The aftershock of the recent Chrysler bankruptcy rulings has reinforced concerns among those that actually respect the rule of law and, more specifically, the established legal protections for creditor rights and private contracts. That the Obama administration was able to buffalo certain lending institutions (I’m talking about TARP beholden institutions such as Citigroup, Morgan Stanley, Goldman Sachs, and JPMorgan Chase, not the holdouts mentioned here) into a settlement of the Chrysler bankruptcy is not so shocking as the rationalization of this outcome offered by the Left. The common argument is that the federal government had a substantial tax payer stake in the outcome and therefore had the “right” to enter into the fray.
As with any rationalization of an indefensible position, the Left’s polemic rests on a fallacy, to wit, that the federal government should have even had a seat at the negotiating table. The federal government shouldn’t have a say in the negotiations for many reasons (not least of which is that they should have no money in the game to begin with), but chief among them is the poisonous effect this intervention will have on the creditworthiness of any borrower that has a union shop. Who in the world would make a senior secured loan to a unionized company after witnessing the treatment given said creditors in the Chrysler negotiations? There is no defense to the federal government’s intervention in Chrysler’s business other than political expediency and political favoritism, two principles that are anathema to the concept of private wealth creation and capitalism.
Megan McArdle nails it with this comment:
What particularly worries me is that it seems so unnecessary. I heard repeatedly from progressives, in the run-up to the bankruptcy case, that the holdouts were unreasonably holding out for a trivial improvement–about 500 million dollars. But if it was so trivial, why didn’t the government just put the extra money in, rather than jeopardizing confidence in the bankruptcy system–and the creditworthiness of a large swathe of unionized firms? $500 million is about the price of one cup of coffee per American, a trivial sum relative to the overall budget. This move has shown potential partners that government funds are dangerous, and potential lenders that union firms are risky bets; both have probably cost American citizens more than they saved. So why did the government risk so much for so little gain?
You know the answer, don’t you? Because they’re planning to do it again.
The Chrysler negotiations are now the archetype of the brave new world of Obama and American capitalism. Don’t think for a minute that this doesn’t have grave consequences for vital issues such as job creation, energy independence and credit decisions. Using a country’s banks for political favoritism is a corner of the international political economy that was historically the domain of despots. President Obama has signaled that his administration is clearly unconcerned about leading this nation down that road.