Chrysler Bailout and Contract Law

Conservative commentators have been criticizing how President Obama handled the Chrysler bankruptcy, saying that because the Administration pushed the secured creditors to take less than the UAW, which was unsecured, the basic tenets of contract law were violated. If the Administration had actually forced the secured creditors into this position, by passing some new law or threatening to arrest them, I would completely agree with these commentators. Rule of law is an essential underpinning of the American system.

But Obama did not “force” the creditors to do anything; he simply applied leverage. This is what parties do in contentious business negotiations. Whether it’s a bankruptcy or unwinding a marketing partnership, when it gets ugly the businesspeople start deploying whatever leverage they have. In Obama’s case, he had two levers: 1) the bully pulpit of the presidency; and 2) the fact that without the UAW on board, Chrysler was worthless and the creditors would get nothing.

With his bully pulpit lever, Obama did indeed “browbeat” the creditors. But hey, this is hardball here, and there were billions of dollars at stake. Plus these are vulture funds…they are used to being insulted. With his second lever, Obama simply was playing the game of chicken that is usually played in a bankruptcy, and he won. The creditors were saying “give us what we want or we’ll take over the company” and Obama replied “take what we’re offering or we’ll give you the company.” The creditors blinked first; they knew that if they took over the company it would essentially disintegrate overnight, and they would be left with a bunch of factories nobody would buy.

I’m as big a supporter of the rule of law as anyone – I have long said that exporting law is more important than exporting democracy – but this is not a case of the government ignoring the law. Instead it’s a case of government playing by the same rules as business, but playing better, which is something the right wing ideologues just can’t handle. And lest you think I’m alone in this, here are a law professor and a private equity professional saying similar things.

Which isn’t to say that I am a blanket supporter of the auto bailouts, because I’m not. I would have been perfectly happy to see Chrysler shut down. But any criticism should be on the merits, not based on a spurious claim being advanced for political reasons.

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6 responses to “Chrysler Bailout and Contract Law

  1. I think that “bully pulpit” is a bit to soft of a word to describe what Obama used to coerce the firms involved. There were allegations of threats against the firms as well.

    When combined with the evidence that Obama’s regime will attempt to create new laws to punish people and firms who disagree with him, this goes beyond mere “hardball” negotiations.

    Of course Obama cut his political teeth in Chicago so this shouldn’t be surprising.

  2. “Obama’s regime”? regime?? Perhaps we can characterize the disastrous imperial presidency of the Cheney/Bush group as “regime” but I think at this point we have an administration – the Obama administration. And where is the evidence of new laws meant to “punish”?

  3. I’m with jonolan – when you have the power to promote judges, your ‘bully pulpit’ carries more weight than it should in bankruptcy court.

    Obama should not have supported, let alone advocated, a scenario where unsecured creditors came out better than secured ones.

    The precedent set will hurt commerce, even municipal debt issuers.

  4. I have to disagree. Considering that federal bankruptcy judges are appointed by appeals court judges, and have 14 year terms, I don’t think they are likely to bend to Obama’s pressure because of appointment worries.

    The only precedent this will set is that distressed debt investors will think twice before buying debt in companies where a unionized work force can completely tank the company, because unsecured or not, that work force has the leverage.

  5. I was thinking more of actions similar to the punitive and confiscatory taxes that they attempted to place on AIG bonus recipients.

    I was also thinking of Obama’s regime’s threats to use the White House Press Office and the MSM to villify anyone who refused to agree to Obama’s terms for the bankruptcies.

    And finally I was thinking of the power that his administration wields through the disbursement of TARP funds and/or shifts in the practices of the SCC and the Fed.

  6. zeusiswatching

    I think it would have been better for MOPAR to go down the tubes. These guys are dinosaurs who have done everything their power to not build competitive cars. I don’t think the mentality goes away with this bankruptcy. Remember, we bailed out Chrysler once before.

    I think Americans can and will build incredible non-petrol vehicles in the future. I worry that the future is actually hampered by letting the Big Three linger on. Apparently, the government is investing in companies that are trying to start up and build different cars.

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