If you go here you can read a short piece at the New York Times Dealbook about the sale of the federal government's remaining shares of new GM, the entity that succeeded to the assets of old General Motors after it went through a prepackaged Chapter 11 in 2009. Of the $50 billion of federal TARP funds invested, the government has realized sales proceeds of $39 billion for a net loss of "only" $11 billion.
For what may surprise some readers, I do not oppose the use of TARP funds to provide financing of GM through Chapter 11. The factor that precipitated GM"s Chapter 11 was its inability to get day-to-day financing anywhere. The financial crisis caused by the collapse of Lehman Brothers was so extraordinary that no lender could lay its hands on enough capital to fund the kind of operating loans GM needed to stay afloat. In ordinary times, the substance of Mitt Romney's misrepresented NYT editorial would have been correct: auto manufacturers should file Chapter 11 on their own and let the chips fall where they may.
As it turns out, the chips fell to the elimination of all shareholder equity interests, which is exactly what should have happened. What was wrong about the GM bankruptcy was its violation of the absolute priority rule of Bankruptcy Code § 1129. Through it's control of GM's line of credit, the Obama administration required any buyer of GM's assets to assume its labor agreements in full, without modification. No ordinary lender in normal times would have made such a demand; why should it? After all, normal lenders want to see the assets of a debtor-in-possession sold for the highest price possible. Yet, the stranglehold of GM's federal financier twisted the priorities of bankruptcy law to favor a politically valuable client (or is it a patron?).
So who's ox was gored by the legal shenanigans of the Obama administration? Old GM's bondholders who got less than bankruptcy law provided. I hope it doesn't go unnoticed that those bondholders included many state retirement funds that are now facing their own solvency problems.
(For some earlier analysis of the GM bankruptcy read my post here.)
For what may surprise some readers, I do not oppose the use of TARP funds to provide financing of GM through Chapter 11. The factor that precipitated GM"s Chapter 11 was its inability to get day-to-day financing anywhere. The financial crisis caused by the collapse of Lehman Brothers was so extraordinary that no lender could lay its hands on enough capital to fund the kind of operating loans GM needed to stay afloat. In ordinary times, the substance of Mitt Romney's misrepresented NYT editorial would have been correct: auto manufacturers should file Chapter 11 on their own and let the chips fall where they may.
As it turns out, the chips fell to the elimination of all shareholder equity interests, which is exactly what should have happened. What was wrong about the GM bankruptcy was its violation of the absolute priority rule of Bankruptcy Code § 1129. Through it's control of GM's line of credit, the Obama administration required any buyer of GM's assets to assume its labor agreements in full, without modification. No ordinary lender in normal times would have made such a demand; why should it? After all, normal lenders want to see the assets of a debtor-in-possession sold for the highest price possible. Yet, the stranglehold of GM's federal financier twisted the priorities of bankruptcy law to favor a politically valuable client (or is it a patron?).
So who's ox was gored by the legal shenanigans of the Obama administration? Old GM's bondholders who got less than bankruptcy law provided. I hope it doesn't go unnoticed that those bondholders included many state retirement funds that are now facing their own solvency problems.
(For some earlier analysis of the GM bankruptcy read my post here.)
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