President Obama pushed Chrysler LLC into bankruptcy court on Thursday, saying the move was forced by a "handful of speculators" -- in other words, the minority of the automaker's secured creditors who refused to go along with a government-designed deal that aims to leapfrog the unsecured claims of the United Auto Workers over theirs.
That prompted many folks to ask about the implications for future access to credit by industrial companies, especially big, troubled, unionized ones. With Chrysler -- and soon, perhaps, General Motors Corp. (NYSE:GM) -- as precedent, and with the rules suddenly looking flexible when the going gets tough, will lenders think twice about getting involved in such situations?
In truth, it's hard to see how the added element of risk fails to produce some recalibration among those who originate and trade this kind of debt. The real question (and hopefully the financial whizzes on the auto task force gave this some thought) is how much they scale back over time, and whether the societal benefits of keeping Chrysler a going concern, or at least being seen to try, are worth the cost.
Editorialists at The Wall Street Journal and elsewhere have been quick to point out that there's pension money in many of the hedge funds that held out. True enough. What bears remembering is how it came to be there: as part of the great wave of dynamism and innovation and (lest we forget) greed and recklessness that has transformed the financial system in the last quarter century or so.
We got a lot of good things by unleashing capital, including a much greater ability for companies, even troubled ones, to adapt and change. And we got some bad things too, including a financial system that, for all its nifty features, turned out to be as overpowered and susceptible to reckless operation as a Plymouth Road Runner.
What happened Thursday is that the newfangled financial machine for channeling money to its richest returns ran up against a problem that, whatever you think of Obama's handling of it, is mighty significant. A Chrysler liquidation might be the modest economic event (at least for those who don't work there) that some say it would be, but it would be another big rip in the social fabric at a time when the country faces multiple challenges.
Among other considerations, the administration had to thread this particular needle while keeping bank rescues, past and possibly future, in mind. Maybe it wasn't entirely fair to blame the "
money people," as Obama called them the day before, for wanting their day in court. But the fact is, they will get that day. Meanwhile, having taken so much flak from the left for going easy on the banks, don't you think Obama was perfectly content to be accused by the talkers on CNBC of "demonizing Wall Street"?
What we'll see next is the resetting of this part of the money machine, part of a more general scaling back of a financial system that is, after all, too big. Will it be two notches, or 20? The hope here is, closer to two. Capital is clever -- it learns quickly to make distinctions. But that's only a guess. The Chrysler bankruptcy process is just beginning, and beyond it awaits General Motors, the main event. -
Kenneth Klee
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