In order to make Chrysler emerge from a quick bankruptcy the administration accepted an unusual plan that was brought to bankruptcy court a few weeks back. The plan (which included two months of paid shutdown) divided a significant part of the company's surviving assets.
This is what happens in bankruptcy. The rules of bankruptcy are complex, but it comes down to handing out money (or stock in this case) to folks based upon when and how they gave the company money. The taxpayer is supposed to be first (if back taxes were owed), followed by lenders and finally investors. Of course, within each category money gets doled out depending on the level of government, the types of loans and the types of investments made by each group. All in all, it is a lawyer's dream.
In many cases, groups that are owed money agree to the new terms. If they don't, or if the firm cannot figure out how to make the payments, the bankruptcy judge can have the firm liquidated -- or sold off in parts.
The Obama administration used their soft power of threats very effectively, making most investors and lenders accept relatively poor levels of compensation. They did this to allow much more resources to be directed to UAW pensions. This had the dual benefits of preventing the Pension Guarantee Trust (AKA taxpayer) from picking up the pieces and benefiting a key political ally (the UAW).
To get this agreement in place, the administration busily demonized "investors" whom it thought should be more willing to part with their money. The president even went so far as to say, "... are the bond holders, the lenders, the money people, are they willing to make sacrifices...?" Investors should be easy to demonize. No doubt their representatives wear expensive suits and know how to order ten different types of coffee at Starbucks. Indeed, about 70 percent are groups already receiving bail-out funds.
Unfortunately for Chrysler, some of these investors just might not be as easy to characterize as fat cats. In fact, it turns out, many of them are us. It should not be too surprising that in a country where two-thirds of households own stock almost one third of Chryslers "investors" are schoolteachers, college administrators, firefighters and police officers. These vultures of Wall Street finance have seen the value of their hard work severely hampered by the Chrysler plan.
Here in Indiana, our state treasurer Richard Mourdock has taken the surprising step of honoring his oath of office and challenging the Chrysler arrangement on the grounds that it is illegal.
Chrysler has fired back at Indiana, threatening job losses if the case comes to court. Sounds like another good case of the law of unintended consequences.