Chrysler to File for Bankruptcy

It looks like Chrysler will be filing bankruptcy today.

Q. Will Chrysler cease to operate?

A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to leave bankruptcy, these companies are reconstituted as new legal entities.

[…]

Q. How long will this take?

A. The Obama administration spoke of a “surgical bankruptcy” which it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.

In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steelmaker, took seven years to resolve.

[…]

Q. What happens to Chrysler employees?

A. The White House said it did not anticipate any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,

Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.

But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.

Here is President Obama’s statements on Chrysler’s bankruptcy. So it looks like there will also be a deal between Chrysler and Fiat as well. If you think that this will end the large amounts of money going from the government to Chrysler, think again.

Consistent with the President’s commitment to provide adequate working capital to help Chrysler through this restructuring period and loan up to $6 billion to the Chrysler-Fiat Alliance, the U.S. government has committed to provide assistance sufficient to help give Chrysler a chance to achieve financial viability.

• Working capital: The U.S. government is prepared to provide approximately $3.3 billion in debtor in possession financing to support Chrysler through an expedited chapter 11 proceeding.

• Loan to the New Chrysler: Upon closing, the U.S. government is prepared to loan approximately $4.7 billion to New Chrysler, in the form of a term loan with $2.1 billion due in 30 months and the balance 50% due on the 7th anniversary and 50% due on the 8th anniversary of the loan. The interest will be an appropriate combination of cash and payment-in-kind. There is also an additional note of $288 million which is a fee for making these loans. The loans will be secured by a first priority lien on all of Chrysler’s assets.

Update: Frequent commenter Drew asks,

But what struck me was the notion that the govt loans will be secured by a first lien on assets.

What happened to the secured creditors in Chrysler today?? One of the most hallowed principles of lending is that secured creditors get flushed last, and that they can liquidate for their claims.

Has this principle been abandoned?? If so, this is mind boggling.

I don’t know the answer to the question. However, there’s this article in the WSJ that Greg Mankiw points to. I don’t have access to it, but Prof. Mankiw does quote this part:

“Like many others I made the mistake of buying what I believed was ‘value,'” Mr. Gwin says, adding that investors who bought at the time believed the loans were worth more than their market price. “We did not contemplate having our first liens invalidated by a sitting president,” he adds.

Prof. Mankiw then follows up with,

As the President intervenes in more and more industries, a key question is how he does it and what he is trying to achieve. Is he trying to reorganize insolvent firms while, as much as possible, preserving the rights of stakeholders as established under existing contracts? Or is he trying to achieve a “fair” outcome as he judges it, regardless of preexisting rules and agreements? I fear it may be the latter, in which case politics may start to trump the rule of law.

So it looks like the first lien creditors are taking a haircut. How much I don’t know, but there is this from the statement put out by the Obama Administration,

Chrysler’s largest secured creditors have agreed to exchange their portion of the Company’s $6.9 billion secured claim for their pro-rata share of $2 billion in cash at closing. The Bankruptcy Court process will be used to confirm this treatment on those lenders that failed to accept the offer that was accepted by a majority of the lenders.

If that is the haircut the first lien creditor took it is a signifcant one. If it was done by President Obama for political reasons it is cause for concern. It is cause for concern because it calls into question our rule of law and property rights, and whether or not this will be an isolated incident or one that will likely be repeated many times. If it is the latter, it could have serious repercussions on the financial sector. Why lend money if the government could come in and tell you, you are just S.O.L. I hope I’m wrong here.

Photo by Flickr user dok1, used under the Creative Commons license.

FILED UNDER: Economics and Business, Government, , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    We’ll just have to see what form Chrysler’s reorganization takes and what the company asks the court before making any judgment. I can’t imagine any viable business plan for Chrysler that doesn’t involve re-writing its union contracts.




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  2. PD Shaw says:

    I never could see how these bankruptcies could be quick, but a bankruptcy filing as a means of making a sale could do it.

