Wednesday, October 28, 2009

Will The Adverse Future Impact Of The Chrysler And GM Bankruptcies Be Obama's Lasting Legacy?

Mark Roe, a Harvard law professor, and David Skeel, a University of Pennsylvania law professor, reviewed the Chrysler expedited bankruptcy and found that the potential damage done to future large scale corporate reorganizations and bankruptcies from Obama's efforts to preserve the auto industry and the unions at the expense of creditors needs to be undone.

See their blog post, Assessing the Chrysler bankruptcy, and their research paper (free download).
Our overall conclusions are not favorable to the process and results. The Chrysler bankruptcy process used undesirable mechanisms that federal courts and Congress struggled for decades to suppress at the end of the 19th and first half of the 20th centuries, ultimately successfully. If the mechanisms are not firmly rejected, either explicitly or via judicial (or legislative) distinction or via a collective forgetting of the event among bankruptcy institutions, then future reorganizations in chapter 11 will be at risk, in ways that could potentially affect capital markets.
With Cap and Trade stalled in Congress, with health reform facing a Senate filibuster, with high unemployment and no near term job growth, with very few shovel ready projects and most of the stimulus monies still unspent, with indecision about Guantanamo detainees, Afghanistan and Iran, Obama's long term presidential legacy may very well be his weakening of US bankruptcy laws and the adverse effect on lending markets and non-financial creditors. And yet, in today's news, GMAC, a subsidiary bank of GM, is requesting more bailout funds of about $2.8 billion to $5.6 billion.

The President, using the power of his office and the cover of the financial crisis to protect his union constituency, undid a hundred years of progress of bankruptcy and reorganization process.

No comments:

Post a Comment