Jesus, when does the idiocy stop?
Kagan defended the use of funds from the Troubled Asset Relief Program and argued that Indiana’s appeal lacks legal merit. In addition, she said the losses to the Indiana funds "cannot outweigh" the potential broader problems a collapse of Chrysler would present.
"As an economic matter … blocking the transaction would undoubtedly have grave consequences," Kagan wrote.
This is the Administration’s response to the appeal to the United States Supreme Court (which has not decided whether to grant cert or not) on blocking the Chrysler 363 asset-strip to Fiat.
Here’s the problem – the rule of law is not about "the economy will be better if we do this."
Under that rubric you have no right to life, property, or pursuit of happiness. After all, it would undoubtedly be better for the economy as a whole if the government re-instituted slavery for anyone who was jobless – go build that road or bridge under penalty of being shot!
That is the essence of the government argument – we know this is blatantly unlawful, but the economy will suffer if we don’t do it, so we’ll break the law, and we demand that the USSC put its stamp of approval on our actions.
The issue is not about whether Chrysler should go bankrupt or not. Clearly, they should.
It is about whether bankruptcy priority, which is a matter of black-letter law, can be overturned not by the operation of the law in a courtroom by a judge but rather by Treasury, who came in and strong-armed a "resolution" that favored one unsecured creditor class over another which, according to the law, has actual priority.
The infirmity of such an argument isn’t just that it is a demand for a rubber stamp of a blatantly-unlawful act – it is that the claim of economic harm is in fact reversed.
If you destroy the priority rights of creditors in a bankruptcy you have effectively defined all bond investors as having no priority whatsoever in a liquidation.
This will lead to the demanded coupon for corporate debt rising dramatically, which in turn will create even more economic damage.
The balance of harms isn’t even examined in the government’s brief, for the simple reason that strong-arming one corporate merger under the bankruptcy code can’t possibly outweigh the impact on corporate debt issue of every firm in America.
Rather than deal with that infirmity the government simply ignores it as though it does not exist.
But whether the USSC decides to hear the case or not, the market cannot be strong-armed into buying corporate debt. In the court of the capital markets government is powerless to demand that corporate debt issues be taken down by private investors.
The Obama administration is making a grave mistake, and should the USSC refuse cert (which I expect) the repercussions of this action will be firmly "owned" by President Obama and his administration.
Buckle up.
