Chrysler, the Law and Barack Obama

There is a bright yellow, plastic ribbon of crime tape that separates the rule of law from behavior that has been proscribed since the founding of the Republic. Sadly, the current Administration in Washington continues to look for ways to skirt that barrier. I'm talking about its efforts to nationalize key sectors of our economy--auto, finance and healthcare. Today's topic is Chrysler.

The Founders framed their Constitution in light of the political climate of England. That included such abuses as confiscation of property, impressment, unequal treatment under the law, and debtors prisons. For over 200 years the Constitution has insulated us from all that by replacing imperial fiat with the rule of law.

Article V of the Constitution contains a "contracts clause" which prohibits states from meddling in creditor-debtor relationships. The bankruptcy clause of the Constitution also directs the federal government to enact uniform laws dealing with bankruptcies under which debtors and creditors could be treated fairly. Which brings me to Chrysler.

The President by no other authority than his own has created a carve-out from the Constitution in the case of Chrysler. He's interfered with this legal process by sending his White House brown shirts out to browbeat Chrysler's senior lenders, who hold first priority on repayment, into accepting only 30% of what they're owed. On the other hand, the United Auto Workers union, a junior lender, will receive half of what it has lent to Chrysler.

The priorities of lenders is the bedrock of our bankruptcy system. It provides assurance that a lender who makes a risky loan has a reasonable expectation of fair repayment even if the debtor is required to reorganize through Chapter 11 of the Bankruptcy Code.

So we have two issues here: The first is that the President is now ignoring the law so that he can pick the winners and losers in his effort to remake the country in his image and likeness. And it's no coincidence the that the losers in this case are hedge funds, investment banks, and all those lending institutions which the President has blamed for the tanking of the economy. The winner is the UAW which supported candidate Obama in his run for the White House. Make of that what you will.

Todd Zywicki writes in today's Wall Street Journal about this forsaking of unpopular creditors in favor of those with more political clout.

The second issue is as unsettling. It's the drying up of credit for small businesses, risk takers and entrepreneurs. These are the folks that have traditionally built our country--the Thomas Edisons, the Bill Gateses, and yes, the Walter Chryslers.

Lending to a guy with a dream and a high school chemistry set in his garage is risky business. But investors and investment banks have always done that knowing that ultimately they'd be treated fairly under the law. But when the President of the United States, who four months ago took an oath to support and defend the Constitution, ignores the law that protection vanishes. Without it, who will lend money to those dreamers and rugged individualists who built the engine of our economy? Who?

Just thought you'd like to know.