    Locally people around here are still upset that the government helped Fiat to buy Allis Chalmers back in the 70s & 80s and as soon as the obligation to keep the local plant running expired, everyone was fired and the equipment was shipped to Italy. (That may have been a different Fiat though)

    I’m sure that doesn’t happen much /sarcasm.




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  3. Drew says:

    Others have, and will, jump on various and obvious issues.

    But what struck me was the notion that the govt loans will be secured by a first lien on assets.

    What happened to the secured creditors in Chrysler today?? One of the most hallowed principles of lending is that secured creditors get flushed last, and that they can liquidate for their claims.

    Has this principle been abandoned?? If so, this is mind boggling.




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  4. Dave Schuler says:

    That’s an interesting point, Drew, and it ties in nicely with the point I made over at my place today that unforeseen secondary effects are likely to be a serious problem for the Obama Administration.




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  5. PD Shaw says:

    Drew, it seems to me that the prior lien would have to be justified by one or two principles:

    1. The government money is creating value and therefore no harm to prior interests. This is the premise of the treatment of mechanics liens and purchase money security interests.

    2. The secured creditors are getting treated better than they would in a liquidation. I’m not sure how this could be, but it’s the basic premise of how creditors have to accept bad results in bankruptcy.




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  6. PD Shaw says:

    The secondary effect of this that I think bears some consideration is that Chapter 11 is usually premised on a business reorganization plan for continuing business. This smells like bankruptcy in aid of the sale of business. Is that a good idea in general?




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  7. Drew says:

    PD –

    I’m not a lawyer, (nor am I necessarily current) but I was a lender from 1989 to 1996 at a major money center bank. And classically credit trained. I’ve been a user of the same type of credit since 1996 as an LBO guy.

    I know of no theory or case law, where a lender with a perfected lien in the assets of its borrower was subsequently subordinated upon bankruptcy.

    Now, the secured lenders in Chrysler may have approved subordination. (Chances: .000001%)

    Or, to your point, they may have assessed their asset liquidation prospects and acquiesced to a haircut. But I see no reference to their refinancing at said discount.

    My antennae are up. As an ex-lender I cannot tell you how spine chilling the prospect is that a lender’s primacy of a first secured lien could have, and the effect on basic working capital financing it could be on business.

    Ask your friends.




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  8. Drew says:

    …the loss of a lender’s primacy…




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  9. sam says:

    Does this (begin to) answer Drew’s question?

    So Chrysler is filing for Chaper 11 bankruptcy protection. But the terms of the “prepackaged” bankruptcy the government is proposing look…suspiciously exactly like the deal the Treasury was negotiating in hopes of averting bankruptcy.

    Here’s the difference: outside the bankruptcy process, secured creditors — meaning holders of bonds secured by collateral like plants and machinery — have to essentially give unanimous consent to any deals, because of the risk the deal would be threatened in court. Inside bankruptcy court, they only need half of the creditors representing more than two thirds of the dollar value of the loans to “cram down” a deal.

    The Obama Administration, in a deal already accepted by the four big banks holding 70% of that secured debt, was offering $2 billion to those secured creditors — a figure it raised last night to $2.25 billion.

    A few major hedge funds were holding out in hopes of either negotiating a better deal in bankruptcy court, or cashing out on credit default swaps they bought to hedge their investments. (Credit Derivatives Research strategist Tim Backshall says the market for Chrysler CDS is very illiquid, but added that there are $2.6 billion in CDS outstanding from the old Daimler Chrysler; how many are held by the company’s secured bondholders is impossible to say.)

    So now the fight is over the agreement of 42 smaller creditors, mostly hedge funds, some of whom have taken to calling themselves the non-TARP lenders — insinuating, of course, that the four TARP banks are having their steep haircut subsidized by bailout money




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  10. Phil Smith says:

    Thirty-two cents on the dollar. Such a deal!

    The ONLY way this deal got done was through government coercion. “Nice bank you got there, shame if somefing was to ‘appen to it.”




