The Chrysler takeover and the rule of law
May 25, 2009 – 11:34 pm by JohnJoshua Claybourn summarizes why the Obama regime’s management of the Chrysler bankruptcy is worse than just more government intervention. It violates the most important aspects of a sound legal system: the sanctity of contracts and the rule of law.
Under these long standing bankruptcy laws—enacted and enforced by the federal government under the Constitution—a secured creditor is entitled to first priority under the “absolute priority rule.” Other nonsecured creditors have “junior” priority. The purpose of this rule should seem clear. When you offer credit to some one or some thing, and do so on the condition that it is secured by an asset, you should be first in line to collect before those providing credit without such security. Unfortunately President Obama’s actions throughout the Chrysler bankruptcy have trampled over these well worn bankruptcy laws, contract rights, and even the rule of law.
One of Chrysler’s secured creditors was the State of Indiana, or more particularly, pension funds administered by the state. But now that Chrysler has filed for bankruptcy, Indiana and other secured creditors are being forced to the back of the line so that unions can proceed to the front. For every dollar of secured creditors’ claims, they’re receiving only 30 cents. Compare that the the United Auto Workers union, an unsecured junior creditor, who will get 50 cents on the dollar.
Why? It’s not because any contract, agreement or bankruptcy law calls for it, but because the federal government decided it was politically convenient. Of course, we’ve become far too familiar with the government robbing Peter to pay Paul, but in this instance the government is violating the rule of law to do it. The arbitrary whims of Obama’s administration threaten the very foundation of capitalism.
I don’t know what else anyone expected from this Marxist opportunist.
Henceforth lenders will hesitate to provide credit, and eager entrepreneurs and businessmen will struggle to find it, because any credit can now apparently be confiscated by government greed regardless of the law or the existence of a binding contract. Simply put, the price of borrowing will now go up because lenders must account for a new risk—government intervention.
This reminds me of something Wendy McElroy wrote a year or two ago: there is a difference between risk and uncertainty. In a free economy, everything has a certain level of risk and the people who play their risks and rewards right will profit more than those who don’t or who don’t risk much. But government intervention introduces uncertainty, not exactly extra risk, which complicates matters and makes otherwise good decisions turn out unprofitable. The new uncertainty in government perturbations also makes political conniving and political decision-making more important and economic decision-making correspondingly less important.
Hat tip: Radley Balko