One of the benefits of being associated with the American Enterprise Institute is that I get to learn things from people who know a lot more about them than I do. A case in point is this article by University of Pennsylvania Law Professor David Skeel.
He points out that in the first third of the twentieth century bankrupt corporations did not go into Chapter 11 bankruptcy but instead went into “equity receiverships” in the debtor and the investment banks representing stockholders and bondholders restructured the company. This was criticized by many New Dealers, who regarded such deals as one-bid auctions which were “a mockery and a sham,” in the words of Jerome Frank, a Yale Law professor who became a New Deal regulator and a judge on the Second Circuit Court of Appeals.
The 1938 bankruptcy law, one of the two major bankruptcy laws passed in the twentieth century, got rid of these equity receiverships and substituted Chapter 11, in which secured creditors got preference over unsecured creditors and stockholders. Among its prime drafters were William O. Douglas, then the Chairman of the Securities and Exchange Commission and from 1939 Associate Justice of the Supreme Court. Douglas was something of a wild man as a justice—after having troubles with the IRS he voted against the government in every tax case, often with a one-sentence opinion noting his dissent—but he was a very smart corporate lawyer.
The Obama administration’s Chrysler deal looks very much like an equity receivership and very much unlike an orderly Chapter 11 proceeding. Skeel suggests that Judge Gonzalez order an independent audit and a complete accounting of the Chrysler deal. He doesn’t call the Chrysler deal, as I did, Gangster Government. But he does make it clear that Franklin Roosevelt would have winced at the deal and that one of his top appointees would have considered it “a mockery and a sham.”