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  11. Jeffrey W. Baker says:

    I’m having a hard time seeing the problem. A majority of the debtholders agreed to this. If they don’t agree to it, they’re going to come out even worse, since the government won’t be bringing in their $2.25b. What’s to complain about?




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  12. Drew says:

    Sam –

    I think it does. In my world, which is the “middle market,” such lenders would never, ever agree to a 2/3rds vote on such an issue. It would be terrible underwriting practice. (various syndicate bank voting levels are set for various issues, depending on how significant they are).

    However, it may be the case that a 67% level was set in this “large corporate” setting, a different market. (And under a theory of less risk)

    That said, Phil Smith then hits the nail on the head. The government, having TARP’d the major Chrysler lenders, squeezed their balxxls to say “yes,” over ruling the minority position hedge funds. This is just as his snarky remark suggests, Mafia-like.

    I hold no brief for the hedge funds. They are risk sensitive and risk assessment capable big boys. But the TARP’d banks??????? This would make this whole issue flat damned simple: the Obama Administration did a two-step: effectively nationalizing the banks, then muscling them to hand Chrysler to the Unions. Period. No other interpretation.

    If this turns out to be the fact set, beware anyone from now on claiming Obama is not a plain vanilla socialist. They are liars and sycophants.




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  13. Steve Verdon says:

    I’m having a hard time seeing the problem. A majority of the debtholders agreed to this. If they don’t agree to it, they’re going to come out even worse, since the government won’t be bringing in their $2.25b. What’s to complain about?

    Its called changing the rules of that game. It makes people less interested in playing. Do we really want finance to become a variant of Calvin Ball?

    Errr…well…anymore than it already is?




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  14. Drew says:

    Jeffrey –

    Compare the value of liquidation to the $2.25. The hedge funds obviously thought the former greater than the latter. They voted with their money, and were holding out.

    The government then stepped in and changed the rules. The subsidized banks did not make a market decision, they made a government coerced decision.

    “Either your signature, or your brains, will be on this contract.”




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  15. sam says:

    Just one thing, Drew:

    the Obama Administration did a two-step: effectively nationalizing the banks

    Didn’t that take place before Obama was elected? Wasn’t the TARP thing put in place by the Bush administration?




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  16. That’s an interesting point, Drew, and it ties in nicely with the point I made over at my place today that unforeseen secondary effects are likely to be a serious problem for the Obama Administration.

    Are you certain the effects are unforeseen? Perhaps crises will be manufactured to allow for ever bigger and bolder schemes. I don’t see capitalism going down with a whimper, but exactly when will the bangs start?

    But seriously, the government has effectively nationalized the banks. The government is now nationalizing the auto industry and stealing, yes I said stealing, equity from some people they don’t like to give it to others they do. Health care is about to be surreptitiously nationalized with nary a comment or dissent. Who has time for that when President Obama can hold court on the “enchanted” parts of his presidency?

    Does anybody else remember Kim Philby’s plan for the socialist left to seize control of Great Britain in Frederick Forsyth’s The Fourth Protocol?




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  17. sam says:

    Michael Steele on “nationalization”:

    It’s been awhile since we’ve had a Michael Steele gaffe. Here you go: “Look, we can’t go back out and start pointing fingers at Democrats and saying look how bad they’re performing, look at what they’re doing with the economy when we jumpstarted this thing,” RNC Chairman Steele said on MSNBC’s Morning Joe. “We were the ones that put the $700 billion on the table and said, all right, let’s start nationalizing the banking system. … So now, for us to stand back and go, oh, that’s a bad thing to do is disingenuous.” Of course this may fit the Michael Kinsley definition of gaffe—“A gaffe is when a politician tells the truth”—but it’s not likely to go over well with the Republican rank-and-file, who already have a target on Steele’s back. Expect a clarification later today.

    Source




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  18. PD Shaw says:

    a deal already accepted by the four big banks holding 70% of that secured debt, was offering $2 billion to those secured creditors

    What if the four big banks originally bought the secured debt for $1 billion?

