Daniel Howes

In Supreme Court, Chrysler bankruptcy paves new legal road

It doesn't take a law degree to understand why the fate of Chrysler LLC and its ostensibly life-saving deal with Fiat SpA of Italy now rests with the U.S. Supreme Court.

We're making new law here, this Obama administration-driven attempt to speed insolvent automakers through bankruptcy court and, at the same time, to unilaterally rearrange the order of creditors, their status and what -- if anything -- they stand to recoup from the process.

The relevant facts: Chrysler's bankruptcy, barely five weeks old, hinges on delivering more value and more of the company to such unsecured creditors as the United Auto Workers at the expense of secured creditors like three Indiana pension funds and similar bondholders.

Whatever the wisdom of investing public pension money in the dodgy future of Chrysler, the Indiana funds' managers invested in bonds secured by the assets of the company -- meaning they would be at the front of the line for repayment should Chrysler go bankrupt. But they aren't in the Obama workout, which is why they're suing despite enormous political pressure to swallow their losses gladly and shut up.

"By refusing to make the relatively small sacrifices that would avert a calamity," Rep. John Dingell, D-Dearborn, said in a statement, "the pension funds will instead create a great catastrophe, which is the same kind of short-sighted thinking that got us into the Great Depression."

The implications of how the Supremes rule -- if they decide to review the case -- could be enormous for business in America. Here the promise and fact of an economy governed by the rule of law has been a cornerstone of commerce, distinguishing us from the arbitrary predations of political strongmen, demagogues and populist backlash.

This is a crossroads. Not just for Chrysler, likely to collapse into liquidation if its alliance with Fiat is not consummated by June 15 or so. But for the credibility -- legality, even -- of the Obama auto task force's effort to steer two of Detroit's three automakers through bankruptcy and onto a road to revival.

Team Obama should welcome a review by the Supreme Court. Otherwise, its heavy-handed auto bailouts risk being de-legitimized by the taint of potential illegality and "crony capitalism" that rewards friends (the UAW) at the expense of the political undesirables (the investor class, post-global financial meltdown).

But that's not all. The auto task force's pressure tactics with Chrysler's secured bondholders and the unsecured bondholders in bankrupt General Motors Corp. send a chilling message to the capital markets -- namely, the rules governing investments don't apply if they clash with political goals.

How, exactly, would these emerged-from-bankruptcy companies raise private capital in the months and years ahead? Who would invest in a "new GM" and Chrysler-Fiat, given the pounding suffered by the Indiana funds, creditor Perella Weinberg and others who resisted the government cram-down?

Successful automakers consume large amounts of capital every year to finance operations, develop product and do advanced research. If the likes of the Indiana pension funds or private equity players won't plump for GM and Chrysler, they'll once again become cash-starved and remain dependents of the federal government.

Would this be the business model the president deemed "viable?" Or would it be an unintended consequence of manipulating the process to ensure a politically acceptable solution to a Democratic president whose party controls Congress?

More than the fate of Chrysler, its employees, retirees and communities depend on what the Supreme Court decides. The course of GM's bankruptcy, larger and far more complex, could be dramatically altered and slowed, increasing the risk to a "new GM" that needs to emerge quickly from bankruptcy to stanch declining revenue.

For tens of thousands, this is not an arcane legal opinion, far away. It's the difference between a job and looking for one.

dchowes@detnews.com (313) 222-2106 Daniel Howes' column runs Tuesdays, Thursdays and Fridays.