A few weeks ago Chrysler declared bankruptcy. Under normal circumstances the bankruptcy law of this nation would have been upheld and the assets of Chrysler would have been sold off and all proceeds would have been allocated to the bond holders (debt holders) until their principal investment was completely repaid. After the bond holders’ secured claims (secured by the assets of the company) were repaid, the remaining proceeds from the sale of Chrysler’s assets would trickle down to the unsecured claims and eventually to the equity holders.
Everyone entered into their contracts with this vision of a bankruptcy in mind. This is how bankruptcy has been handled in this nation for decades. Every bond holder, union, and equity holder was expected to understand that in the case of liquidation (bankruptcy) secured lenders (bond holders) are paid in full first. However, when the Chrysler bankruptcy came down the line President Obama and other members of his Administration decided that this was simply not good enough. They decided that the Bankruptcy Code in the United States was not valid and that contract law was not valid.
After Chrysler declared bankruptcy the Obama Administration set into motion its own vision of how the restructuring and liquidation would work. Instead of Chrysler’s assets being sold off and having the proceeds go directly to the secured lenders, the Obama Administration decided it had a place in the bankruptcy courts and forced the secured lenders to take a dramatic discount on their debt and rescinded their right to liquidate Chrysler’s assets in order to be repaid. Instead, the Obama Administration decided that the United Auto Workers Union, an unsecured lender and therefore second in line to the secured lenders in the case of bankruptcy, would receive a 55% stake in all of Chrysler’s assets as well as a $4.5 billion note from the Chrysler company that would emerge from this mess. Moreover, the Administration granted an 8% ownership stake to the unsecured United States and a 2% stake to Canada. The remaining 35% stake in the assets would be sold to Fiat, an Italian automobile manufacturer (ironic since the entire goal, according to the Obama Administration, is to help American industry).
The only legitimate part this disarray is that the company’s assets would be sold to Fiat. In a normal bankruptcy proceeding there is a strong chance that all of the assets would be sold to one company, or group of companies, and normal business operations would continue. Not wanting to risk this, and — more importantly — not wanting to upset the unions, the Obama Administration broke the law of the United States and has shown clearly that the Executive Branch has adopted complete, autonomous control. That was, however, until Supreme Court Justice Ruth Bader Ginsburg stepped in yesterday and put a hold on the deal. This injunction will allow the Supreme Court time to decide if it will hear an Appeal from Indiana Pension companies regarding the restructuring of Chrysler.
My politics and my idea of justice are not always perfectly aligned with Justice Ginsburg, but in this case she is a holy saint. Always wanting to help out the common man, Justice Ginsburg has realized that the ones that are truly hurt in this are the people that hold Chrysler debt in their retirement funds and other investment vehicles. Those people include teachers, firemen, policemen and many other middle-class, hard-working individuals. In this whole mess designed to coddle the United Autoworkers Union (UAW), many people in a far worse financial situation than auto-workers are being told that the money they have lent Chrysler is no good and that the Obama Administration will decide how much of a discount they will take on their debt. All the while the Obama Administration bows down and kisses the feet of the UAW offering them a majority stake and a huge note.
The course of action taken by the Executive Branch regarding the Chrysler bankruptcy should not go unnoticed. The laws of the United States – the very laws that have kept our nation’s order for decades – have been disregarded and, instead, a few people have again determined that they are above the law and are more able to decide what is best for each of us than we are able to decide ourselves. Justice Ginsburg has stepped in to at least temporarily delay this Administration’s attempt to be rid of contract law and bankruptcy law and I applaud her for it.
Sources: The Wall Street Journal 06/09/2009