This op-ed by equity fund manager Scott Sperling in today’s Wall Street Journal makes an interesting case that the Obama administration’s handling of Chrysler and GM is actually evidence of capitalism at work. In my view, he’s right that the restructuring of these companies has some similarities to how things would play out if the government weren’t cramming down its own preferred plans. Both companies would have filed for Chapter 11, and would have been restructured. But the op-ed strikes me as very misleading in its suggestion that restructuring of Chrysler in particular can be squared with the bankruptcy laws. In talking about Chrysler, Sperling seems to suggest that it’s fine to give employees, retirees or anyone else (including current stockholders, presumably) a large stake in the new company, so long as they aren’t allowed to keep everything they have now. That is, he seems to forget the rules of priority, which say that the senior lenders are required to be paid first. When he turns to General Motors, on the other hand, he suddenly remembers the priority rules. The recalcitrant bondholders really aren’t entitled to anything (or much of anything), he argues, because the government, as senior lender, is entitled to be paid first.
Banking on Bankruptcy--Skeel
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