I’ve heard this twice in the last couple of days, Romney taking the Mourdock-type talking points about the auto bailout. In particular that the unions, as unsecured creditors, got more than they should have in the Chrysler bankruptcy in light of the fact that secured creditors got lss than 100%. Politifact takes a look and calls Romney’s claims false when he says that Obama gave the companies to the unions. I heard one of Romney’s surrogates regurgitate the nonsense about how secured creditors were getting shafted in violation of 200 years of bankruptcy law.
I recall, at the time, Abdul and Josh Clayborn giving some credence to this notion. Abdul was mainly relaying Mourdock’s claims while Josh seemed to embrace it. But, the bankruptcy judge specifically addressed the claim that the secured creditors were being unfairly treated and rejected it. Mourdock’s complaint was that entities that happened to be unsecured creditors were getting paid before secured creditors got 100%. O.k., sounds like a problem.
Let’s say Joe has two creditors, one is the bank that loaned him the money for a car, the other is his buddy Fred. The bank is secured and he owes the bank $1,000. He also owes Fred $1,000. His only asset is the car, only worth $500 at the moment. Now typically what would happen is that you sell the car, the bank gets the $500 and Fred gets nothing. If Fred gets $200 and the Bank only gets $300 of the proceeds of the car, that’s a problem.
But, in this case, there is a third party. Let’s call him Barry. Barry comes in and says he’ll pay $1,500 if he gets the car and Fred and Joe agree to go to work for him. $750 goes to the bank and $750 goes to Fred and Joe as a sort of signing bonus. In this scenario, the bank has no cause to complain. It gets more than it would have if the car was simply sold.
Mourdock and Romney’s bellyaching is a lot like the Bank throwing a tantrum because it didn’t get all $1,500 or the $1,000 left on the bank note. Their main complaint is that Fred and Joe got something out of the deal; preferring, apparently, the scenario where they only get $500, so long as Fred and Joe get nothing. They ignore that, without the take-it-or-leave-it offer by Barry, they don’t even get the $750. They get $500.
If the complaint is that Barry is the government instead of Bain Capital, that’s a policy disagreement, not some sort of miscarriage of bankruptcy law. Fact is, Bain Capital (or anyone else) weren’t willing to step up and offer the secured creditors any more than they got.