The Government is stepping in to rig the Chrysler bankruptcy in a manner that, in effect, violates the absolute priority rule (APR). Article here. This rule dictates who gets paid, and in what order, when a company files Ch11.
Deviations from APR are in fact common when a lower ranked claimant is able to extract a concession from a higher claimant, but usually these are matters that occur between two private groups. By dictating the deviation in favor of the auto workers union, the Government is, in effective authorizing a wealth transfer from the bond holders to the union. Had the bond holders known that this was likely, they would have probably not lent money on the terms they did.
Going forward, this is bad policy, because any rational bond holder will be reluctant to lend to a large unionized company because of the risk that their claim will get trashed by the Government in the event of bankruptcy. For example, who is going to lend to GM in the future?
HT: My friend Jeff.
This is a very, very bad precedent. When the federal government starts intervening in private contracts to obtain an outcome that is politically desirable, then the entire system is in danger. The sanctity of contracts and their independence from gov. meddling is one of the cornerstones of the free market system.
ReplyDeleteWell said.
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