Document Type

Article

Publication Date

2010

Abstract

As usual, my colleague Jim White has hit many nails on many heads. Also as usual, however, I’m going to be a pain and part ways with him a bit. First, was Chrysler’s bankruptcy “suspicious” in its use of section 363 of the Bankruptcy Code? You bet. Leaving aside the proliferation of 363 sales to swallow Chapter 11 as we once knew it, Chrysler was out in left field. Not only was it a “sale” of everything meaningful in the company, it was to a seller—Fiat—that put in no money. (To be fair, Fiat agreed to contribute technological know-how on cars that Americans will now be much more interested in buying than they were in a pre-financial collapse environment.) And GM was even weirder: Not only did the government put up all the purchase money, but the purchaser wasn’t even a foreign car maker with a plausible contribution of sweat equity; it was “new GM,” a legal creation. GM bought its economic self from its former self for no money down, all at the underwriting of the government. So yes, that’s “deviant,” even worse than Professor White lets on. But why the deviance? Was it to mask a nefarious government plan of wealth redistribution? Before we analyze the propriety of the government’s conduct, we must consider why it got involved in the first place. And to do that, we have to understand basic business reorganization financing. In a regular reorg, companies turn to a now thick and sophisticated market of so-called DIP lenders who provide funds to reorganizing “debtors-inpossession,” as the struggling companies are called in the Bankruptcy Code. In a regular Chapter 11, you’d call up commercial lender CIT Group and ask for a multimillion dollar DIP loan (which, rest assured, gets highly favorable treatment in bankruptcy law, so don’t worry about the DIP lender’s risk). Thus, free marketeers would say, “Fie on public intervention! Let the auto companies fend for themselves, get a DIP loan, if they can, and reorganize the same way anyone else would have to in Chapter 11.”


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