Friday, May 15, 2009

The Founders Put the Contract Clause in the Constitution for a Reason

Chrysler and the rule of law:

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.

Read the whole thing.

(HT Josh Wright)

1 comment:

thinking said...

First, what is this vague assertion that these creditors were "browbeaten" by the President. What exactly does that mean? What evidence is there for that? And if someone indeed accepts less in any negotiation, then, hey, that's business. That's not against the law...if creditors felt they had constitutional rights to be upheld they have every right to take it to court, and I'm sure the large dollar creditors would have no reservation doing so if they believed they had a case.

As for the UAW and the employees of these autoworkers...well it doesn't surprise me that the WSJ finds another way to try to bash the unions.

The unions have been the ones making the most concessions these last few years for the automakers, yet they always get bashed by conservatives.

The unions didn't make the wrong decisions concerning product mix and marketing, and certainly the auto workers have never displayed the level of incompetence of people like the former CEO of GM.

As one auto mechanic put it:
"Who makes key decisions that ultimately decide whether a company survives. It's the executives, the same folks who were content to keep building gas guzzling big trucks and SUVs while practically ceding the core midsize and small vehicle markets to import brands. These are the same people who have had 30 years to win back the confidence of American consumers who believe, often rightly so, that import models offer far more in the way of quality and reliability."

We need to repair the middle class in this economy, and unions are a part of that. It's amazing to me that publications like the WSJ have spent far more time and energy bashing unions than criticizing the vastly overpaid executives who have made wrong decision after wrong decision.

Let's also remember that many of the competitors that are so respected...for instance, the Japanese auto makers, have enjoyed for years generous support from their the way of providing healthcare to their workers, subsidizing some of their research and development, etc.

If American autoworkers enjoyed the same govt benefits that Japanese autoworkers did, then the American companies wouldn't be in such financial trouble, nor would the unions be needed as much.