public policy

Lawyers. They get everywhere. I read recently that about 2% of our GDP is consumed by the legal system in one way or another. And now Chrysler’s survival has been thrown into doubt by the claims of a few Indiana based pension funds who are asking the bankruptcy court to void the government mediated sale of Chrysler assets to Fiat. The reason? Under the current deal those funds get about 29 cents on the dollar. They think they should get more.

So they appealed the original court decision and have pushed the case all the way to the Supreme Court. We now await that court’s opinion.

Meanwhile Chrysler continues to bleed cash at a prodigious rate. Presumably that will diminish it asset value were the court to decide that the current deal needs replacing. The funds are also protesting the deal’s inherent legality by arguing that the government’s intervention is unconstitutional: the bailout money being used was set aside by Congress for the financial industry not the auto industry, so there was no legislation providing the money that the government is using.

So public policy will be determined by the courts, not by policy makers. Or at least that’s the potential.

As we wait while the lawyers slow everything down we should keep a couple of salient facts in our minds:

• Chrysler is losing about $100 million a day. So every day counts.
• The funds are hardly long term investors who stand to lose big bucks. They bought their debt at 43 cents on the dollar last July. They knew Chrysler was in dire shape. They are speculators not investors. Quite why pension funds are speculating I don’t know, but I would guess they are trying to bolster what would otherwise be bad returns by bottom fishing for junk rated debt.

The funds have a point however. The Chrysler deal involves a huge amount of strong arming by the government to get the creditors into line with the public interest. Normal bankruptcy procedures have been short circuited. The creditors, naturally, are taking a very narrow view: they would prefer that Chrysler goes out of business and that its assets are liquidated. Their brief to the court says as much: they argue, explicitly, that defending normal bankruptcy process is more important than saving Chrysler. This is as if every lawyer in the land doesn’t look for ways to bend the law profitably for their clients. But this is a nation of laws. The rule of law matters. So we are supposed to be pleased that these funds are defending us from the marauding tendencies of ‘big’ government. It is brave souls like these Indiana lawyers who form the last redoubt against rampant socialism. Or at least that’s want us to believe.

I have no allegiance to Chrysler, or to GM for that matter, so I am agnostic as to whether it ‘should’ be saved. But I do see the merit in defending thousands of jobs while we are in the depths of a terrible recession. There is a very clear public virtue in forcing through a rapid bankruptcy. So I can see why the government would want to bend the law in its favor. And, given the length of time legislation takes, I can also see that there very few alternatives. Let’s face it: if the current deal fails because of this legal action then it is almost certain that Chrysler is liquidated. Under those circumstances it is highly probable that the funds will receive less than the 29 cents on the dollar they are now being offered. Plus all those jobs will be wiped out.

Perhaps the lawyers whose fees will not doubt be secure under any circumstance should be subject to the same pressures as Chrysler’s employees. And I wonder if the teachers and police officers whose pensions comprise the funds are aware of: (a) the investment strategy of their funds that led to the purchase of what was, effectively, junk bond debt; and (b) the consequences for the workers whose jobs are being risked for about 14 cents on the dollar.

But let’s not be too harsh on the lawyers: they have to make a living too.