As boring as it may seem to wade through the legalese lingo involved, the proceedings over the Chrysler bankruptcy are extremely interesting. However, the issue at hand is not so much to do with Chrysler itself, but rather the precedent setting effects the rulings will have for other soon to be bankrupted companies over the next few years.
The ruling will have broad implications for the equity and corporate bond markets, as previously assumed claims to assets may be juggled in favor of populist politicking. But I would also argue that this case has implications for the US in general, as the sanctity of contract law takes a backseat. One of the defining characteristics of a modern economy in comparison with a banana republic are its adherence to contract laws and guarantees of private property.
That is what is at stake here.
Steve Jakubowski does a great job on his blog in outlining the details of this and some of the previous precedent setting cases that will be contributing to this present day situation.
Chrysler is owned by a variety of different classes of investors, all of whom have different places in line in terms of priority in the event of a liquidation. Those who are at the bottom of this structure are obviously trying to prevent liquidation altogether and instead push for a type of reorganization in which they would still have a claim if the company were to ever recover. Those who are at the top of the structure are trying to push a full-scale liquidation through as fast as possible in order to protect the value of the assets that are rapidly losing value as time wears on (things like the R&D department or the brand name). There are also the employees and suppliers in the middle of all this, fighting for their pensions and accounts receivables that Chrysler owes them. And let's not forget the US Treasury who took a stake in the company a few months ago.
The Obama Administration is using its clout in the process to demand a higher payout to the unionized workers and for itself than they should otherwise be entitled to. This is obviously upsetting the senior secured lenders and others who are higher up in the capital structure but are being brushed aside for political purposes.
As mentioned before, it is the sanctity of contract law that is of issue here. If this is allowed to occur, there could be a stampede out of senior corporate debt for fear of not being honored in bankruptcy court to their rightful claims. The subsequent rise in the cost of obtaining financing in such an environment would have the additional effect of expediting their own bankruptcies.
What makes this seem acceptable to many is that in most cases the senior preferred holders are hedge funds - not exactly the most popular bunch right now. As much as it may seem appropriate to stick it to these overpaid, greedy and often incompetent elite class, it should be remembered that "two wrongs does not make a right." If the individual fund managers, bankers and the like can be found guilty of fraud, then they should be convicted of it and put in prison where they belong. Putting political pressure on them via selective enforcement of contract laws could have very grave long-term consequences for the international perception of safety in the US markets.
It should also be remembered that in many cases, investors in hedge funds are pension funds themselves. So in order to satisfy the demands of the auto unions' pensions being spared, the Administration is indirectly punishing other pensioners. Such political favoritism could prove damaging in the long-term.
Contracts and the rule of law need to be upheld. The loss of confidence that could result from selective enforcement of laws could further cripple the already shaky corporate bond market and accelerate a crisis in pension funds.
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