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Great news! SCOTUS supports contract law

June 9, 2009

Update: Apparently, they could only support contract law for 24 hours or so. They declined to stop the sale of Chrysler, saying the Indiana Treasurer failed to establish sufficient evidence of need for the Court to step in. Here’s the best writeup I could find, as usual from a Brit paper.  When investors start avoiding bonds, realizing that preferred status in bankruptcy is now worthless, SCOTUS may realize their error.

Justice Ruth Bader-Ginsburg granted a stay of the Chrysler-Fiat merger. Indiana had asked the Supreme Court to hear the case. Their argument was two-fold. One, that the Chrysler “bankruptcy” overturned the traditional payment of senior creditors, with no legal authority to do so. Second, the use of TARP funds in the Chrysler bailout was done without Congressional authority. I think the second argument is weak, especially in light of Keith Hennessey’s detailed account of how the auto bailout came about.

Ginsburg is a liberal member of the Court, but even she can see that upsetting contract law is a bad precedent. As the Indiana Treasurer, Richard Mourdock said on CNBC, upsetting contract law would result in investors moving their money to safer foreign markets.

Fox News’ coverage of the announcement included this interesting quote from Congressman Gary Peters (D) of Michigan:

“Other stakeholders, including other secured lenders and Chrysler’s autoworkers, accepted shared sacrifice because they recognized their interest was better served keeping Chrysler alive rather than forcing liquidation. Why the officials who decided to take their objections all the way to the Supreme Court can’t recognize this is beyond me,” Peters said. 

Since when is sacrifice an American value? Funny, the autoworkers he bows to in this statement don’t seem to have shared in the sacrifice as much as the bondholders. Peters was parroting Obama’s remarks to the bondholders. Many of the people that would be hurt by this deal are teachers and other government employees. Doesn’t Obama care about them, too? The Obama settlement would’ve cost bondholders $4.9 billion; that money would’ve gone to Fiat (who’s getting a share of Chrysler with zero money down) and the UAW.

It’ll be interesting what the Supreme Court decides to do with this case. There have been reports of the White House strongarming Chrysler, and the bondholders. Will the Court mention these?

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