Yesterday afternoon, Justice Ruth Bader Ginsberg issued a temporary stay against the impending sale of Chrysler to Italian auto maker Fiat. Now, this may seem like an anti-free market move and therefore I should be against this, right? Well, no, it’s actually not and I’m glad she did it.
You see, the way Chrysler’s bankruptcy was structured, the UAW would get somewhere in the neighborhood of 87% of their investment back, while the bond holders would get more along the lines of 29% despite the fact that bankruptcy law says the bond holders get paid back first. These bond holders are the “senior” debt, while the UAW is more junior.
Of course, President Obama promised us change we could count on. Unfortunately, it’s the same old politics. After all, bond holders didn’t get him elected, but the UAW sure did. As a result, bankruptcy law has been ignored in order to give the UAW more than what the law actually says they should get. So, a couple of Indiana pension funds took issue since they hold bonds and are getting screwed.
Why is this a Supreme Court issue? Well, there’s that whole “equal protection” thing that’s being ignored here. Equal protection means that everyone is equal. A bond holder is a bond holder. The law says that senior creditors (like the pension funds in Indiana) get paid first. This has happened in many other bankruptcies in the past, but it’s not happening in the case of Chrysler so these bond holders are clearly not getting equal protection under the law, wouldn’t you say?
When you look at the broader economic issues, the lack of uniform enforcement of bankruptcy laws may cause people to not invest in bonds, which are really just loans. Without lending to businesses, many companies will shut down, the exact thing that President Obama claims he wants to avoid.
Now, in all fairness, there is a chance that the deal with Fiat could go belly up as a result of a Supreme Court ruling, and could force Chrysler into liquidation. To many, this would be a death knell, but I’m not so sure. We currently have three domestic auto makers which are generally inefficient and non responsive to market changes. Perhaps through liquidation, we could end up with a half dozen auto makers which would increase competition and drive each other to be more agile to market demands.
Unfortunately, we’ve been told by the Administration that we can’t let Chrysler or GM fail…but we were told we couldn’t let them go into bankruptcy either, and yet where are they both right now?
[...] I wrote about how many ways this was wrong and I was genuinely hopeful that SCOTUS would uphold the rule of [...]