Megan McArdle weighs in on the essentially lawless approach of the Obama administration to the Chrysler bailout:
For the record, I have no problem with whatever cramdown those debtholders--or any others--get in bankruptcy court. If the judge thinks that the reorganization can't be done without making the UAW basically whole, fine. I just think that the reorganization should be done under the well-established procedures of the bankruptcy court, not at the behest of an administration trying to reward its supporters.
It's all very well to say that most of the senior lenders are going along, but of course, the leading senior lenders are doing this because the administration has them over a barrel. I think most of the people enthusing about this actually recognize that in other countries, when the government uses the banking system as a slush fund to reward its constituencies, this generally turns out badly--and makes the banking system a lot more frail.
Nor will it fly to claim that the administration's threats--and note that Perella Weinberg has most carefully not denied that they were threatened--are just standard jawboning. Standard jawboning does not involve the White House bloody press corps. It is true that DIP financiers often get to demand serious concessions from creditors, but those creditors are limited by what those creditors would get out of a recession, and are aimed at either maximizing enterprise value, or maximizing the likelihood that the loan will be repaid. This deal does neither. ...The administration is beating up the creditors because a) it wants to give the UAW a much better deal than they'd get in liquidation and b) they'd like someone else to pay for it. I recognize that the law is always kind of messy, but as far as I know, this kind of blatant political intervention between debt claims is unprecedented, and worse, it's a dress rehearsal for doing the same thing at GM. I don't think this is good for the rule of law, I'm pretty sure it will be bad for capital markets, and I'm nearly positive it's going to make it hard for any heavily unionized company to get substantial capital for the next decade.
Larry Ribstein raises a good question:
Chrysler, which has managed to lose money in every possible configuration so far, has now been pushed by the government to find a new one -- a partnership between a union and an Italian auto company. The deal the Administration is pushing calls for the secured creditors to take a two thirds haircut while the union gets fifty percent value. As the WSJ notes, "if the current plan is pushed through, then good luck to any unionized firm trying to raise secured debt on decent terms in the future." Nobody seems to be asking what customers will pay for the products of this so-called company.
The real irony here is that a lot of the secured creditors are institutional investors, including pension funds and mutual funds held by American workers, who are getting screwed on their retirement so that the UAW can save as much of the gold-plating on its contracts as possible.
