The effect of the Chrysler Bankruptcy

We have just seen the first major US car manufacturer enter a "structured bankruptcy" orchestrated by the federal government. While I support the bankruptcy for Chrysler since the private owners weren't committed enough to step up to the plate and put in their own capital, the whole issue raises a number of troubling concerns which I would like to address here.

1. What role, if any, does the federal government have in choosing the winners and losers in a free market economy?
2. Is it fair for the federal government to take sides in a dispute between bondholders, shareholders, and the employees of a company?
3. What right does the federal government have in committing taxpayer money to rescue a failing company by investing money in that company?
4. What gives the right to the federal government to make special accomodations for a foreign company to take ownership of a US company?

These questions have been played out in a number of different scenarios in the last 100 days, all of which point to a new activist government that is willing to bend the laws to achieve their goals.

What started out as a banking crisis that stopped the flow of credit to businesses and consumers has morphed into a blank check to do whatever the government decides is in their (Obama's) best interest. The initial response to the banking crisis from Hank Paulson and the Bush administration was to provide TARP funding to remove the toxic assets from the bank's balance sheets in order to free them to make loans. This was never done due to an argument that there wasn't enough funds available to cover the amount of bad assets ( a number which was never stated clearly). Well, some funds were dispersed, loans were made and now the banks want to repay the money to the treasury and they are reporting strong earnings in the first quarter. Obviously, if you can borrow money from the Treasury at 0 % interest and you loan it out at 6 %, you're bound to make money!! As if that was not bad enough, we have the Fed lending money to AIG to bail them out of credit default swaps that they underwrote for banks - foreign banks!! We have US taxpayer money going to Switzerland to bail out UBS for insurance policies written by AIG!!

No - The government is stepping beyond their authority to make decisions like this.

Next we have Obama taking the bully pulpit to castigate the bondholders of Chrysler for not taking pennies on the dollar for money lent to Chrysler while the government gives a better deal to the unions that put the auto industry in the mess they find themselves in! Bondholders are secured creditors with as much right to a return of capital as any other secured party. This is bending the bankruptcy laws without due process. We can only hope that the Trustee pays due attention to the laws of our country when he makes his decision.

No - The government cannot bend the laws to fit their purposes!

The government does have a need to support failing companies when their failure results in substantial job losses not only at that company but in the extended network of companies linked to them. These interventions should be limited to loans, not equity. The government does not have a proven record of good business management and this can only lead to politization of the operations of these companies.

No - Loan, don't own!!

The last point is needless to argue. Let the foreign entity take the risks of entering this business as the money will be repatriated to the foreign country.

If you feel the same way, please respond to this blog. We need to make our voices heard!!

Manufacturing Matters - especially in the USA!!!