Chrysler, Fiat and Obama: Gutting The Rule of Law

May 13, 2009

The "rule of law" is a favorite notion of us conservatives: the belief that our country revolves around the legislation written and enacted, not on gut and instinct and sleights of hand.

The concept might not be immediately important to you car fans and shoppers out there, but it's very much a concern as the Chrysler bankruptcy spins in federal court. We all need to be concerned and worried that laws designed to protect the structure of bankruptcy are being flouted, even more so as General Motors approaches a day of reckoning of its own.

There's simply no precedent for President Barack Obama's heavy-handed intrusion into the legal bankruptcy process with Chrysler. His micromanagement has turned contract law on its head, and created a monster that will kill companies, argues George Mason University law professor Todd Zywicki in today's Wall Street Journal.

Obama's hardball tactics prior to the Chrysler Chapter 11 filing led to some astonishing bullying--using patriotism to shame creditors who had first legal rights to reclaiming a fraction of their investments as Chrysler spiraled toward bankruptcy. Obama's administration told the media that those creditors were not acting in the best interests of the country--and actively tried to circumvent the rights of those bondholders to push the UAW and the government ahead in the payout line.

It's a stunning turn of events, to be sure. Zywicki says it's also a "profound challenge to the rule of law." While the bondholders will get about 30 cents to the dollar for their good-faith investments in the company, the United Auto Workers will get 50 cents on the dollar toward their healthcare contributions. They're both contractual obligations, but by law, the creditors come first.

Not now. Zywicki says Obama's moves will result in a "sham sale" of Chrysler assets to Fiat--but more importantly, will disrupt the normal bankruptcy process that lets stakeholders have their say in the plan.

That's trouble for an economy already at a tipping point of government intervention. "By stepping over the bright line between the rule of law and the arbitrary behavior of men," Zywicki writes, "President Obama may have created a thousand new failing businesses."

Chrysler and the UAW may have gotten their bailout, but the consequences for the rule of law are troubling. As General Motors hurtles toward a potential Chapter 11 filing on May 31st, how much say will the President have in their reorganization--or in something as picayune as their advertising budgets?

It's a brave new world out there. A dangerous one, too.
[Wall Street Journal, sub. required]

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