Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
D.C., June 3, 2009—Kudos to the
judges on the Second Circuit U.S. Court of Appeals for putting a stay on the
Obama administration’s nationalization scheme for the bankruptcy sale of
Chrysler LLC. Kudos also to Indiana
state Treasurer Richard Mourdock for standing up for the middle-income
teachers and police officers in the state pension funds and making sure that
contracts affecting their retirement savings are respected.
When President Obama announced the Supreme Court
nomination of Sonia Sotomayor, who coincidentally is an appeals court judge on
the Second Circuit, he praised judicial qualities that are directly relevant to
the courts overseeing the bankruptcies of Chrysler and General Motors. The
president said that the qualities he most respected in judges were, “a
commitment to impartial justice, a respect for precedent, and a determination
to faithfully apply the law to the facts at hand,” as well as “an understanding
of how the world works and how ordinary people live.”
As such, President Obama and his auto task force should
respect the role of the bankruptcy courts and recognize that their role is
not to rubber stamp the administration’s plan to take over Chrysler and GM, but
to apply bankruptcy precedents and faithfully apply the law to the facts at
hand, with an understanding of how contracts work in the real world and of the “ordinary
people” who own the car companies’ debt securities as
individual investors or through their IRAs and 401(k)s.
The bankruptcy judges also need to look beyond the
individual circumstances of Chrysler and GM to weigh how the
treatment of creditor contracts in these cases will affect American credit
markets in the future. If courts cave to politicians’ whims and give secured
creditors and bondholders less than they would receive under traditional
bankruptcy precedents, our credit markets will suffer further damage as lenders
and investors will be less willing to put their capital at risk in companies
whose contracts could be abrogated at politicians’ demand.
Bankruptcy is a not an executive but a judicial function, and judges in the car
companies’ cases should take as much time as they need to weigh the
competing interests and ensure an equitable outcome. The measure of success
should not be how fast Chrysler and GM emerge from this bankruptcy, but the
degree to which contracts are honored in an impartial process.
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