Carlos Lam's  Instablog

Well, H.R. 2751: Consumer Assitance to Recycle and Save Act -- better known as the Cash for Clunkers bill -- passed the House of Representatives on a 298-119 vote and is awaiting action by the U.S. Senate.  The bill gives buyers a $3500 to $4500 tax credit for trading in their used car for a new car at a dealership.  The dealers then have to ensure that the used car is either crushed or shredded; they cannot even sell it overseas!

Edmunds has reported that the average price of a new car is $27,800.  BankRate.com reports that an average car buyer puts down 5%; this would mean that an average new car buyer would take on about $26,410 in new debt.  The tax credit (let's say an average of $4,000) would take this down to $22,410. 

Just as with the $8,000 first-time homeowner tax credit (and a "first-time" homeowner is anyone who hasn't owned a home in 3 years), the federal government is tempting Americans with more debt.  Yet again, Washington proves that it does not get it: debt is the problem, savings the solution. 

Instead of creating an economic incentive for Americans to take on new debt, Congress should pass incentives for Americans to pay off their debt.  For example, how about a $3,000 above-the-line tax deduction for paying off an auto loan?  How about a $1,000 tax credit for paying off one's mortgage?  Of course, these incentives would do nothing to further the interests of the real estate industry or the automobile industry (which is and/or will be run by the government and its UAW supporters).

I sincerely hope that not too many Americans fall for this foolishiness.  Why would a person trade in their unleveraged, perfectly-working 2001 Saturn SL1, for example, so that he or she can take on $20,000 in new debt?

Disclosure: No positions

Last week, Bankruptcy Judge Arthur Gonzalez denied a request by Indiana governmental pension and capital funds (the State Police fund, Teachers' Retirement Fund, and the Major Moves road construction fund) to delay the sale of Chrysler to Fiat while the funds sought review of the Chrysler/Fiat deal from a federal district court.  All three funds hold secured creditor debt which will effectively be subordinated if the Chrysler/Fiat deal closes.  Typically, secured creditors get "first dibs" on the assets of a company in bankruptcy while unsecured creditor get the remains.  The arrangement created by Pres. Obama's administration, however, would place unsecured creditors (namely, Chrysler's union) in a better position than Chrysler's secured creditors.  As an attorney, I can tell you that I have never seen such a thing done, though bankruptcy is not my specialty.

Now, the Indiana funds--administered by Indiana Treasurer Richard Mourdock--have requested that a federal district court take jurisdiction over the Chrysler case.  The request is based on a variety of reasons, but the most serious claim is that by forcing secured creditors into a position behind unsecured creditors, the government is executing a "taking" without due process and, therefore, violating the 5th Amendment to the U.S. Constitution.  The argument boils down to the following steps:

1.  The Chrysler deal has the federal government's fingerprints all over it, so the deal is tantamount to an action by the federal government itself

2.  By placing Chrysler's secured creditors behind unsecured creditors, the federal government diminished the value of the funds' assets (the current "deal" will result in the funds' receiving only about 29 cents on each dollar they invested).  Such an action is equivalent to "taking" the pensioners' property without due process of law.

3.  The remedy requested is for the District Court to order a halt to the sale, place Chrysler under a trustee, and work on a deal that will "cure" the civil rights violation alleged.

The funds' attorneys argued the case before federal district court Judge Thomas Griesa this morning in New York.  Since Judge Gonzalez's bankruptcy court will hold a final hearing on the Chrysler/Fiat deal tomorrow, I expect Judge Gonzalez to rule today.  What will happen?  I don't know.  If Judge Griesa halts the Chrysler/Fiat deal, then it appears that the company is doomed and may be liquidated.  This may give Judge Griesa pause.  If he accedes to the government's actions, however, then he is essentially allowing brute force to dictate the outcomes in the bankruptcy process.  His is not a position I envy.

Disclosure: No position in Chrysler or Fiat