Thursday, May 14, 2009

Rule of law

As part of outsourced economic criticism, from Wednesday’s WSJ:

Chrysler and the Rule of Law
By TODD J. ZYWICKI

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.…

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 Chavez. But it would never happen here, right?

Until Chrysler.

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.

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.
Zywikci puts it more clearly than anyone else has. The US government has now introduced political risk into the enforcement of US contracts, where decades of legal precedent can be arbitrarily supplanted by the whim of those in power. The treatment of Chrysler’s lenders is the sort of thuggery we’d expect from Ch├ívez, Castro or the Chicago mob — not the POTUS.

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