What was the judicial rationale for letting Obama circumvent the Bankruptcy Code, in re General Motors?
As I recall, the bondholders in the GM bankruptcy got subordinated to union pension obligations, and that this was upheld by at least one court. But I can't find if this ever made it to the Supreme Court and, if so, what the rationale was.
Does anybody know? I can find allusions to it on Ricochet, but nothing definitive or final.
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Answer by Big Green
Just to add some more info on the GM bondholder situation that Zywicki glosses over (he spends more time on the Chrysler creditors because it was more egregious). The bondholders in GM were not subordinated per se, they were treated as the same class but received a smaller recovery than the UAW unsecured obligations (which were retiree healthcare liabilities, not pension obligations). In "normal" bankruptcy law all creditors in the same class are to be treated equally...that is the whole point of sorting creditors by class.
The main reason given for this was effectively that the company needed workers (UAW) to function post-bankruptcy but didn't "need" bondholders. This argument was pretty weak since although the company needed workers, they didn't necessarily need UAW represented workers. Further, the UAW would have most certainly agreed to a lower and more equitable recovery given the set of alternatives.
Another argument that was made is along the lines of your point #3 above. The government argued that the bondholders would receive much less in a liquidation (the only other alternative stated at the time). Now this is most certainly true but the UAW would have received much less as well. The government basically bullied them into unequal treatment.
If I recall correctly, this was challenged and a court supported the company's/government's plan (i.e. unequal treatment of creditors in the same class) and the bondholders felt further challenges would be futile.
If you want to see some more egregious stuff on this, research how the IRS/government allowed GM to keep all of its net operating losses (NOLs) post-bankruptcy despite the cancellation of debt income and 363 sale. This has never happened before in a bankruptcy proceeding that I am aware of and was basically a $10 billion giveaway to the company so the UAW's equity in the company would be worth more.
Lots of layers to this onion...hope this helps.
Scarlet Pimpernel: I remember speaking with a bankruptcy attorney about this who said they were following a legal, but sedom used part of our bankruptcy laws. I don't recall more than that. I might be that the scandal is what's legal.
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- · March 7, 2012 at 5:38pm
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Answer by Ricipedian
It sounds like there were a combination of reasons. As near as I can figure [1]:
1. The Obama Administration made the GM restructuring look like a sale, in order to make the rules more favorable. This kind of shenanigans was supposedly outlawed in 1978.
2. Some of the bond holders were financial institutions that were benefiting from TARP, so they weren't in a position to risk the wrath of their governmental benefactors by objecting.
At first, the fact that the companies' creditors (and especially Chrysler's creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler's secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders' acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.
Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly. [1]
3. It became a fait accompli. GM could argue that the Obama Administration wouldn't do the deal unless it rewarded its political allies at the UAW, making liquidation the only alternative.
Sources
- Todd Zywicki, "The Auto Bailout and the Rule of Law," National Affairs, Spring 2011. http://www.nationalaffairs.com/publications/detail/the-auto-bailout-and-the-rule-of-law
Ricipedian: Yes, I know. I answered my own question.
I'd still be interested in Prof. Epstein's take on this whole fiasco.
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- · March 5, 2012 at 9:37pm
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Ricipedian: I discovered this source that suggests it's a dead issue, as of June 30, 2009.
http://www.americanthinker.com/2009/06/the_gm_bankruptcy_and_the_supr.html
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