Obama's Disruption Of Bankruptcy Rules And Priorities Will Be His Unfavorable Lasting Legacy

From The Wall Street Journal, "The Real Cost of the Auto Bailouts: The government's unnecessary disruption of the bankruptcy laws will do long-term damage to the economy." by David Skeel:

The claim that the bailouts were done at little cost is even more dubious. This side of the story rests on the observation that GM's success in selling a significant amount of stock, reducing the government's stake, and Chrysler's repayment of its loans, show that the direct costs to taxpayers may be lower than many originally feared. But this doesn't mean that taxpayers are off the hook. They are still likely to end up with a multibillion dollar bill—nearly $14 billion, according to current White House estimates.

But the $14 billion figure omits the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it's sold. By waiving this rule, the government saved GM at least $12 billion to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers' pockets.

The indirect costs may be the worst problem here. The car bailouts have sent the message that, if a politically important industry is in trouble, the government may step in, rearrange the existing creditors' normal priorities, and dictate the result it wants. Lenders will be very hesitant to extend credit under these conditions.

This will make it much harder, and much more costly, for a company in a politically sensitive industry to borrow money when it is in trouble. As a result, the government will face even more pressure to step in with a bailout in the future. In effect, the government is crowding out the ordinary credit markets.

Also, see my November 10, 2010 post, "Obama's Lasting Negative Legal Legacy: GM, Chrysler Bankruptcies" and my October 28, 2009 post, "Will The Adverse Future Impact Of The Chrysler And GM Bankruptcies Be Obama's Lasting Legacy?"