Saturday, May 2, 2009


The administration's support for a reorganization plan for Chrysler that only pays senior creditors 30 cents on the dollar has provoked a certain amount of ranting from the right:

Which brings us to the real question, which is, when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line? Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.

I find it unconvincing. Without government assistance Chrysler would be liquidated. The government can favor junior creditors with its assistance as long as the senior creditors are left no worse off than they would be with liquidation. If there is a plausible case that the senior creditors could expect to get substantially more than 30 cents on the dollar from liquidation I would like to see it. Otherwise it appears to me they are just trying to use their power to obstruct things to extract a higher price from a government which is reluctant to let Chrysler be liquidated.

On the other hand the administration's claims that the junior creditors have made sacrifices that the senior creditors should share are also unconvincing. The junior creditors aren't sacrificing anything relative to what they would get in liquidation if the government walked away which is nothing. So this is not a reason for the senior creditors to accept less than liquidation value.

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