Bailout Watch 279: Is The Bailout Unconstitutional?

I’m not a constitutional law expert. But I’m a fan (of the document, not the lawyers). And I’m extremely uneasy at the prospect of the United States government assuming control of Chrysler, GM and (maybe) Ford ahead of the company’s legal owners AND its creditors. Of course, I’m not the only one. And, once again, we turn to the just plain folks at The Heritage Foundation for a heads-up on a bailout-related issue. “A key provision of proposed legislation to bailout the General Motors and Chrysler, which say they are on the brink of insolvency, may be an unconstitutional taking of private property… General Motors and Chrysler already carry significant loads of ‘senior’ debt with priority over other claims, and it is a standard feature of such debt agreements that borrows cannot subordinate this senior debt—that is, as a condition of the loan, the borrower agrees not take on additional debt that has a higher priority and would therefore imperil the senior debt. But that’s precisely what the bailout bill purports to do.” In other words, “Without providing any compensation to senior creditors, the bailout legislation would convert their loans to junior debt, increasing the likelihood that they will not be paid, which amounts to a partial or total taking. There is also a real question as to whether this taking would be for a ‘public use,’ as also required by the Constitution.”

“There are only two sure-fire fixes to the legislation. One is that the government could pay off the automakers’ senior debt-holders with ‘just compensation.’ The downside is that this could add billions to the bailout’s price-tag and be a windfall for lenders that might otherwise face a ‘haircut’ on their payouts in a bankruptcy proceeding.”

BUT–

“The best, safest, and most fiscally responsible solution is the simplest: Don’t use taxpayer funds to bail out the Detroit automakers. Instead, rely on the mechanism established in the Constitution to let the automakers confront their problems and reorganize: bankruptcy.”