Chrysler said it’s going to file for bankruptcy because the Obama Administration’s plan to give 55% of the company to the United Auto Workers Union fell through.  Why?  Because some creditors insisted on resolving things the old-fashioned way, through the courts, and refused Treasury’s payoff:

Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler’s debt in return for $2 billion in cash.

But the administration said about 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through. Those creditors said the proposal was unfair and they were holding out for a better deal.

A person briefed on Wednesday night’s events said the Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash. But in the end, this person said most thought they could recover more if Chrysler went into bankruptcy and some of its assets were sold to satisfy creditors.

The sweet deal was pushed by taxpayer-funded TARP banks, in other words, Obama Treasury proxies, just so you know.

The President was not amused.  But the collapse of this incestuous deal allows for the return to the rule of law, says WSJ.  Chrysler Goes to Court

Bankruptcy – not Treasury – is the fairest venue for all parties.

President Obama’s broadside against bankers yesterday illustrates better than any argument ever could that bankruptcy court, and not the political arena, is where Chrysler belongs. Yesterday’s filing isn’t the end of the U.S. auto industry, or even necessarily of Chrysler, and it offers the best chance to protect all parties under the rule of law.

“I don’t stand with those who held out when everyone else is making sacrifices,” Mr. Obama nonetheless declared, blaming what he called “a small group of speculators” for the car maker’s Chapter 11 filing. To hear the President tell it, you’d never know that Chrysler had borrowed, and since frittered away, the $6.9 billion that it owes to those “speculators.” The Administration had only offered $2 billion to those secured creditors as part of its proposed restructuring for the car maker. So it’s hardly a surprise that many lenders would rather take their chances in bankruptcy court.

Who are these people who have the audacity to refuse to be sacrificial lambs, and why are they so uncooperative?

The Chrysler creditors at least represent teachers, pensioners and retirees, among others. The Administration is advancing its own social and political agenda through its ever-deeper entanglement with Chrysler and General Motors. That explains why the government is giving 55% of the new Chrysler to the UAW’s retiree-benefit trust, a junior creditor, while those ahead of the trust in line get a mere 30 cents on the dollar.

The same tug-of-war is playing out at Government Motors:

Meanwhile, over at Detroit’s other ward of the state, General Motors, the Treasury was dismissive of a counter-offer that GM’s private creditors made Thursday. Earlier this week, the Administration (via GM) made an offer to give those creditors about five cents on the dollar while taking 50% of the equity for the government. And it justified that offer by saying taxpayers needed to be protected for the $16.2 billion Treasury has already lent to GM.

So GM’s creditors offered to take 50% ownership themselves in exchange for canceling their $27 billion in debt. The UAW would still get about 40% of GM, but the new private owners would control the firm. And the Treasury’s own loans would be kept whole, helping to ensure that taxpayers get all their money back.

“The company can’t sustain all that debt,” a senior Treasury official told us, explaining why the government’s share of the debt load needs to be reduced. That could well be true, but if the Treasury knew that $16.2 billion was too much debt for GM to carry, it had no business lending the company that much in the first place.

I thought the President was all about fairness.  Apparently some groups are more deserving of it than others, in his view.  I hope GM ends up in law before a court, too, where, theoretically at least, everyone is equal.