Monday, June 8, 2009

Judge Ye Not Chrysler, Lest GM Also Be Judged


Justice Judith Bader Ginsburg issued a writ today, stalling the sale of major assets by Chrysler to Fiat. This writ was issued based on a case brought before The Court by a group of pension and construction funds in Indiana who stand to lose millions of dollars from lost investment in Chrysler secured bonds (or loans).  
Normally such secured credit holders are the first to be paid off in bankruptcy proceedings, but in the case of Chrysler, these bond holders were in fact placed at the end of the line (or not in the line at all). The interesting part about the action brought on behalf of these pensions funds is the two-prong attack:  

1. Why were normal bankruptcy procedures bypassed in this situation by the lower courts, and was it do due to improper pressure brought to bear by the government?
2. The funds used by the federal government to prop up Chrysler prior to bankruptcy and the reason that the federal government has had so much to say about how reorganization would work were taken from the TARP funds.  

For those of you who can't remember all the way back to the last months of the Bush Administration, TARP funds were originally designed to buy toxic assets from banks (hence the name Toxic Asset Relief Program). While actually never used to buy any toxic assets, the funds were generally understood to be used for the bailout of the banking industry. Congress, recognized that TARP funds might not be able to be used for bailing out automobile makers however when that situation appear imminent, and tried to get a separate bailout package passed for that purpose. They were unsuccessful in doing so. 

Ignoring the legislative defeat however, the Administration at the time simply decided to take the money from TARP anyway. Since the fund had no real Congressional oversight in place, they were able to apply it where and how they saw fit. If the Supreme Court now rules that TARP funds were used improperly for one bailout, then obviously they would have been used improperly for both. 

If this turns out to be the case, how will both companies give back money that has already been spent to a government that doesn't want it? An equally interesting part of this is case is not just what happens to these bond holder pension funds and to Chrysler as a result, but what impact this could have on the bankruptcy re-emergence of General Motors, whose bond holders were likewise given short shift when asset reallocation was performed and approved. Not only could this case re-establish the rule of law where these auto bankruptcies are concerned, it could also prove a serious roadblock to the Obama Administration's continued attempts to take oversight control of operation and reorganization of private sector companies. (Can you say medical insurance?)  

We will all be waiting and watching with great interest ...  

Update:

The Court turned down hearing the petition and more's the pity. There seems to be no brakes on this runaway train of government. 

6 comments:

Hooda Thunkit (a.k.a. Dave Zawodny) said...

Tim,

If I were (or playing) an accountant with management/oversight of this government boondoggle, I would HAVE to throw up my hands and walk away muttering to myself...

The thing is that, as I used to understand bonds, not only were the bondholders first in line, but they were guaranteed TOTAL repayment before anybody else received was able to expect to see any money.

But with this administration in charge, all of this is being rewritten so that no one will likely ever expect bonds to be a sure and safe investment. Just a little more undermining of America's former confidence in our own markets.

It also widens up what is now classified as a junk bond to include ALL bonds...

Great job Mr. "O" and Co.

Tim Higgins said...

Dave,

What is at stake here, and I believe that is why the Supremes are likely to take up the case, is the very future of the market. Who will invest in the market if legal guarantees mean nothing to a national leader acting little better than a third world dictator.

Thank the Founders that such checks and balances are built into the system, and let us hope that the rule of law will rule once again.

Winky Twinky said...

Wow... I wasn't aware of some of the details you've outlined in this post. Always a learning experience, TH... So, let's now see indeed if the checks and balances haven't yet been too muddied up with so called "politically correct" politics...

Tim Higgins said...

WT,

I believe that the real question is whether the Supremes are willing to wade into this mess. If they take it up, will they have the guts to rule on this case based on the Constitution (their job, by the way).

If they do, I have a feeling that the current Administration is going to be wearing a lot of chicken embryo on the faces.

Winky Twinky said...

Yes indeed.....and I really hope that happens....

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