    That’s just one of the problems with class, as opposed to individualized, determinations.




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  19. Drew says:

    Sam –

    I think the first point is fair enough. I’m not enough of an insider to know the sequence of events across administrations.

    But there can be no doubt who used the government’s TARP leverage against the Chrysler banks.

    Some may argue that this was a unique circumstance in history. But I ask any of you: would you put your hard earned money into a risk position, based upon your belief that historical rule of law and commercial practice would prevail wrt your investment (apart from classic risk assessment), now that you know this Administration might change the rules after the fact and compromise your investment?

    For those of you who have not spent the majority of your careers in the capital markets, you have no idea how chilling this is.

    This is how socialism kills economic growth.




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  20. Drew says:

    PD –

    I strongly suspect the “big 4” banks were the originals……with a basis at par.




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  21. Steve Plunk says:

    Three words to toss out for fun and comments: Class Action Lawsuit.

    The bond holders could very well file a suit individually or as a class. Unlike stockholders I don’t believe they are bound by group decisions but rather the terms of the bonds themselves. This is where rule of law will be put to test. Politicians will always want more than they legally should have but that’s why we have courts. I can’t imagine the Supreme Court not having final say or ruling against the bondholders. It’s a contract.

    Why is this not being mentioned? Am I that far off base? For gosh sakes people sue over much less.




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  22. An Interested Party says:

    Perhaps crises will be manufactured to allow for ever bigger and bolder schemes.

    Oh, you mean like the Iraq War…




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  23. Phil Smith says:

    Look over there, it’s Chimpy McHitlerbush!!




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  24. Jeffrey W. Baker says:

    Uh well I hate to be contrarian twice in a thread, but it seems to me that if the banks hadn’t got themselves into a pickle, then the government wouldn’t be holding a gun to their heads. They came with their hands out and now the man who pays the bills is calling the tune. This doesn’t seem in any way odd to me.

    What DOES seem odd to me is that both the banks and the corporations in question have already effectively failed, financed as they are on the margin by taxpayers.




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  25. PD Shaw says:

    Drew, the “Big 4” banks might have bought in at par, but they might also have insured some of the risk or obtained other third party recourse in the event of a default. The “Big 4” banks might also stand to gain if the smaller lenders take hits that the larger banks can withstand.

    All hypothetical, of course, but I dispute the notion that it is necessarily just for a vote of the banks to determine what is appropriate for all. They are all individual entities making calls in their own self interest, nothing more.




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  26. Steve Verdon says:

    Uh well I hate to be contrarian twice in a thread, but it seems to me that if the banks hadn’t got themselves into a pickle, then the government wouldn’t be holding a gun to their heads. They came with their hands out and now the man who pays the bills is calling the tune. This doesn’t seem in any way odd to me.

    Jeffery,

    It isn’t just the banks getting screwed here, but the others who are holding Chrysler first liens. It would be like pressuring the bank to screw over home owners with mortgages, then you come along and say, “Well if the banks hadn’t screwed up the home owners with mortgages would be fine, so lets blame the home owners with mortgages!!” Is that what you really wanted to imply?




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  27. Jeffrey W. Baker says:

    I don’t get your analogy, because in your scenario the homeowners would be Chrysler and the banks would be the creditors.

    That aside, I think I get what you are saying. You are saying that the minority creditors are not getting what they thought they would get in a liquidation. But I’m saying that can always happen to minority creditors in a bankruptcy, regardless of who the majority creditors are. Nobody’s acting outside the system here, except for the fact that the administration has leverage over the majority creditors due to the majority creditors being themselves insolvent, in fact.

    The fact of the matter is that those minority creditors are going to get equity in the reorganized Chrysler, which considering the phenomenal stupidity of their investment is more than they have a right to expect. The government’s pressure here is preserving an asset which will emerge with much more value than they would get in liquidation.




