May 06, 2009

"It was the big cop, Calahan, that did this to me. I have rights !! I have rights !!"

I think that's how the line went in Dirty Harry. That scene, where the serial killer is being wheeled into a hospital after having just been beat up, comes to mind when I hear the whining coming from the dissenting creditors in the Chrysler bankruptcy. As it turns out, the speculators are going to make out like bandits anyway (come to think of it, the Scorpio Killer hired a third party to beat him up), and now that the judge has all but validated the sale, telling the dissenters to put up or shut up by matching or bettering the deal made by Fiat, it's impossible to say that they're "getting screwed."

Lastly, arguments that this is somehow contra to precedent or some sacred analysis of holy bankruptcy text are forgetting two essential points: first, minority interests in a class get the short end of the stick all the time; and second, even if the sale were to be defeated, and Chrysler was forced to propose a Chapter 11 plan rather than a quickie sale, the speculators would likely have their secured liens stripped (ie, treated as unsecured debt), since the corporate assets are almost certainly insufficient to repay all the secured claimants. For the speculators to get more than what they are being offered right now, the bankruptcy would have to be converted to Chapter 7, and the assets of Chrysler liquidated. Filing a bankruptcy, then selling the company to a third party right off the bat, happens all the time, and its up to the legal system to determine whether its in the best interest of the company and its shareholders.

Liquidation of the company may, in the long run, be the optimal result. But with the Chapter 11 process only now beginning, our legal system is going to allow Chrysler some time to see if it can reorganize. Contrary to what many on the right may have thought, bankruptcy is not automatically a system designed to screw uppity workers and their pensions; it is a set of rules and procedures geared to allow people and companies a fresh start. As libertarian editor Matt Welch puts it, better to give the "controlled force of bankruptcy" a chance, and let Fiat try to sell Jeeps for awhile.

UPDATE [5/7]: Mickey Kaus responds, asking why it was necessary for the government to allegedly "strongarm" the creditors into accepting the sale to Fiat without letting the bankruptcy run its course and simply let the judge do the strongarming. Perhaps the best answer to that is that there is well and truly a new sheriff in town, one who is not going to bend over for the interests of Wall Street. Indeed, Presidents make decisions to intervene (or not intervene, which would have the same effect on the parties) in corporate reorganizing all the time, but usually, its the union and its worker that feel the pressure to surrender their position. The law hasn't changed, it's the scales of justice that are tipped differently.

With this President, any resolution that keeps the company afloat is going to be less-disadvantageous to the workers, and the major creditors (as opposed to the small-time speculators who are challenging the sale) saw the writing on the wall: either give up some of their position, or prepare to see the company liquidated, and their position completely wiped out. Quickly resolving the Chrysler situation allows the company to get back to selling cars quickly, and allows the creditors of the company a chance to recoup some of their losses. And since the judge has (so far) approved of the procedure to quickly sell the company to Fiat, any allegations of "strongarming" by the President should be viewed skeptically, even if "strongarming" was in and of itself a bad thing.


Anonymous said...

Valuable post, thanks. However, I don't think it's the right wing that sees bankruptcy as an opportunity to screw workers and their pensions. I think it is the Administration and the left wing that sees it that way. Hence their desire to avoid bankruptcy and put people first, no?

Anonymous said...

Minority interests are screwed all the time but not by a majority clearly vulnerable to government intimidation.

This is the US behaving like Japan - when the world sends capital to the US because its different.

Steve Smith said...

Is "US behaving like Japan" supposed to be a bad thing? Anything that makes the government the master, and capital the servant, is something that is long overdue in America.