Before the mid-1800s, the inability to pay one’s debts could land one in prison. For the next century, bankruptcy laws progressively tended to favor the debtor. This trend reached a peak in the late 20th century with Chapter 11 reorganization-type “bankruptcies” becoming alternatives to complete liquidation.
In 1998 the trend began to reverse itself. During the Clinton administration, the bankruptcy discharge of student loans was significantly restricted. Ten years later, under the Bush and Obama administrations, corporations deemed “too large to fail” (AIG, GM) were “saved” from bankruptcy, at least temporarily, at taxpayers’ expense. For the benefit of whom, you might ask? Hard to say.
Now, under the Obama administration, creditors’ rights have been trashed extrajudicially for the benefit of workers. Bankruptcy divides a shrunken pie according to heretofore well-established rules. All claims are not equal: secured creditors rank above shareholders and employees. On April 30, those well established rules were ignored when Chrysler entered a “modified, prepackaged” Chapter 11 that promises bondholders 28 cents on the dollar for some $7 billion in claims, while giving an employee health-care trust run by the United Auto Workers union 43 cents per dollar on its $11 billion-odd claims, as well as a majority stake in the restructured firm.
Is anyone objecting to this new workers’ paradise? As The Economist reports, “The many creditors who have acquiesced include banks that themselves rely on the government’s purse…. The objectors have been denounced as ‘speculators’ by Barack Obama.”
So much for our president’s much vaunted intelligence. The TARP was set up to grease the cogs of a seized credit system. (Never mind that instead of lending more money with TARP funds, lenders used them to shore up their bottom line.) Now the president has thrown a wrench directly into the gears. He can’t see that undermining confidence in the credit markets is no way to loosen credit.
Meanwhile, back here in Arizona, the Tucson Citizen, a 138-year-old newspaper, is trying to go bankrupt responsibly. In a small step for legal theory but a giant leap in sophistry, Arizona Attorney General Terry Goddard filed an antitrust lawsuit in federal court to force the state’s oldest continuously published daily to keep publishing. Yes, you read that right: antitrust. Brace yourself for the reasoning.
Sometime back, in order to save costs, the Citizen and its one competitor, the Arizona Daily Star, agreed to a joint operating agreement through which they share profits and losses, and a subsidiary operates all noneditorial functions. This arrangement passed the Attorney General’s muster. Now, the AG’s suit alleges that closing the Citizen would”substantially lessen competition.”
What’s next, affirmative action quotas for failing businesses? Sagely, U.S. District Judge Raner Collins threw out both the lawsuit and the motion for a temporary restraining order. But the respite is only temporary. Terry Goddard is the Democrats’ front runner for Arizona’s next gubernatorial election.