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  28. If that is the haircut the first lien creditor took it is a signifcant one. If it was done by President Obama for political reasons it is cause for concern. It is cause for concern because it calls into question our rule of law and property rights, and whether or not this will be an isolated incident or one that will likely be repeated many times.

    Well, but the issue ultimately is that the creditors probably got more than what they hoped to get out of bankruptcy proceedings. Crysler went down because some bondholders and specifically some hedge funds thought they could do better in the courts. We’ll see if they were right.

    I suspect that the big-4 banks were happy to get $2billion back at all, and that it had relatively little to do with either coercion or a backdoor bribe through TARP.

    Does anyone think that absent the government role the creditors would have been made whole somehow?
    Ultimately, you can’t get blood from a stone.




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  29. Let me just follow up my last point with the observation that we probably just don’t know enough about Chrysler position to know whether the big-4 got a good deal or not.

    But I would agree with Drew, Steve Verdon, and several others here that there needs to be much more transparency on this in order to either (a) reassure capital markets than nothing untoward happened here or (b) to force the administration to make a public defense and explanation of whether they are engaged in some sort of extraordinary conduct (and what the limits on it are) or whether this reflects a new public policy position.

    Here is a chance, btw, for Democrats in Congress to show they are more willing to exercise oversight than the Republicans were during the Bush years. I doubt they will seize the opportunity, but I certainly would like to see hearings about this and the Bank of America revelations from last week.




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  30. davod says:

    Were the bondholders who balked really hedge funds or is hedge fund being used as a slur.




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  31. sam says:

    Were the bondholders who balked really hedge funds or is hedge fund being used as a slur?

    See if this answers your question:

    The Lenders Obama Decided to Blame




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  32. sam says:
  33. Drew says:

    Some responses to various observations in the thread:

    1. In my experience it would be highly unlikely that a secured creditor, given their position in the cap structure, would get only 2/7= 29 cents on the dollar in liquidation. I don’t profess to be in possession of a liquidation analysis, but that would be a very, very light result.

    2. The hedge funds obviously came to the same conclusion I did. That’s why they came into the situation, and why they fought the TARP’d bank cramdown.

    3. “..but I dispute the notion that it is necessarily just for a vote of the banks to determine what is appropriate for all.”

    PD – Could you clarify? I’m not sure what you are driving at. Cap structures are tiered by risk and reward. No doubt there was a Loan and Security Agreement describing the rights of all the participants in the senior secured tranche, and a Subordination Agreement that basically said “the rest of y’all come behind us.” Of course, the senior secureds got paid less.

    So it really is quite natural for the seniors to demand to enforce their rights vis a vis those below them. Now, if the hedge funds came into the deal with a voting provision that allowed the Big 4 to accept the deal they did, the hedge funds made an underwriting error. But I’m sure they made that error by never thinking the Feds would come in an coerce the banks. That’s called getting fuxxxed. And that’s why this will have a chilling effect. Lenders now have to incorporate a wild card in their credit anlysis: a powerful entity motivated by the politics of the day.

    4. Steve Plunk – I doubt anyone but the senior secureds (the hedge funds, really; against the Big 4 banks) has a legal claim. Subordinated creditors would have to prove that value in excess of the $7MM in secured debt was available, and some breach of duty to get that value by the Board. The Board will say the Feds made them do it etc etc..

    But I’ll tell you this. This stinks, and I wouldn’t want to be on that Board!




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  34. Steve Verdon says:

    Were the bondholders who balked really hedge funds or is hedge fund being used as a slur.

    There is absolutely nothing wrong with the concept of a hedge fund. Seriously if you buy car insurance you are hedging yourself in case there is an accident even if you are a careful driver. Futures are a type of derivative and can be used for hedging. Part of the reason California had such an energy crisis was that the utilities were prohibited from hedging against the high spot market prices.

    This notion that hedging is somehow inherent bad should be jettisoned. If someone insist on thinking this way that person is nothing short of a complete moron.

