Law, Opportunity Cost and the Chrysler Deal

In a recent article written by Todd Zywicki titled, “Chrysler and the Rule of Law” the Obama administration is also criticized for its handling of the Chrysler deal. Todd Zywicki is a professor of law at George Mason University and argues that the Obama bailout plan for Chrysler infringes on the rights of priority creditors laid out in the U.S. Constitution. He challenges the constitutionality of the Chrysler plan and explains that, “the close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. The redistribution of priority credit contracts in Obamas’ plan is evident by secured creditors receiving only 30 cents on the dollar while the United Auto Workers Union-a junior creditor-will recuperates 50 cents on the dollar.

Mr. Zywicki also comments on the long term ratifications of disrupting the order of priority among creditors. The opportunity cost of such a change can arise in the form of increased uncertainty in the market for equity and debt financing for companies which have received government funds, like General Motors. This increased uncertainty might reduce the amount of capital available for distressed industries in the economy. The reduction in available funds might keep companies- which are financial feasible but constrained in capital-from attaining the capital necessary to continue operations and go bankrupt. Zywicki points out that if this were to occur the potential losses in jobs might be greater than the gain from keeping United Auto Workers Union jobs safe.