In order for a successful out-of-court reorganization to be completed generally, the treatment of each of the stakeholders must follow the rules of a chapter 11 bankruptcy. If it doesn't follow those rules, the disadvantaged parties will force the company into bankruptcy to get better treatment.
This is what is happening this morning in Chrysler. The Treasury's proposal is treating the banks worse than a bankruptcy court would treat their loans. This goes against the rules of the game that have been in place since at least 1979 when the Bankruptcy Code was enacted. This is nicely set forth in this WSJ article that covers the decision on hedge fund holding Chrysler debt is facing. The call for 'shared sacrifice' is a little disingenuous because it doesn't fully credit that one class of creditors is senior to other classes.
I have posted before that there is a real danger to a precedent of not following the rules of the current Bankruptcy Code. The rights of lenders are factored into the loans banks make to borrowers. Ad hoc changes to those rights will result in some chaos and confusion in future lending.
The Treasury can accomplish its goals without igniting such chaos by following the rules. They work.
Cheers, Mike
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The point of setting the wrong precedent is something that worries me the most about the Administration's dealing of this issue. Going against the law as it has been defined creates uncertainty within the US market. Uncertainty causes investors to seek more certain areas to place capital, which could further hinder our ability to climb out of recession.
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