Okay, I admit it; I am a lawyer by training. As such, I have a certain amount of respect for the processes and procedures and protections that have been developed over the last 200 plus years of American jurisprudence. This body of work is anchored by a few key concepts that help the commercial world (in fact, our entire society) operate with some degree of certainty and standards, albeit imperfect. Among these key components is the sanctity of the written contract and the fairly bargained relationship between a lender and a borrower, particularly when the borrower agrees to provide the lender a security interest in property owned by the borrower. This security interest affords the lender "senior status" and in the case of default, allows the lender to liquidate the property and attempt to have the obligation paid off. This added level of risk mitigation generally makes the loan possible and in consequence, enables the lender to offer a lower cost of borrowing. For centuries (if one includes British common law, for example) this concept has been understood and followed. It is exceedingly difficult to imagine the spectacular growth of industries over the last two centuries without this. It's doubly difficult in the case of heavy manufacturing and other "capital intensive" businesses.
These time-honored laws and procedures are being overwhelmed, selectively but nevertheless, significantly. Chrysler, as one major example, has suffered through many years of losses, accumulating senior secured debt of over $6.9 billion dollars. Every single penny of that debt was fairly negotiated with their lender, agreed to by senior management and by extension, Chrysler's Board of Directors. Under the proposed Bankruptcy Court settlement currently working its way through the system, those senior secured lenders are being shown the door with a proportionally small payout and nary a parting gift. What makes it even more disturbing is that UNSECURED creditors (specifically the union who has significant "receivables" from Chrysler for health care funding and other obligations) would be given a majority control of the company in exchange for their unsecured position. This settlement, brokered by the Obama Administration, would effectively flip the secured/unsecured creditor relationship on its head.
When Chrysler filed for protection under Chapter 11 of the US Bankruptcy Code, all parties should have had the certainty that the laws and precedents developed within bankruptcy would be followed. Under Chapter 11, the Court tries to ensure maximum value of the filer, either through reorganization, liquidation or the sales of the business or its assets under Section 363 (which provides for an orderly sale of the business). My partners and I at Silverstone Advisors have been involved with numerous transactions where the Bankruptcy Code, overseen by a knowledgeable, fair-minded judge and assisted by professionals who are capable of creatively implementing the wishes of the Court, has enabled businesses to successfully emerge from bankruptcy while providing the highest degree of protection for those creditors who (in good faith) had leant the company funds to operate their business. It is never pretty to observe a company working through bankruptcy, but in most cases, the laws and certainties provided by our system somehow manage to make the most of a bad situation.
In particular, a Section 363 sale can be an exceptionally effective mechanism by which a bankrupted company may be sold to a third party. The 363 sale is designed to not only maximize the value of the asset, but to provide real incentives for the lead bidder (known as a "Stalking Horse") to take a risk and place a public bid on the assets of the company. The process is additionally designed to entice other bidders to enter into an auction process, all the while providing the Stalking Horse with protections and preferences for taking the risk of being the first bidder to come to the party. This process, when handled by the bankruptcy court and competent professionals has proven again and again to maximize the value of the company and create reasonable outcomes for the company's secured lenders, as well as other stakeholders.
Admittedly, a Section 363 sale may not have been feasible in the Chrysler case. But then again, how would we know? How do we know whether a 363 sale would not produce a better result for the entire Chrysler enterprise, in addition to those lenders who have a valid lien on certain plants, equipment and other property of Chrysler? In the current scenario, these creditors are being forced to write off the billions of dollars of loans as they stand by and watch the unsecured creditors being given up to 55% of the company. In fact, a small group of lenders who have shown the temerity to question this action and to seek the precedents of the bankruptcy court to be followed were recently labeled "un-American" and have recently withdrawn their opposition, citing the immense pressure put on them by the U.S. government.
I appreciate the logic that defines this as being "different" and I am aware of the large number of employees who have their jobs at stake. But this creates a dangerous precedent. If this pressure can be successfully applied here (and GM to follow?) and bankruptcy law and standards can be sidestepped, then what other cases and what other circumstances might be labeled as "special" by a part of the Executive Branch of our government? Isn't the Administration effectively making decisions that clearly belong within the Judicial Branch of the government?
Finally, there is a lot of talk these days about the "frozen" lending system and how banks are not willing to lend to borrowers in a fashion and an amount to enable our economy to get back on its feet and grow. In all this discussion, I have not heard any discussion of the chilling effect of the Chrysler situation. Ask yourself, if you were being asked to lend a large part of your assets to a company and knew that the rules for securing that loan and trying to ensure repayment now seem to be inherently controvertible and situational, would you take the risk?
The best course of action is to allow the longstanding precedents and standards developed by our court system of bankruptcy be administered. These precedents are best administered by a competent Bankruptcy Court and implemented by professionals being overseen by the Court, not by the Executive Branch with political as well as other motivations.