Absolute Priority

Wed, 06 May 2009 12:34:06 +0000

I confess, I have no idea what "absolute priority" means after reading this article in The Washington Post. Or maybe I have no idea what "senior" or "secured" means. Read for yourself:

Chrysler filed for Chapter 11 bankruptcy protection Thursday after a handful of lenders holding some of the company's senior secured loans declined to accept the government's offer of 33 cents on the dollar. The dissident senior lenders contend that the sale illegally rewards junior creditors at their expense, despite laws granting "absolute priority" to the senior lenders. The UAW, for instance, would get the bulk of its pension payments, the dissident lenders said.

Simple question -- if these lenders really are senior and secured, then how are junior creditors like the UAW getting anything if the senior, secured lenders aren't getting everything to which they are entitled? And let's be clear: only some of the senior lenders are dissidents in this process. Most of the senior lenders (judged by dollars at risk) have taken TARP money. To protect the taxpayer, the government should be the one pushing for absolute priority of the senior claims over those of the UAW. It is doing the opposite. What a joke.

The problem is not the speed of the process. The problem is that the current stage of the process appears ready to transfer assets to which the senior lenders have the strongest claim to other stakeholders who have less of a claim to it. The judge should modify the plan put before him to correct this.

I'll be continuing my education on these matters at this new (to me), indispensable blog.