Anyone following Chrysler’s journey into bankruptcy is shaking their heads in dismay. Investors, employees, and suppliers are all sitting on pins and needles wondering what is going to happen next. There have been so many irregularities in the events leading up to this point in time that boggle the imagination.
OK, so I used a lot of cliche’s… But here’s the fact of the matter…
Chrysler and GM shouldn’t even be here.
When Chrysler and GM went to the Federal Government for loans, they were turned down by Congress. President Bush used his executive authority to transfer Billions of TARP money to the automakers to keep them solvent. While this helped keep the automakers running, he had no legal authority to make those loans. TARP’s stated purpose is to buy troubled assets from financial institutions. While financial institutions do have financial stakes in the automakers, I do not believe that the automakers debts fell into the realm of what the TARP money was to be used for.
And now we have President Obama continuing the trend in lending more TARP money to keep GM and Chrysler running, and financing Chrysler’s bankruptcy (and possibly GM later this month or next). But where this is leading to is the continued questionable actions of the Executive Branch.
One of the reasons that Chrysler declared bankruptcy is that not all of the holders of secured bonds would agree to a reduced settlement of debt (29¢ to 33¢ on the dollar). These bondholders are contractually entitled to 100% of the face value of the bond, and were acting in their client’s best interests, which by the way, is supported by contract law.
Except when the Executive Branch / Federal Government gets involved.
According to several news sources, the bondholders were threatened by the Executive Branch with ruin unless they cooperated in taking the reduced amount. President Obama vilified the bondholders on national media to further pressure them to the deal, and reportedly was to release the names of the holdouts to the public.
Doesn’t anyone else see the problem with the President of the United States pressuring private investors to take a loss on an investment that was guaranteed? While not illegal, it certainly is unethical, especially considering the following:
While private bondholders were being pressured to accept 29¢ to 33¢ on the dollar of their secured bonds, the UAW retirement fund would receive 50¢ on the dollar for unsecured debts. This is a violation of one of the basic principles of bankruptcy law, which is that secured creditors are to be paid in full before unsecured creditors get anything. And here’s where the problems begin.
This is blatant political favoritism of one group over another, i.e., the UAW over investors. Yes, it’s pointed out that the UAW retirees deserve protection, but what about the retirees and investors represented by the bondholders? Why should one group be favored over the other in violation of contract and bankruptcy law?
And now, in bankruptcy court, Fiat is being promoted as the only viable buyer for Chrysler. Attorneys for other concerns have stated that that is not the case because a due diligence of the company’s assets has not been performed. While this tact could keep the company together, it doesn’t follow the procedure of the courts.
So here’s the point – the Executive Branch is taking property from one party and giving (or selling) it to another party. And this is a violation of property rights….or is it?
In 2005, the Supreme Court held that government, under eminent domain law, could transfer property from one private party to another if “just compensation” is given and the transfer is in the public good. This ruling now legalizes the virtual theft of private assets on the whim of whoever is in power. And that is what is happening to Chrysler, GM, and a host of other businesses.
So here are some points:
- Law. There is nothing to protect the political unfavored from being ruined.
- Property Rights. Property and wealth can now be appropriated for the “public good” for pennies on the dollar and given to the politically connected.
- Investing. While there are risks that are taken by investors, if their is no protection through contract law or property rights, why bother?
The United States is supposed to be a nation of laws, and these laws are to provide everyone equal legal rights. What has been demonstrated is that these laws are being violated in principle if not in reality. And that will be the downfall of our country.
If we are not a nation of laws, we will be instead a nation of anarchy. – Tom