There’s some hubub regard the rejection on the part of some creditor’s of the Government proposal to Chrysler debt holders to write off a greater portion of the debt.  These “Non-TARP” lenders have appealed to the public that they represent everything that’s right in America.   They have refused to take pennies on the dollar for their nickels on the dollar.

Let’s set aside the issue if the Government should be involved at all.   The Government’s involvement is a big issue, and one that should be debated, but not critical in evaluating how lenders should be behaving.  Assume that role of the Government in this case were instead being played by that of a private investor who already owns a large stake in Chrysler.

Chrysler had hoped to avoid bankruptcy by negotiating with its lenders and union workers.  The investor was willing to put more money into Chrysler if lenders were willing to take a haircut on the money they were owed.   Most lenders and the unions agreed to these concessions.  A few held out.

On the most part, I don’t have a problem with the “Non-TARP” lenders holding out.  That’s perogative, they should decide what’s the best decision financial decision for them.   Maybe they can get more out of the Government by holding out?  Maybe they will get more via a bankruptcy proceeding.  There is one case in which the actions of these lenders may be morally questionable.  If they hold credit default swaps that insures their debt and would actually make them better off if the company were to go bankrupt.  That situation would be akin to me lending a large sum of money to a friend and then taking out a life insurance policy on that friend.   So far so good, but then let’s say that my friend is critically ill and needs a life saving blood transfusion from me.   My friend might get better but if he dies I’m definitely better off financially.

What I object to is the notion that the current actions on the part of the Government in demanding concessions somehow “breaks the rule of law” as some voices of the other end (of the White House) political spectrum have screamed.   Renogitiating when circumstances change is part of a well functioning society, and well within the idea of the “rule of law.” Chrysler is not asking for a renogitation just because it wants to, but because it has to. That’s good business. Those who believe that the “rule of law” is sacrament must believe the only option for dead beat debtors is prison. Even if we still had debtor’s prison, how do you put corporation in prison?