Obama's Chrysler deal and the rule of law

Robert Robb:

The proposed end games for General Motors and particularly Chrysler illustrate why government shouldn't have gotten involved in the first place.

It's worthwhile to begin with the broader picture. Americans used to buy about 17 million new cars and trucks a year. Now, we're buying less than 10 million. That, of course, puts considerable stress on manufacturers with weaker products or financial structures.

How many new cars Americans will want to purchase in the future is unknown. But there can be a high degree of confidence in this: however many it is, someone will sell them to us.

Moreover, they are likely to be produced in the United States. A majority of cars sold by foreign manufacturers in the U.S. are actually built here.

So, why should the federal government care who it is that sells us our cars? There are two rationales offered. First, to preserve an "American" auto industry. Second, to preserve "American" jobs.

The proposed Chrysler restructuring gives the lie to both rationales.

Under the Obama administration's proposal, Chrysler would, in essence, be given to Fiat, an Italian company, to operate.

So, how is an Italian car manufacturer operating in Michigan any more "American" than a Japanese manufacturer operating in Kentucky?

And why should the federal government give a market preference - through taxpayer financing and warrantee guarantees - to Italian cars produced by American workers in Michigan over Japanese cars produced by American workers in Kentucky?

The Obama administration's proposed restructuring is more than just unjustified, however. It dangerously undermines the rule of law, as explicated so beneficially by Friedrich Hayek in his classic, "The Road to Serfdom."

The essence of the rule of law, according to Hayek, is that what the government will do is known to all economic actors in advance. That government will not act arbitrarily in specific circumstances to favor some economic actors over others.

Chrysler has $6.9 billion in secured debt. Under the law, secured lenders have the first claim on the assets of the debtor in the event of non-payment.

The Obama administration is attempting to muscle past this law. Under its proposal, the health care trust of the auto workers' union, an unsecured creditor, would forgive 57 percent of what Chrysler owes it, and receive 55 percent of the company's equity in exchange. The federal government would forgive about a third of what it would loan Chrysler and receive 8 percent of the company's equity. Fiat would pay nothing for its 20 percent initial ownership.

The secured creditors, with the first claim on Chrysler's assets, were asked to forgive 70 percent of what they are owed and receive nothing in equity. When they refused and forced the company into bankruptcy, they were excoriated by Obama - a shameful act by a president who pledged to uphold the law, not make it up as he went along.

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More and more people are starting to notice how wrong the Chrysler deal is. The bankruptcy judge should throw it out.

When Robb asks, "So, how is an Italian car manufacturer operating in Michigan any more 'American' than a Japanese manufacturer operating in Kentucky?" I think the answer is that Obama is favoring the UAW over non unionized workers in the Japanese owned plants. It si another example of his unequal protection of the law.