Will Chrysler’s Bankruptcy Uphold the Rule of Law?

The President recently announced that despite the Government’s best effort to save Chrysler from bankruptcy, greedy bondholders are forcing a bankruptcy because they want a better deal. Once again, the President mischaracterized reality to suit his own political agenda. He claimed that certain bondholders refused to make sacrifices that other stakeholders did. He did not tell us that those bondholders were put off by the fact that the Government proposal offered them less than 30 cents on the dollar, some $2 billion in cash for their nearly $7 billion investment, with no equity stake in the new company. He also conveniently omitted that the autoworkers union (UAW) would receive half of the value owed it in stock of the new company and would become New Chrysler’s majority stakeholder. Does it really make sense to reward the guys (the union) who significantly contributed to Chrysler’s demise in the first place by giving them a huge stake in the new company? Isn’t it just a bit sneaky to completely ignore the fact that in bankruptcy bondholders would be among the first to be paid and probably walk away with substantially more than 30 cents on the dollar-value of their investment?

The major issue isn’t the obvious unfairness or idiocy of that proposal. It is about the Government using its discretion to change the way business is done America. Politics clearly played a key role in formulating the Government’s proposal to save Chrysler. The autoworkers union and others were a significant factor in electing President Obama and it is obvious that he was attempting to reward them for their support. It will be interesting to see if those politics play a part in structuring a deal in bankruptcy. If it does, the deal’s ramifications will extend well beyond its impact on the parties to the struggling automaker.

American business thrives because it relies on the rule of law and the sanctity of private property rights and private contracts. Throughout our history, through thick and thin, that system and its precedents have provided a framework of predictability, certainty and impartiality to the way business is done here. It has also been a major reason why foreigners and Americans alike would rather do business in America than anywhere else on the planet.

The world’s major governments were justified in intervening in private industry in an unprecedented manner during past two years in order to save our global financial system. However, they may have now overstayed their welcome. Either way, America will need to know how Government intends to proceed going forward. The Government has already become ensconced in our financial system and because of its demonstrated ad hoc and lacking management approach, there is a growing reluctance among private investors to collaborate with it to recapitalize the banks. Investors are quite rightly concerned that submitting to an investment program where our Government changes or makes up the rules as it goes along presents risks that outweigh even the most attractive of returns expected from the public-private partnership to purchase toxic assets from the banks. It is also clear that the Obama administration plans to replicate its onerous management format in order to play a major role in our energy industries and healthcare system going forward. You can bet those efforts will be met with a similar lack of enthusiasm, skepticism and confusion by the private sector.

The Obama administration may truly believe it is implementing change we can believe in, but it is rapidly becoming change Americans cannot invest in.