Judicial Mistake Favor Government

Judicial Error
By INVESTOR'S BUSINESS DAILY |
The Law: The Supreme Court's decision Tuesday to lift a bondholder stay in the Chrysler bankruptcy fails to grasp the value of legality in markets. It strengthens the hand of government but weakens the rule of law.
Chrysler's bondholders, who poured $6.9 billion into Chrysler coffers, now find themselves on the wrong side of the Obama administration's bankruptcy restructuring.
It's an outrage that undermines the very foundation of why bond markets exist at all.
Three Indiana pension groups did try to stop the feds' free-form bankruptcy at the Supreme Court Tuesday. But their case was inexplicably dismissed, the court saying they hadn't made a sufficient case to rule. That's a shame, because the law is clear: Bondholders' claims must be satisfied first when a company goes belly up.
Some think the Court worried about opening up a can of worms with other investor claims if they gave this one the time of day.
But bankruptcy liquidations have been part of the financial landscape since the 17th century in the Netherlands, where the idea of orderly restructuring came to the fore after the tulip mania of 1637.
Precedent was set from those days. However, it wasn't followed when Chrysler went bankrupt last April.
Instead of paying bondholders first, the cream of Chrysler's assets was skimmed up and handed off to Fiat in a deal brokered by government, its power derived from bailout cash, questionably so.
The Italian company formed a new debt-free company of Chrysler's remains in exchange for a possible 35% ownership stake, with taxpayer money letting U.S. and Canadian governments take 20% and the United Auto Workers Union 55%.
All Chrysler's bondholders were left with was the remaining shell of Chrysler LLC, along with all the product liability claims, outdated plants and legacy costs, meaning 29 cents on the dollar. The UAW glided off to the new debt-free firm and sacrificed nothing. It shows political clout matters more than rightful claims.
"There was a time when we would have called this a scandal," wrote former House Speaker Newt Gingrich in an e-mail. He points out the UAW contributed $4 million dollars to Obama's campaign in 2008, and $24 million to Democratic candidates since 2000.
He's right. This is little more than a socialist wealth redistribution scheme that rewards political cronies at the expense of others.
More than robbing the rich to give to the poor, it takes from the politically unconnected to give to the politically connected.
Contrary to stereotype, most bondholders aren't millionaires like Thurston Howell III, clipping coupons and living the high life. No, they're cops and teachers with pensions in places like Indiana who must now subsidize autoworkers from their own pockets.
The Court was too smart to call its decision a legal ruling, which would have rendered all bondholder contracts meaningless. But it damaged bond markets nevertheless by failing to address the essential issue around rule of law.
This undermines the reason for buying a bond at all, accepting lower returns in exchange for legal guarantees. That in turn will reduce the willingness to buy bonds.
It took 100 years for the U.S. to democratize its credit markets so that small investors and fat cats alike could buy bonds. Stiffing bondholders raises a red flag. Will government, not the savings of average Americans, be the main source of capital in the future?