NCPA - National Center for Policy Analysis


June 1, 2009

The Obama Administration is abusing bankruptcy law to benefit a favored constituency, the United Auto Workers union.  This threatens serious consequences, says Andrew Grossman, Senior Legal Policy Analyst at the Heritage Foundation.

According to Grossman:

  • Without the discipline of a real bankruptcy reorganization, General Motors and Chrysler may not be able to achieve the reforms that they need to survive and prosper.
  • The restructuring plans announced by both automakers are not bold enough; to gain a competitive edge, they will have to cut more dealers loose, put an end to the Byzantine system of work rules that stifles flexibility, and in general, make deeper cuts.

Selling Chrysler to a shell corporation for the purpose of divesting lenders of their rights is a stunning abuse of U.S. bankruptcy laws that threatens to upend this important resource for troubled companies.  The "rule of law" means clear, generally applicable laws by which individuals can organize their affairs and which are applied consistently, without respect to status; by favoring a union over creditors with superior rights, the Obama Administration has violated a fundamental principle of our constitutional government.

Striking down contractual rights arbitrarily, merely because they are inconvenient or expensive to the government, raises the costs of making and enforcing agreements across the economy.  Certain industries and businesses will suffer disproportionately: the automobile industry, heavily unionized industries, corporations that are faltering or undergoing reorganization, and already weakened financial institutions.

The bankruptcies of Chrysler and General Motors are a microcosm of the lawlessness that threatens our freedom and our prosperity.  With its legislative power, Congress can put an end to the bailouts and begin the slow process of unwinding those that entangle us today.  Members of the House Judiciary Committee should focus on three points, says Grossman:

  • The U.S. auto industry itself has been harmed by the initiatives of the Bush and Obama Administrations that were meant to save it.
  • The Obama Administration's abuse of bankruptcy to carry out its initiatives will serve as a precedent for others to sidestep the requirements of America's Chapter 11 reorganization process.
  • In rescuing Chrysler and General Motors, the federal government has trampled the rule of law in ways that will prolong our current recession unless Congress acts to rein in the excesses of the Administration's interventionist policies.

Source: Andrew M. Grossman, "Testimony before Judiciary Committee United States House," Heritage Foundation, May 22, 2009.


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