    Jeffery,

    That aside, I think I get what you are saying. You are saying that the minority creditors are not getting what they thought they would get in a liquidation. But I’m saying that can always happen to minority creditors in a bankruptcy, regardless of who the majority creditors are. Nobody’s acting outside the system here, except for the fact that the administration has leverage over the majority creditors due to the majority creditors being themselves insolvent, in fact.

    Not all creditor’s are the same. In a bankruptcy proceeding they are ranked. Those at the front of the queue will stand to get the most back from their money. Those at the end may get nothing. This deal screws those at the front of the queue.

    Now, at the same time we the Obamassiah telling us he wants to get credit markets moving again, then he pulls a stunt like this. This is precisely the opposite thing he’d want to do if he really wants to get credit markets working again. People who had been willing to take first lien positions in other companies that might be less inclined to do so now because of it. In other words, I’m not sure Obama and his team have thought through the unintended consequences aspect of their solution.

    The fact of the matter is that those minority creditors are going to get equity in the reorganized Chrysler, which considering the phenomenal stupidity of their investment is more than they have a right to expect. The government’s pressure here is preserving an asset which will emerge with much more value than they would get in liquidation.

    The creditors disagree with you and I’m pretty sure they have more information on this than you do. And if they want to take that risk I say let them. Problem is that it likely went counter to the Obama Administrations goals, so the Obama Administration used strong arm tactics.




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  35. PD Shaw says:

    Drew, you seem to be getting hung up on the specifics of my examples, where they were only intended to be examples.

    Here is where I am coming from. I’ve been in numerous rooms with a class of creditors and when the creditors disagree on what to do, such as whether to agree or challenge a reorganization plan. When there is disagreement in my experience it has nothting to do with the merits of the reorganization — it has do with individual circumstances. The most notable one is that there is always some guy who wants the money now. It’s not always the small guy. It might be the Fortune500 company that will say that they’ve already written off their loss and want to move on.




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  36. Drew says:

    PD –

    “When there is disagreement in my experience it has nothting to do with the merits of the reorganization — it has do with individual circumstances.”

    I wasn’t trying to be intentionally dense! (Maybe it comes naturally)

    Yes, I concur. Many times the first meeting is all about “what’s right.” But by the 3rd…4th….5th………its about who’s the meanest SOB in the room, who’s tired, who has already taken their reserves etc.

    Scary sometimes.




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  37. Drew says:

    PD –

    PS, I didn’t mean to preach in my comment to you. I didn’t know you had experience in this arena.




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  38. Rick DeMent says:

    you know there was less caterwauling from the econo-maniac class when Nixon unilaterally tore up just about every contract in the US in 1971.




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  39. Now, at the same time we the Obamassiah telling us he wants to get credit markets moving again, then he pulls a stunt like this.

    You see… and then you want us to take you seriously. Obamassiah… that’s on the same level as Chimpy McFlightsuit.

    The creditors disagree with you and I’m pretty sure they have more information on this than you do. And if they want to take that risk I say let them.

    Except that politics works both ways. If the creditors thought they could get more from a liquidation, then fine. That is their choice… and they made it. But what if they didn’t think they could get more from the the liquidation of the company but were instead trying to hold up the government for more cash into the company.

    Critics of what has happened are all assuming the the creditors just wanted to get what they were due and would get out of liquidation. But it is also possible they wanted to get more than they were due and were hoping to back the government into a corner in order to keep Chrysler out of bankruptcy.

    We just don’t know the details at this point.




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  40. Drew says:

    Steve says –

    “Now, at the same time we the Obamassiah telling us he wants to get credit markets moving again, then he pulls a stunt like this. This is precisely the opposite thing he’d want to do if he really wants to get credit markets working again. People who had been willing to take first lien positions in other companies that might be less inclined to do so now because of it. In other words, I’m not sure Obama and his team have thought through the unintended consequences aspect of their solution.”

    This is exactly correct. People or institutions that extend credit have a laundry list of things they evaluate before doing so. To now add: the government may step in and obviate all your best thinking and judgment because of the political winds of the day is an issue that cannot be underestimeted.

