Out of Control Policy Blog

Finally, Chrysler Bankruptcy

There is no question that free market actors royally messed up over the past few years, leading to the decline of many major companies in America. But no one ever said the free market meant everyone succeeds. And when a firm fails the free market has self corrective measures--with bankruptcy proceedings a part of that. After months of getting the process dragged on by Washington, Chrysler can finally go the way it should have from the first place... into a court room to sort out its future after to failing to run a good business.

The Wall Street Journal sums it up today:

"Chrysler's finances can now be restructured in a less political atmosphere in the New York courtroom of federal Judge Arthur Gonzalez. This is how the Chrysler collapse should have been worked out last December, when the auto maker first went looking for taxpayer cash. Treasury could have saved the $4 billion it lent the car maker at that time, to which we can now add another $8 billion that Mr. Obama promised yesterday to keep the company going."

Some of the lessons that should be learned here are: 1) that a chief problem with Washington getting involved in free enterprise is that it interjects political games where they are most destructive; 2) firms fail for a reason, and in the case of Chrysler it was the standard reason of bad business practices, which ultimately can not be corrected by a big loan; and 3) when we say, let the free market run its course, we don't mean let anarchy reign in the streets, we just mean let the system do its thing. After all, if bankruptcy were a nuclear blast on the car industry--like many claimed several months ago--then why is it okay now? It would have had the same effects in December as April, well, actually maybe better affects, without wasted taxpayer money.

Bankruptcy proceedings can be very orderly, and effective when done right. Now the key is will it be done right?

The White House has proposed a deal, worked out between Fiat, the Treasury Department, and the UAW, which would restructure the firm's ownership arrangement. But the deal offers a settlement to investors that they essentially rejected as too low earlier in April. The President wants creditors to work with him in a "spirit of shared sacrifice"--but they ask why? Sure they will take some sort of loss for investing in a poor company, but why take a greater cut than necessary in order to preserve Union power or failed leaders?

As the WSJ continues: "...let's hope Judge Gonzalez (in charge of the bankruptcy) ignores Michigan Representative John Dingell, who yesterday called the investors "vultures" and warned darkly that they "will now be dealt with accordingly in court." Someone should tell Mr. Dingell that the debt-holders aren't on trial in a bankruptcy proceeding."

The creditors who support the government's plan are the large banks already bailed out by the government. They are under the thumb (and trying to get away from) President Obama. They have to support it. The lenders who want the most they can get from a Chrysler asset sale in bankruptcy, instead of just 30 cents on the dollar, are teacher pension funds, retirees, and the like. Instead of supporting them, the government is (admittedly) playing political games, offering 55% ownership to the United Auto Workers union.

Anthony Randazzo is Director of Economic Research


« Highlighting Transit Innovations | Main | A Victory Against Cramdowns in… »

Comments to "Finally, Chrysler Bankruptcy":

Mira's Desk | May 4, 2009, 11:29am | #

Chrysler Files Bankruptcy - Assessing The Financial Carnage. Here is a very cogent legal analysis of where the Chrysler chips may fall. Looks like the Judge will have to determine if the deal has any sub rosa plots. http://pfx.me/KM

Napoli's Desk | May 4, 2009, 9:31pm | #

With Chrysler now in bankruptcy, our attention will turn to whether Obama’s promise of a short and surgical bankruptcy, coupled with an alliance agreement with Fiat, will ultimately be realized. http://pfx.me/lK

NOahZ | May 21, 2009, 5:37am | #

Bankruptcy is the most painful part in running up the business. The worst was, no matter how much you try to repel from it, it seems that situation doesn’t get any better. Unfortunately this is what happened to those, which were not able to cope up with the difficulty that the company had been going through. The GM dealer-closing list has over 1,000 dealerships on it slated to shut, as General Motors is drastically scaling back to get their house in order. The Chrysler dealerships closing list was also a long one and the company has filed for bankruptcy protection. Both companies received large low interest loans from the government, and began restructuring in order to return the companies to financial health and competitive status in the market. Dealers are lamenting the move, and experts say that nothing, including the GM dealer closing list, will solve GM's problems with needing debt relief.



Out of Control Policy Archives