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Chrysler, Obama, and the Rule of Law
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Topic Started: May 13 2009, 03:39 AM (149 Views)
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George K
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May 13 2009, 03:39 AM
Post #1
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Chrysler and the Rule of Law
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The Founders put the contracts clause in the Constitution for a reason.
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. While the rest of the world in 1787 was governed by the whims of kings and dukes, the U.S. Constitution was established to circumscribe arbitrary government power. It would do so by establishing clear rules, equally applied to the powerful and the weak.
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 Chávez. But it would never happen here, right?
Until Chrysler.
The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact "uniform laws on the subject of bankruptcies."
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 jawboned browbeaten (sorry about that - GK) 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.
The U.S. government also wants to rush through what amounts to a sham sale of all of Chrysler's assets to Fiat. While speedy bankruptcy sales are not unheard of, they are usually reserved for situations involving a wasting or perishable asset (think of a truck of oranges) where delay might be fatal to the asset's, or in this case the company's, value. That's hardly the case with Chrysler. But in a Chapter 11 reorganization, creditors have the right to vote to approve or reject the plan. The Obama administration's asset-sale plan implements a de facto reorganization but denies to creditors the opportunity to vote on it.
By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?
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Mikhailoh
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May 13 2009, 04:09 AM
Post #2
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If you want trouble, find yourself a redhead
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Amen. Goes for AIG too.
'What I'm saying is that if the President does it, it's not illegal.' R.M. Nixon.
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Once in his life, every man is entitled to fall madly in love with a gorgeous redhead - Lucille Ball
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1hp
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May 13 2009, 07:47 AM
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With all the talk about going after persons from the last administration involved in declaring waterboarding as......well, whatever they declared it as, I wonder if Obama realises that there will be a time when he will no longer be President, and the next administration may treat him the same way, looking at actions he has taken and announcing investigations into their legalities.
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There are 10 kinds of people in this world, those that understand binary and................
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Nobody's Sock
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May 13 2009, 07:51 AM
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- 1hp
- May 13 2009, 07:47 AM
With all the talk about going after persons from the last administration involved in declaring waterboarding as......well, whatever they declared it as, I wonder if Obama realises that there will be a time when he will no longer be President, and the next administration may treat him the same way, looking at actions he has taken and announcing investigations into their legalities. I'm sure he hasn't the time to think 8 years into the future.
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