts of the assembly workers were torn up and they only had jobs at $10-20 an hour and Chrysler, owned by the senior debt holders, could make a profit. It seems to me the senior debt holders could say in court the $ 2 billion offered is less than the value of expected cash flow from such a deal. You say that Ratner (?sp) threatened to turn the presidential press corp on them. I'm surprised Vladimir Putin hasn't fled to the Urals. Think of what the presidential press corps could do to his beefcake photos. What Obama may have been saying in his remarks about the bankers is that I've shown up in my limousine with the U.S. flag on it and, yes, I'm giving away money but don't expect me to give you much more than you would have gotten anyway just so you'll make nice.
I don't care whether the bondholders actually would have gotten a better deal in a world where Obama stayed the hell out of it. If they'd gambled on liquidation and lost, boo-hoo for them. If they'd tried to gamble on liquidation, and a judge had stopped them, waaaa! What I care about is that the government arranged a sham transaction to do an end-run around the absolute priority rule by leaning on its pet banks and publicly bullying holdouts into abandoning their fiduciary duty. Not a good precedent.
I think the point isn't so much the merits of this particular case. It's the introduction of a high level of uncertainty into what was heretofore a bedrock process of our economy. And not in isolation- GM aside Obama has engaged in a number of unprecedented moves in the market with his strong arming of TARP recipients especially (and particularly refusing to allow the repayment to keep them on the string).
The market hates uncertainty, and Obama has done some things that should be freaking a lot of people out right now. Can anyone possibly predict what could happen in 6 months much less a year if the economy doesn't improve? Is there any limit, philosophically or legally to what Obama may attempt if he see's something he wants?
This case stinks to high heaven given labor's big payoff while everyone else took a hefty haircut, but analogous to bankruptcy itself, that's not the real issue here. The level of uncertainty set loose in an already shaky market is far more worrisome. What's even scarier is Obama and his people don't seem to have a clue that they have unleashed it, or even why it would be worrisome.
This whole affair was handled badly by a bunch of amateurs. Pros would have accomplished the same result, but it wouldn't look so ham-handed and caused as much collateral damage. Pros would have skillfully used the bankruptcy process and preserved the rule of law.
The biggest problem remaining with GM and Chrysler is the fact that the terminally expensive union contracts are not being rewritten. This was the whole reason for bankruptcy. Now, both companies will get another trip to bankruptcy court to write the next chapter of their book -- Chapter 7 because of this failure.
The biggest problem with this administration is the unintended consequences of these actions on the bond markets. If they are not careful, people might assume they will treat U.S. government issued bonds in a similar manner. Many investors I know feel this way.
That would lead to a capital strike because people know they can't trust Obama to honor their contract and won't willingly invest money with him because he will turn around and give it to one of his constituencies or find a way to cheat them, like he did the Chrysler bondholders.
I agree with everyone above that this is a terrible deal that likely will not end well for anyone, the workers, the company, or the taxpayers. It is not a subversion of the rule of law, though.
That a bankruptcy judge was willing to approve the sale even before the last creditor caved should tip you off on this fact. Otherwise, why was he willing to approve it? Was he also threatened with the White House Press Corps? Was he willing to toss aside the rule of law aside because he loves Unions so much? Of course not. To believe that the judge was going along with it for any reason other than its legality, to posit that our judges are generally willing to willfully ignore the law as they understand it because the President asks it, implies that the rule of law is and was in far worse shape than anything else alleged here.
The reason that Ms. McArdle's claim on this point is and has always been belied by the evidence is that the government is not paying a fair price for Chrysler and giving more of it to the Unions than they deserve. They are offering the highest bid to the secured creditors, and then they are kicking in an additional giant pile of money for the Unions.
History suggests that that is probably not a great business idea, but there is nothing illegal about it. The highest bidder is entitled to offer additional money to other creditors for whatever reason, it's his choice. This happens all the time in 363 sales, and the statute specifically contemplates the buyer assuming additional contracts and debts after he has made his high payment. He generally cannot count these assumptions as part of his bid, but he is free to take them on.
Buyers have to do this because they frequently need to honor debts to keep the company going - yes, a buyer can tell all of the acquired asset's customers, workers, and suppliers (including of credit) to kiss off, that he has paid the secured creditors and that's all he needs to pay. But that's often not a good business move. Your purchase isn't worth much if you buy an asset in an otherwise well functioning industry and your first move is to screw your customers and employees. So, a buyer is allowed to assume whatever debts he wishes to any of these creditors as an ordinary and legitimate part of the bankruptcy process.
The government's actions stink because they have chosen to assume far more debts than they need to, and they've created a company that has a minimal chance of ever weaning itself off the public teat. Still, there's nothing illegal about that. They put up almost $10 billion for this transaction, and since it's completely in the buyer's discretion it's their call.
Now, the administration's actions may have been illegal if the secured creditors could have obtained more in a more open bidding process. The idea that they were disadvantaged because they did not receive all of the $10 billion is still stupid, but it would be wrong if the government had prevented the secured creditors from obtaining the maximum they could have received.
From the facts on hand this claim seems unlikely, though it is possible. There is nothing to suggest that there would have been any bidders besides Fiat. Suitors have been free to come forward for months now, and nobody has shown an ounce of interest in any of the business under any terms. Surely if somebody was itching to pay $3 billion for Jeep so long as X, Y, and Z occurred, we would have heard something by now.
Still, Fiat itself may have been willing to make a higher offer, and the government may have preempted it. We may never know, but this seems unlikely given that we have not heard any possible motive for why they would do this. The administration was already tossing around billions, yet we're supposed to believe that they intentionally prevented Fiat from making a higher bid ... why? We know it's not because they like being stingy with banks. You have to believe something very odd about this administration to believe that they would take this kind of risk - of, among other things, a public rebuke from a bankruptcy judge and, as occurred, their pillorying in the financial press - while being so profligate in everything else that they do.
In any case, it's still possible that they preempted a higher bid from Fiat, and if they did - and there's no evidence that they did - then they likely violated the law. That's a different claim, though, than the one Ms. McArdle repeatedly makes, that the administration broke the law by giving the Unions money it could have given to the other creditors. I may be wrong, but this is how I understand it, and if my understanding is correct then she really should stop calling these actions illegal when they're not.
By what part of the Constitution is the president authorized to do any of this? What right does he or any of his minions have to pronounce new contract law out of thin air?
It is illegal, on its face. He has no authority. Or as the phrase goes, the Emperor's new clothes are his birthday suit.
It is an unbelievable overstepping of the bounds of propriety.
tom