Obama's bad policies

David Frum:

Something bad and dangerous is happening in Barack Obama's America.

The powers that the Obama administration claimed in order to arrest the financial crisis and mitigate the recession are being used and abused in ways that are underming the legal and financial stability of the United States. Investors: You are warned.

The first warning was the attempt to snatch Chrysler's assets away from their rightful owners to pay off administration friends and supporters.

The Obama plan to save Chrysler would have sold Chrysler's most valuable assets into a new company co-owned by the U. S. and Canadian governments, Fiat and the United Auto Workers (UAW) -- with the UAW getting the biggest piece, 55%.

The trouble was: those assets belonged to somebody else. They belonged to the company's bondholders, who had a legal first claim. Under the administration's plan, those senior-secured creditors would have received just 29¢ on the dollar.

For a failing company to shuffle assets so as to favor some creditors over others with a stronger claim is a very serious wrong, potentially even a crime. There's a sound economic reason for this rule of law: Bondholders accept lower returns in good times in exchange for greater security in bad times. Protecting bondholders in bad times ensures that future borrowers will be able to borrow in good times.

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In that last quoted paragraph Frum explains what many supporters of Obama ignore. For people to be able to borrow, there has to be some assurance that they will receive what they bargain for. The unsecured creditors accepted greater risk in order to get greater return in the good times. For them to jump ahead of the secured creditors will distort the credit markets in the future.

It is not just the unsecured union pension funds who have moved ahead of the secured creditors. The government has also assumed a superior positon. They could only do this if the secured creditors signed subordination agreements. It is possible they did to get the government loans, but that is not clear from the record so far.

Without valid subordination agreements, there is no way for other creditors to jump ahead in teh bankruptcy proceeding.