Congratulations on the Chrysler Bankruptcy

by Odysseas Papadimitriou on May 1, 2009

ChryslerChrysler has been in deep financial trouble for months and the President has been trying to save it.  In order to keep the iconic American company afloat, President Obama had asked that various groups make concessions.  First through the government bailout, he asked tax payers to make concessions.  We were willing.  Second he asked the banks to whom Chrysler owes money to make concessions; they would have to forgive the majority of the loans awarded.  They were willing.  Then he asked the auto workers themselves to make concessions; for Chrysler to stay afloat they would have to accept pay cuts and a restructuring of employee benefits.  They were willing.  The hope was that all of these concessions would make the company attractive to Fiat who would then swoop in and save Chrysler from economic oblivion.  It was this plan that had ultimately guided the government’s attempt to rescue Chrysler.

Unfortunately, Chrysler also owed money to hedge funds who were also asked to make concessions; they were not willing.  Because of these hedge funds, Chrysler is now going into what is called either surgical or pre-packaged bankruptcy:  bankruptcy in which the government steps in after the debts have been sorted out and provides funding to allow the company to emerge in shape to continue doing business.  By going into pre-packaged bankruptcy, Chrysler and the U.S. government are basically forcing the hand of the hedge fund investors who would not play ball.  They will have to get in line with Chrysler’s other creditors.

We applaud the government’s new plan for Chrysler because it is fair.  The government’s previous bailouts was, simply put, unfair.  It left some people holding the bag for Chrysler (banks, tax payers, and employees for instance), just as previous plans had let some people holding the bag for AIG, Citigroup, and Bank of America.  These plans have let others get away without taking economic damage from these collapsing giants.  Pre-packaged bankruptcy makes everyone take responsibility for the repercussions of Chrysler’s failure.

We hope that this new method of dealing with failing companies that present a systemic risk to the economy becomes the standard for government aid in the future and we would have liked to have seen more surgical bankruptcies in the past, obviously, with other companies which the government is now keeping insolvent.  When these companies are unable to fail, they are expected to keep paying all their debts even though some of these debts may be to companies whose livelihood is not necessary to the health of the national economy.  For example, if AIG owes money to five savvy individual investors that had bought Credit Dafault Swaps from AIG, surgical bankruptcy keeps them from getting paid since they do not represent a systemic risk to the entire economy.  It also keeps the company from paying out American taxpayer dollars to German banks, damaging our economy here so as to heal their economy there.  Surgical bankruptcy makes sure that a bailed out company survives without having to blindly pay everyone that is owed money by that company.

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