Chicago Enforcement Techniques Defended

If I understand it correctly, the case for the Chrysler cram-down goes something like this:

"Hey bondholders – the US government saved the entire credit system when it bailed out AIG. Therefore it is now entitled to bend or break a few tedious legal rules. You may get less than the law theoretically requires. You should be grateful you are getting anything at all."

Here’s a more elegantly phrased statement of the case by a reporter for the Huffington Post:

Many of the Wall Street firms holding Chrysler bonds may also own credit default swaps that they bought to hedge their bets. These swaps, which are essentially like an insurance policy on the bonds should Chrysler default, were likely mostly issued by AIG.

AIG, thanks to the government bailout, has paid off swaps in the past at 100 cents on the dollar. Under the deal they would have had to accept with Chrysler, the bondholders would have received as little as 30 cents on the dollar, for example.

Why take 30 or 35 cents on the dollar from Chrysler when you can get the whole buck from the American taxpayer?

"The basic story is very simple," says economist Dean Baker of the liberal-leaning Center for Economic and Policy Research. "If they hold credit default swaps on the bonds, they're totally happy with them defaulting."

In what would rank as one of the great scams of this financial crisis, government bailouts may be colliding. Wall Street may be raking in taxpayer dollars through AIG and returning the favor by driving the auto industry into bankruptcy.

Let’s retrace the logic here. The government stepped in to rescue AIG so it could honor its bonds. By that act, the government gained the moral right to dishonor the bonds.

But isn’t the point of rescuing AIG … precisely to allow AIG to pay what it owed? If a failure to pay legally recognized obligations was catastrophic in October, is it not still unhealthy in May? It’s a nice question whether an abrupt failure to pay because of an insurer’s insolvency is worse than a telegraphed failure to pay because of deliberate government policy … but both must carry some pretty severe negative consequences each in their own way, no?