    “The fact of the matter is that those minority creditors are going to get equity in the reorganized Chrysler, which considering the phenomenal stupidity of their investment is more than they have a right to expect.”

    Wrong and wrong. I did some investigation. The senior creditors are going away; no equity. And they weren’t stupid, they had the rules of the game changed by the Feds.

    The UAW gets 55% of the go-forward equity FOR NO FRESH MONEY. (But a VEBA concession?) Fiat gets 35% FOR NO FRESH MONEY. (But perhaps some investment in the event of negative cash flow?) The taxpayers, who presumably have had their previous $5B loan vaporized (Thanks, Barry. That’s not what you told us weeks ago.), now get 10% FOR AN ADDITIONAL $6B IN FRESH MONEY.

    Say what mf???

    I discovered that the senior loans were trading at 17 cents on the dollar. That would tend to bolster the argument of those who said “you can’t get blood out of a turnip.” However, I would suggest that 17 cents reflected an insiders knowledge discount on potential Fed heavy handedness.

    But here is the bottom line. Thos seniors were owed a piece of the equity. The BIG WINNER here?

    The UAW.

    Anyone surprised??




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  41. Phil Smith says:

    But it is also possible they wanted to get more than they were due

    Bernie, you don’t know how financial instruments work at all, do you?




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  42. Drew says:

    Bernard –

    “Except that politics works both ways. If the creditors thought they could get more from a liquidation, then fine. That is their choice… and they made it. But what if they didn’t think they could get more from the the liquidation of the company but were instead trying to hold up the government for more cash into the company.”

    Historically, creditors have been able to rely on a well worn history of contract case law and commercial practice. The liquidation value should have been their backstop. That’s what a first priority lien means.

    Your premise that some may have speculated that the government may have given them an unwarranted premium might be be correct. Government is, after all, inept. But it is not a rationale for supporting this stunt the Feds pulled in strong arming TARP banks. This has piled a significant new risk premium into the credit equation.

    Let me ask you something. Would you plow a significant portion of your net worth into a mutual fund focused on health care stocks knowing you could wake up tomorrow and read in the paper that Obama had strong armed health care providers into a 30% price decrease…..in the public interest, or the health care workers union interest??




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  43. Bernie, you don’t know how financial instruments work at all, do you?

    I guess I don’t. Explain it to me then.

    Government put in $4 billion into Chrysler back in, what November? If I were holding Chrysler debt, instead of walking away, I might see if I could push the government into making another contribution to sweeten the deal. What am I missing?

    By “due” I don’t mean more than par for their holdings, but rather more than the liquidation value they could hope to realize. Again, Phil, which part of that is wrong.

    Walk me throught it. I am always happy to learn.




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  44. Your premise that some may have speculated that the government may have given them an unwarranted premium might be be correct. Government is, after all, inept. But it is not a rationale for supporting this stunt the Feds pulled in strong arming TARP banks. This has piled a significant new risk premium into the credit equation.

    I agree 110%… if indeed the TARP banks were strong-armed rather than making a business decision that 30 cents on the dollar today was a good deal. Remember, also, that some consider “strong-armed” to be quite the reverse — that in effect, the government is using TARP funds as a back-door way to make the TARP banks whole. There is so little transparency on this, we can’t know whether the government strong-armed the TARP banks or whether the TARP banks strong-armed the government… though I agree, the former is more likely than the latter.

    And just to be clear… which I was originally lukewarm in support of TARP and the auto bailouts,etc… I now acknowledge (and have for at least a couple of months) that you saw the problems with it much before I did. At this point, I don’t think there is a dime’s worth of difference between your view of TARP and mine. It was a disaster. I may have come to the conclusion through a slightly different process than you… but we’re in the same place on that.

    Where we disagree, I think, is that you seem to think that Obama has a hidden agenda here. And I think he’s just trying to muddle through.




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  45. The BIG WINNER here?

    The UAW.

    Anyone surprised??

