Editorial: Risk and reward

The U.S. Supreme Court's decision not to intervene in the Chrysler bankruptcy gives the auto firm a reprieve, but it creates new risks and problems for all companies seeking to raise capital.

The legal system's haste was understandable. Both the company and the administration of Barack Obama argued that the longer Chrysler remained in bankruptcy, the more diminished in value it would become. And under the deal arranged by the administration, Italy's Fiat, which is taking over the business, can walk away if the transaction isn't completed by June 15.

While Fiat CEO Sergio Marchionne at first said the automaker would be patient with the legal proceedings, he later said a decision must be reached by the original date. The government has also contended that Chrysler is running through an estimated $100 million each day it remains in bankruptcy.

Under the government-arranged settlement, Chrysler's bondholders will receive $2 billion for their $6.9 billion in debt. That amounts to about 29 cents on the dollar. Nine-tenths of the creditors agreed to the deal, although most of them are banks and investment funds that are borrowers from the federal government.

Three Indiana pension funds, whose debt holdings amount to $42 million, contended that as secured lenders they should have received better treatment than such unsecured creditors as the United Auto Workers retiree health care trust fund. The UAW fund will receive 55 percent of the equity in a reorganized Chrysler while Fiat, which put up no money, will receive a 20 percent share as well as effective control of a new Fiat-Chrysler alliance.

Legal commentators have said the union received a better deal than is usual in a bankruptcy.

The bankruptcy judge in the case opted for pragmatism. He ruled that the secured bondholders received the best deal available, since the liquidation value of Chrysler would at most be slightly more than half of the $2 billion they would receive under the Fiat merger, and no other lender or suitor was available. An appellate court upheld the bankruptcy judge.

Still, the decision on whether to accept the deal should have rested with the bondholders -- not presented as a government ultimatum. Protecting the interests of secured creditors is the point of bankruptcy law. The Indiana pension fund beneficiaries are average working Americans no less than the UAW members employed by Chrysler.

This is a tough call. We're pleased that Chrysler gets another chance. But given the treatment of the secured creditors in this case, any major company may now find it difficult to borrow money.