Wednesday, May 13, 2009

More on "gangster government": "The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law."

Gun owners to Wall Street: "Welcome to the party, pal!"

More from the Wall Street Journal today on gangster government here.

Chrysler and the Rule of Law

The Founders put the contracts clause in the Constitution for a reason.


The rule of law, not of men -- an ideal tracing back to the ancient Greeks and well-known to our Founding Fathers -- is the animating principle of the American experiment. While the rest of the world in 1787 was governed by the whims of kings and dukes, the U.S. Constitution was established to circumscribe arbitrary government power. It would do so by establishing clear rules, equally applied to the powerful and the weak.

Fleecing lenders to pay off politically powerful interests, or governmental threats to reputation and business from a failure to toe a political line? We might expect this behavior from a Hugo Chávez. But it would never happen here, right?
Until Chrysler.

The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact "uniform laws on the subject of bankruptcies."

The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors -- entitled to first priority payment under the "absolute priority rule" -- have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.
Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

The U.S. government also wants to rush through what amounts to a sham sale of all of Chrysler's assets to Fiat. While speedy bankruptcy sales are not unheard of, they are usually reserved for situations involving a wasting or perishable asset (think of a truck of oranges) where delay might be fatal to the asset's, or in this case the company's, value. That's hardly the case with Chrysler. But in a Chapter 11 reorganization, creditors have the right to vote to approve or reject the plan. The Obama administration's asset-sale plan implements a de facto reorganization but denies to creditors the opportunity to vote on it.

By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?

The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government's threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming.

Chrysler -- or more accurately, its unionized workers -- may be helped in the short run. But we need to ask how eager lenders will be to offer new credit to General Motors knowing that the value of their investment could be diminished or destroyed by government to enrich a politically favored union. We also need to ask how eager hedge funds will be to participate in the government's Public-Private Investment Program to purchase banks' troubled assets.

And what if the next time it is a politically unpopular business -- such as a pharmaceutical company -- that's on the brink? Might the government force it to surrender a patent to get the White House's agreement to get financing for the bankruptcy plan?

Mr. Zywicki is a professor of law at George Mason University and the author of a book on consumer bankruptcy and consumer lending, forthcoming from Yale University Press.


Anonymous said...

Interesting that you included this in your blog Mike.

Of all the things that have happened recently I think this is one of the big ones that will have an impact on relegating us to Banana Republic status.

The US has always been a benefactor of capital flight from other parts of the globe but after this I fear that will not be the case. Who in their right mind would invest in the US if contracts could be made null and void by the whims of our imperial overlords?

This will be another nail in the coffin for the US standard of living.

Mr. Sulfur

Defender said...

"The U.S. government also wants to rush through what amounts to a sham sale of all of Chrysler's assets to Fiat."

The Italians can manage the company better, I guess, just like New Haven, Conn., decided an office park was a better use for Mrs. Kelo's homeplace than a HOME. Better for THE COLLECTIVE.
And not yet four months in office...

suek said...

The security of private property from seizure by those in power has been central to economic security. This contract protection has been a factor of that security, though before this, I must say I never thought of it that way.

The Kelo decision was a blow to that right of private ownership, and this is a second blow. What is left?

Mr Sulfur is absolutely correct.

Anonymous said...

This is no diffrent than Zimbabwe's seizure of farms and subsequently turning them over to favored apparatchiki.

Obama just tries to do things "under the radar".

CorbinKale said...

I am not surprised by the outcome of the Chrysler bankruptcy. It is just one more step in a series of actions that seem designed with the specific intent of undermining the Constitution and the dollar. Both being necessary to facilitate the subjugation of the U.S. under a 'higher authority'.

The actions of the Obama crew have been too consistent to be chalked up to incompetence. It is a long train of abuses and usurpations, pursuing invariably the same object, evincing a design to reduce us under absolute despotism.

Defender said...

The National Park Service plans to invoke eminent domain to take private land for a memorial to 9/11 Flight 93 so it can be completed by the 10th anniversary. NPS says negotiations are unsuccessful, BUT land owners say they have not been approached with offers. A member of the commission to build the monument resigned over the abusive plan.
Gettin' to be a habit, innit?

s said...

well there was once a bunch of guys who tried to take some land just outside Gettysburg. Though my sentiments were with them, they were unsuccessful. could we see a replay?