On December 4, 2008, my colleague, Ed Morse, and I wrote an essay calling on the U.S. federal government to let the marketplace work in terms of the potential bankruptcy of GM and Chrysler. Since that essay was written, the federal government has funneled good money after bad to the tune of $20 billion to $30 billion.
As of this writing, Chrysler is in bankruptcy proceedings and there is a 99 percent likeihood that GM will likewise declare bankruptcy. GM's bankruptcy is moving quickly forward due to GM bondholders rejecting the plan to exchange their bonds for GM stock. The GM bondholders have correctly assessed that they will do better under bankruptcy proceedings than under ownership of the "sinking ship." Who could blame them? Well the Obama Administration could and does.
In the Chrysler crisis, the Obama Administration forced secured bondholders to accept a deal that only a Washington Mutual stockholder would agree to. Essentially, the Obama Administration is attempting to abrogate bankruptcy law by strong arming Chrysler bondholders into accepting less than they would have received in statutory bankruptcy proceeding. Well, it is not working with GM as GM bondholders reject the extortion attempts from the Administration.
The Obama Administration must accept the fact that not only does this activist policy approach not work, it produces exorbitant costs for the taxpayer. "Too big to fail" should be replaced by the shorter and more accurate "just too big."