Respected Bankruptcy Law scholars mark Roe and David Skeel have just posted a new paper in which they sharply criticize the Chrysler bankruptcy:
Chrysler entered and exited bankruptcy in 42 days, making it one of the fastest major industrial bankruptcies in memory. It entered as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a pseudo sale of its main assets to a new government-funded entity. The unevenness of the compensation to prior creditors raised considerable concerns in capital markets, which we evaluate here. We conclude that the Chrysler bankruptcy cannot be understood as complying with good bankruptcy practice, that it resurrected discredited practices long thought interred in the 19th and early 20th century equity receiverships, and that its potential, if followed, for disrupting financial markets surrounding troubled companies in difficult economic times is more than small.
One of those points deserves special emphasis; namely, the unfairness of how the pain was allocated amongst stakeholders, with certain classes of creditors taking a disproportionately large hit compared to, say, the union. The bond markets will not soon forget the blatant government bias in this deal.