Bankruptcy, Obama, & the Rule of Law
May 15, 2009
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Posted by Michael S. Langston
There’s an article well worth reading at the Economist discussing the Obama’s administration flagrant dismissal of current bankruptcy laws (here).
…Bankruptcies involve dividing a shrunken pie. But not all claims are equal: some lenders provide cheaper funds to firms in return for a more secure claim over the assets should things go wrong. They rank above other stakeholders, including shareholders and employees. This principle is now being trashed…
..The Treasury has also put a gun to the heads of GM’s lenders. Unsecured creditors owed about $27 billion are being asked to accept a recovery rate of 5 cents, says Barclays Capital, whereas the health-care trust, which ranks equal to them, gets 50 cents as well as a big stake in the restructured firm. If creditors refuse to co-operate, the government will probably seek to squash them using the same fast-track legal process…
Since Obama, and his proponents, call him a Constitutional scholar I assume it would be nothing new to him to understand how in our history bankruptcy laws came to be.
During the time of the founding fathers, they left an oppressive country to find freedom. One of the key pieces of oppression they wanted to stamp out in the New World was debtor’s prison and debt inheritance; where one bad decision could affect generations of family members.
They learned by the errors of the Old Country, that not only did the old way overly favor the creditors, but it also slowed down investment and innovation.
It’s pretty easy and intuitive to understand why this would be. Anyone taking a loan today to start a new business knows the worst possible result will be bad credit for a limited time and potential seizure of assets to pay back creditors. This is obviously a lot less intimidating for entrepreneurs than the potential consequences in the Old Country freeing up more people to push for more success.
Creditors also know how to manage their risk based upon the current laws. For instance, secured creditors get first shot at monetary recover, lowering their risk, while unsecured creditors have a higher risk and are further down the line.
& all of this worked. The brilliance is not only in how & why the laws were fashioned over time, but also the consistency to which these laws were implemented.
In our own history, many success stories of pioneers in this or that industry had all been bankrupt at one time or another. Thomas Edison, Henry Ford, Benjamin Franklin, and many others, whose innovations we might have never have seen under old bankruptcy standards.
The founding fathers even found it so important, they codified the ability to enact uniform bankruptcy laws in Article One, Section Eight of the United States Constitution. While they did still hold to debtor’s prison for a little while, it was stamped out completely in mid 1800′s. (though today for various debts you can still be jailed, such as debts acquired through fraud or failing to pay child support)
Now we have POTUS playing politics with the rule of law. Ensuring money goes to unions before secured creditors, the same unions who are using that money to buy up assets of the companies they helped to bankrupt.
As has been a constant refrain of mine in this blog over the past few weeks (or is it 100 days?), when the ends justify the means, where does one stop.
Categories: Business, Economics, NGOs
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Tags: Business, Economics, Financial Regulations, NGOs, Obama Administration, Rule of Law, Unions
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