The Rule of Law and the Auto Bailouts: A Conversation with Todd Zywicki

with Todd Zywicki

This episode of Liberty Law Talk is a conversation with George Mason School of Law Professor Todd Zywicki about the blatant violations of the federal bankruptcy code and the breach of the rule of law by the Chrysler bailout. Professor Zywicki stresses that the Chrysler bailout abandoned the bankruptcy code’s clear and known rules regarding creditor interests that derive from the code’s 19th century origins. This allowed for the sinister use of the public trough by special interests that benefited from the bailouts. Moreover, Professor Zywicki highlights the fallout in corporate bond markets from the subversion of the legitimated process for corporate bankruptcy worked by the Obama administration. In short, borrowing costs and bond yields for companies similarly situated to Chrysler or General Motors have increased as investors fear being given short shrift to special interests that might receive favorable treatment by the federal government if such a company experiences distress or potential bankruptcy.

Reader Discussion

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on June 04, 2012 at 15:32:19 pm

I stopped listening after Zywicki concluded that the threat of GM shuttering without Treasury funding was a "myth." Either he's a liar or is unfamiliar with the case.

In the background of its ruling on the motion for sale under section 363 of the Code, the court mentioned that the retained valuation expert concluded that (a) GM's worth as a going concern was somewhere around $80B, (b) its liabilities were $180B, (c) its worth sold in pieces on the courthouse steps was probably about $10B, and (d) GM would cease to exist absent Treasury funding. If the Government had pulled its funding, the best that the creditors could expect would be a split of the proceeds in liquidation: $10B. There were no private sources of funding on the horizon, or else the Government's bid on GM as a going concern for $45B would not have succeeded. Bear in mind that bankruptcy allows creditors to "credit-bid" what they are owed for the company's assets. $180B's worth of creditors were involved, and they apparently thought that splitting $45B in cash from the Government was better than pooling their credit and running the company themselves.

All the points about moral hazard or the bond markets may well have a basis in fact, but the truth is that the creditors in GM's case split what they always split in a liquidation: the proceeds of a sale of the company's assets. If they're unhappy that the purchasing entity chose to honor the selling entity's CBAs, then that's outside the scope of bankruptcy law. Zywicki should know this and probably does, but then ideology is always more important than precision, isn't it?

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on June 04, 2012 at 22:44:50 pm

The right response to putting union workers ahead of bond holders is the boycott of every unionized corporation bonds by investors. I know that will not happen because mutual funds do not care, its not their money., but if enough investors demanded a high risk premium, companies with powerful unions would be under great competitive pressure because of higher capital costs than non-union employers.

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on June 04, 2012 at 23:02:37 pm

Thanks for your comment kindasorta. But I'm afraid your points miss the mark.

First, it really would have been wise for you to continue listening--because I specifically note that given the problems in credit markets at that time, a case could be made for using government funding or a guarantee to ensure DIP financing. The real problem with the bankruptcies is not that, but rather that that very narrow justification for a targeted intervention in no way justifies everything else that followed. There was nothing in the need for a government intervention that meant that taxpayer money had to funneled to the UAW or that the retirement funds Indiana Police Officers should have been plundered to give money to the UAW.

Second, it is not accurate to say " or else the Government’s bid on GM as a going concern for $45B would not have succeeded." That's because, am I'm sure you know, the bidding was rigged in the government's favor with a lot of strings that usually are not present in a 363 sale. So it is true that no one else would likely bid, that's because of the terms that were established--namely that any bidder was required to assume the liabilities of the UAW trust. It is true that no one else was willing to bid more if it meant losing $20-$23 billion in giveaways to the UAW (the amount that Treasury apparently is willing to lose in order to give taxpayer money to the UAW). But we'll never know if that means no one else would have bid in a typical fair auction--because we didn't have a typical fair auction here. So the fact that no one was willing to bid in an unfair auction says nothing at all about whether there would have been competing bids in a fair auction.

As for your last point, I'm not quite sure what you are saying because it sounds like you may be confusing Chrysler and GM. Be that as it may, then the question for you is whether you are thus saying that the secured creditors in GM received what amounts to a fraudulent conveyance because they were paid 100 cents on the dollar? To put it another way, if the alternative was liquidation in both cases, tell me the theory you are providing that explains why secured creditors received 29 cents on the dollar in Chrysler but 100 cents on the dollar in GM--both of those can't be correct, can they?

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Todd Zywicki
on June 05, 2012 at 08:24:21 am

GM and Chrysler made crappy over-priced cars prior to the bailout. Now they make crappy over-priced cars on the taxpayer's dime with billions still due to said taxpayers. At least Ford had the balls to say "No" and toughed it out instead. I own all imports now(they're better made and last longer)and will never, ever buy a GM or Chrysler product again.

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on June 05, 2012 at 10:59:40 am

Whether you agree with the policy underlying the Treasury's provision of funds to the purchasing entities does not make the transaction itself a violation of the rule of law, or a "plundering" of any creditor's rights in the company. No money was diverted from the sale of the productive assets of either company to the UAW, unless you believe that the Treasury imposing conditions on how its money would be spent constitutes a "plundering."

In both cases, there were no sources of funds other than the Treasury for restructuring, and the Treasury was not interested in continuing to provide it all the way through a traditional plan confirmation. Once the Treasury pulled funding, the court found (in agreement with the creditors' committee brief) that the company would have been wound up and its assets liquidated. In both cases, what the Treasury paid for those assets through the purchasing entities was substantially more than the estimated liquidation value that would have gone to the creditors, but roughly half of what they were worth as a going concern (and much less than either company's outstanding liabilities).

So the creditors in General Motors split $45B instead of $10B, and in Chrysler $2.5B instead of $800M. Unless you're arguing that the creditors would have received more in a liquidation, or that a source of funds without the Treasury's strings was forthcoming, it would seem that the creditors did as well as they could expect to do with this 363 sale. I'm sorry that the Treasury decided to make sure that these new companies wouldn't reward their loans by screwing the UAW, but that didn't take a penny in proceeds from the sale away from any of the creditors in either case.

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on June 09, 2012 at 12:52:50 pm

I learned 2 truths after listening to this interview. 1st. We do not live in a Nation of laws but a nation of men. 2nd. If the government can go into anyone's paycheck,savings,businesses,investments or property and take thru taxation what they want whenever they want it,under the color of the law, and spend it on whatever is politically expedient then we don't live in a Constitutional Republic with secure property rights but instead we live in a mobocray democracy run as a criminal enterprise.

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libertarian jerry

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