Can someone explain something to me? I know that judges have great powers in bankruptcy proceedings. However, in the GM bankruptcy would valuing the equity, real or implied, of one group, say, the UAW pensioners over the value of the equity of others, say, GM’s secured bondholders be a violation of the takings clause?
Not really, because debts don’t have a value per se once you’re in bankruptcy. If that weren’t the case, bankruptcy itself would be impossible, because creditors hardly ever get the full value of the debts owed to them.
Thanks, Alex. It would seem to me possible that, once a hierarchy had been arrived at, that relative putative value would be a consideration. However, I understand what you’ve said and that makes sense, too.
I’m not a lawyer, so I guess I’m on real thin ice here.
But I always thought the takings clause was about government paying “just compensation” for taking private property “in the public interest.”
That seems a far cry from private participants in a troubled private enterprise cap structure sorting out their respective rights, preferences and payouts.
I didn’t understand Alex’s response, though. There is a bright line legal distinction (until Chrysler, anyway) between the rights of secured vs unsecured creditors. “Debts” (I would say “claims”) may not have “value per se” in the unsecured down through common equity class, and be subject to the whim of the court. But the secureds surely have a different and superior position.
Further, as a purely commercial consideration, if you start allowing junior claims (with their pricing and terms) to leapfrog more senior claims (with their pricing and terms) in troubled situations you have just laid out a prescription for capital inavailability. In effect, it becomes ALL EQUITY. And that’s expensive capital, peoples. So:
This is all legal bullshit. I of course travel in financial circles. I can tell you unequivocally that as a practical matter equity and debt investors have observed and digested what has happened here (Chrysler) and have no intention of investing/extending credit to union businesses (and non-union) in the amounts or at the prices previously available. The “government” risk has been acknowledged.
Same as it ever was. Government policies supposedly in the interest of the little guy harm the little guy. Any wonder I’m not a big government guy?
Let me try it this way.
Once an individual or corporation is insolvent, the property rights of the unsecured creditors become highly theoretical and abstract. If you have one hundred creditors each owed $1 from a company with $25 in total assets, then each individual creditor has a chance of collecting his or her debt. Without bankruptcy, the debts would probably be paid to friends, family, future business associates, the company with the most obnoxious collection arm . . . Bankruptcy presents the notion that paying each creditor 25 cents on the dollar (minus costs) is more equitable and frankly more pro-capitalism than every debtor for him/herself.
Chapter 11 corporate reorganization is more problematic IMHO. Liberals should be more wary of what is being done now under the guise of beneficent liberal corporatism, because precedent is being laid for (leveraged) companies to simply use bankruptcy sales to discharge union obligations, environmental clean-up costs, consumer obligations, asbestos litigants, safety and employment claims, etc. In a more typical case, the corporate debtor will favor the lenders from whom capital will be needed in the future.
Reorganization cannot prefer the unsecured claimants over the unsecured claimants. But a secured claim is only secured to the extent of the value of the collateral. In the Chrysler case, evidence was presented that Chrysler was near worthless if a liquidation sale were held right now. Which means the roughly $6 million claims of secured creditors, were actually $2 million secured and $4 million unsecured.
In any event, takings arguments are still relevant in bankruptcy, but they all go back to valuation issues first.
Dave, last I heard there were not significant secured creditor issues for G.M. like there were in Chrysler. I’ve not seen any write-ups on today’s filings yet though.
Drew, there is still a valuation issue. There was evidence that the secured creditors in Chrysler were getting paid the value of the collateral, which was severely diminished by current market conditions. Valuation is a feature of time, place and manner. The valuations appear low, but I can’t tell how low. May I recommend to you the Fear and Greed Blog, by Lawrence Loeb, an investment banker with an apparent specialization in bankruptcy matters. I know of a few good legal blogs, but he’s the only one that seems to be blogging from the financials p.o.v. I think you’d like his blogging on Chrysler.
PD –
Thanks for the references.
Trust me, I understand, asset valuation is a moving number. I’ve lived it.
I have no inside knowledge, but just a number of years in the business tells me the secureds could have done better if liquidation was pursued. Further, even if the secureds value was so diminished, we still have no justification for the UAW getting the lion’s share. That’s a head scratcher from a purely financial, not political, point of view.
Now I’ve seen some numbers: “GM has $27 billion in secured debt. The Daily Bankruptcy Review (no link) today reports that GM has an estimated liquidation value of, at most, $9.7 billion. The Obama Plan’ pays secured creditors in full and gives unsecured creditors 10% of the reorganized company and warrants for 15% more of the company.” I’m not sure what paid in full means here, but I assume it means secured creditors get paid $9.7 billion, that’s the value of the collateral. Consequently, no property is being taken.
http://www.creditslips.org/creditslips/2009/06/gm-investor-rights.html#comments
BTW – My post was in reference to Chrysler. GM? I’m agnostic at this point.