Rules, What Rules?

I was astonished earlier today when I read a headline that read: "U.S. Asks Supreme Court to Permit Sale of Chrysler Without Delay."

The grounds on which the government attempted to exert influence were economic - that is to say that its urging of an expedient sale of Chrysler to Fiat was based largely on the grounds that the sale would avoid significant job loss and avert potentially calamitous economic circumstances. (from CNN http://money.cnn.com/2009/06/08/news/companies/chrysler_stay/index.htm?postversion=2009060816): ...in a filing Monday U.S. Solicitor General Elena Kagan, arguing for the administration, said the losses to the Indiana pension funds "cannot outweigh" the potential broader problems a collapse of Chrysler would present. " As an economic matter ... blocking the transaction would undoubtedly have grave consequences," Kagan wrote. "Even if the stay were continued for a short time and Fiat did not withdraw from the transaction, the consequences of delay for both Chrysler and the United States government would far outweigh any benefit to applicants."

This sounded like a potentially inappropriate exertion of influence given our constitutional mandate of maintaining an impartial body to interpret and provide guiding principles on the rule of law. The Supreme Court is not and should not be subject to political influence.

With an important caveat that I'm not a lawyer, the case at hand should be judged on purely legal, not economic grounds. Basically there are classes of creditors in structured proceedings that stand in line for the bits left over after a Chapter 11 reorganization or Chapter 7 liquidation bankruptcy. What has happened in this case is that the government has very obviously prioritized the claims of unsecured creditors - e.g. the UAW - over the claims of secured creditors such as the Indiana pensions. It's hard to make a straight-faced claim that this preferential prioritization was anything other than a cold, calculated political move.

Below is a quick excerpt from the Wall Street Journal concerning the pension funds' position (copy of full pleading at http://online.wsj.com/public/resources/documents/indiana.pdf):

"The pension funds argued the sale, orchestrated by the U.S. and Canadian governments under bankruptcy laws, was illegal and that the federal government exceeded its bailout authority with its involvement.

"The negative economic consequences of permitting an unlawful sale to proceed may well over time dramatically outweigh Chrysler's short-term harm," the funds said."

What is clear to me is that the outcome of this case will set an important precedent for the rule of law in corporate bankruptcy - impacting the current GM proceedings - and will in turn affect the risk tolerance of investors to deploy capital. This is no trivial matter.

By the end of the day, the prudent Ruth Bader Ginsburg made the wise move of halting the deal for now, "pending further order from the court."
http://www.ft.com/cms/s/0/804bf34a-546c-11de-a58d-00144feabdc0.html

The Indiana pension funds have taken an important stand that other creditors were unwilling to take due to the politics of the moment. The chess match has now begun. Meanwhile, the clock is ticking on the June 15 deadline set by Fiat to complete the sale. Suffice it to say that there will be many interested parties in the ruling on this case. I hope and expect that this Supreme Court ruling will be based not on the politics of the moment, but rather the rule of law, as it always should be.