As such, President Obama and his auto task force should respect the role of the bankruptcy court and recognize that its role is not to rubber stamp the administration’s plan to take over 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 General Motors bonds as individual investors or through their IRAs and 401(k)s.
The Administration’s reorganization plan, in which the government owns more than 70 percent of the stock will not serve taxpayers, middle-class investors or ultimately the American auto industry and its workers well. There is no reason why the taxpayer money outlayed to GM — a mistake of both the Bush and Obama administrations — justifies the Obama administration’s demand for such a large ownership stake for the government and the United Auto Workers. The Chrysler bailout of the 1980s, while a troubling precedent for government rescues of industries, was resolved with taxpayers reimbursed without any government ownership stake.
The government ownership is already leading to politicization of questions ranging from dealership closings to the making of “environmentally correct” cars. Such decisions being made by politicians and bureaucrats means that restoring the company’s profitability — and paying the taxpayers back — will take a back seat to the goals of constituencies the government favors.
But bankruptcy courts also have to look beyond GM to weigh how the treatment of bondholder contracts in this case will affect American credit markets in the future. Much is made of how 54 percent of bondholders apparently approve of the revised settlement. But this is well short of the 90 percent that was originally the goal of the Obama auto task force.
And bankruptcy courts, according to the Associated Press, traditionally only approve a Chapter 11 reorganization that has the approval of two-thirds of the claims for each class of bondholder. If courts cave to politicians’ whims and give bondholders less than they would receive under traditional bankruptcy precedents, the 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 GM case 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 GM emerges from this bankruptcy, but the degree to which contracts are honored in an impartial process.
Where have you gone, Judge Narragansett? (Brush up on your Atlas Shrugged!)