Behind the Chrysler bankruptcy

Chrysler is going into Chapter 11 bankruptcy, despite the Obama administration’s efforts to keep it out. The problem was that a group of small bondholders rejected the deal that car czar Steven Rattner and his deputy (and it seems the real dealmaker) Ron Bloom.

The bondholders made a good point. They are secured creditors, and in our bankruptcy law secured creditors get paid off in full before unsecured creditors get anything. That’s a sound legal principle: why would secured creditors lend anyone anything unless they can get their security back if the loan isn’t paid off? In this case, the small bondholders were willing to settle for only 60% of what they were owed. But, they complain, the government wouldn’t negotiate directly with them, but only through JPMorganChase, which (unwillingly) took TARP money on October 13 and thus is under pressure to do what the government wants.

Translation into politispeak: The government squeezed the small bondholders too hard in order to protect the United Auto Workers, which of course has over the years been a bounteous source of money (and manpower) for the Democratic party. The government can muscle the big banks, but it can’t (at least not yet) muscle creditors whom it hasn’t forced to take its money.

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