Chrysler and the rule of law

The Obama Administration's handling of the Chrysler mess is truly appalling. When a company goes bankrupt a line of people form to get their chunk of the company in the hope that they can sell it or put it to more productive uses. At the front of this line as the "secured" creditors -- those creditors that invested in the company with the understanding that they would get a piece of it should it go under.

The Obama Administration has turned this on its head, and is ladling out pieces of the company on an artibrary basis. And when I say arbitrary, I mean politically connected, given that unions are receiving 50 cents on the dollar being junior creditors while the secured creditors are only getting 30. While this by itself is sufficient for real anger at the way the administration is riding roughshod over the rule of law, the real tragedy is the knock-on effects. As Todd Zywicki points out:

By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?

The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government's threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming.

When words no longer mean what they say and contracts are not honored we all suffer.

Update: It's a similar story with GM. All this hope and change is really getting me down.