If you're a parent with teenagers (like me), you may know the spectacularly successful video game called Grand Theft Auto.
The game's characters pursue an anarchist agenda of car jacking and killing police officers. It includes all the sex, language and violence that most teenage boys crave in their games. I have been unsuccessful in limiting my son’s access to it, as he simply plays it at somebody else’s house. When I lecture him about how a society cannot function without laws, he reminds me that it’s just a game.
I bring this up because it recently got me thinking: If we can't get through to our teens regarding the importance of the rule of law, what chance do we have of getting through to our government, which is now seeking to impose a reorganization plan on Chrysler that usurps the rights of its senior bondholders and violates established contracts and laws?
The enforceability of contracts and the prioritization of debt is so important that the U.S. Constitution has specific language dedicated to it: The Contracts Clause of Article V and the Bankruptcy Clause of Article I, Section 8. This country persevered through many boom and bust cycles, each time keeping the primacy of secure debt intact. Until now.
The Chrysler bankruptcy plan proposes to break the secured bondholders' contract and force them to accept a settlement value of 30 cents on the dollar for their bonds. I am not a lawyer, but this directly challenges the "absolute priority rule," which states that secured creditors have primacy over subordinated debt, unsecured debt and equity. Yes, these bondholders agreed to the settlement, but they were dragged to the table kicking and screaming, assured that anything less than this "agreement" would lead to additional concessions on their part. It's not so much an agreement as government coercion -- in direct contradiction to the letter and spirit of the Constitution.
There are some who say this "special case" is just too important for the U.S. economy. Well, we've lost over 6,000,000 jobs already. Why was the loss of millions of textile, consumer product and steel manufacturing jobs less important than an auto assembly job?
Others argue that Chrysler bondholders are getting what they deserve because they were just too greedy, anyway. That's a ridiculous argument. The credit market and our economy relies on high-yield, high-risk assets to provide funding when all other funding avenues have been exhausted. Secured bond buyers make the investment into risky, distressed assets at fire sale prices because they are secure in the knowledge that their contract will be executed. No more. This gives the name "Grand Theft Auto" a new meaning, doesn't it?
Deflation put our economy at a crossroads. With earnings and assets values in decline, private equity firms whose investments provide funding under these risky conditions will now have to think twice.