    My understanding is that there are some pretty major concessions from the in the deal, no? I haven’t seen a long-term economic analysis of the costs paid by each party. Have you? Do we even know enough details to assess it?




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  46. Phil Smith says:

    Bernard, what the creditors are “due” is the face value of the debt instrument, plus accrued interest. They’re definitely going to have to settle for less, but they aren’t “due” any less. The use of that term is either mendacious, or ignorant. I gave you the benefit of the doubt and presumed ignorance on your part. Feel free to correct me.




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  47. Phil Smith says:

    According to Bloomberg, the UAW’s concessions amount to the pension fund writing off half of the $10.6B owed by Chrysler; they’re not giving up anything on active member pay scale or health care; and “the contract also has a provision that as much as 25 percent of the total Chrysler-UAW workforce will make $14 to $16 an hour. This increased from 20 percent in an earlier contract.” So $5.3B and increasing the number of folks by 5% – all of whom will be new hires, or re-hires – that make $14/hour buys the UAW 55% of Chrysler.

    This is a crap sandwich that the taxpayer and the bondholders are having shoved down their throats. “We don’t know enough yet” is a bs answer. We know plenty, and it’s long past time for any honest person to stand up and call bullshit.




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  48. PD Shaw says:

    OK Drew, you made me look something up. This is from a Bankruptcy treatise (Collier’s):

    “A class of secured creditors subject to a cram down can be provided with fair and equitable treatment in a plan if: (1) the creditor(s) in the class retain the lien and deferred cash payments are provided; (2) the collateral is sold with a lien for the benefit of creditors in the class attached to the proceeds; or (3) the class of creditors realizes the indubitable equivalent of its claims.”

    I haven’t read the plan, but it appears that we are in category (3), which is highly litigious territory for a quick bankruptcy.




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  49. Drew says:

    “Where we disagree, I think, is that you seem to think that Obama has a hidden agenda here. And I think he’s just trying to muddle through.

    and

    “My understanding is that there are some pretty major concessions from the in the deal, no?”

    We agree?? Angels sing and trumpets blare… I’ll buy you dinner. Seafood, steak or Italian?

    Now:

    Yes, I do see an agenda. In a real workout/bankruptcy, the capital providers whack up the residuals. Labor might make concessions to future wages and benefits as a concession to induce fresh money to come in and revitalize the situation. They might buy the company.

    But let’s review what is happening here:

    Banks – Claim: $7B. Recovery? $29%. Go home.

    Equity I – (Old taxpayer money) – Claim: $5B. Recovery? In return for $6B in fresh money!!: Zip on old money plus 10% of future equity for the $6B.

    Equity II – (Old equity holders) Claim: Zero. Recovery: Zero. Go home.

    UAW – Claim: Zero. (since the banks got less than zero, and the UAW VEBA is subordinated) Recovery? 55% of the future equity for zero in new money.

    WTF!!!???

    People will try to characterize the VEBA as a concession. That’s BS. But set the BS aside and consider: The UAW gets 55% of the futures for forgiving a $4B asset worth zero??? And the taxpayers 10% for foregiving a $5B asset worth zero plus $6B in new money????

    Let me repeat: WTF!!!!???

    For whatever the future equity might be worth (zero or bazillions) the prior capital providers should have been given this contingent asset, not the UAW.

    We may hear brain dead media types trying to explain away this travesty by noting that the UAW got a worthless asset in the equity, BUT THEN WHAT THE HELL ARE WE PLEDGING NEW TAXPAYER MONEY FOR??

    I don’t like Barack Obama, or his policies. I think he is an inexperienced fraud who rode a media fed propaganda wave to the White House. However, I DO NOT THINK THE MAN IS STUPID. He knows exactly what is going on here. And its a flat out pro labor “agenda” with your money.




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  50. I gave you the benefit of the doubt and presumed ignorance on your part. Feel free to correct me.

    No, you decided to be insulting on the basis of a semantic technicality. I was clearly talking about what they could expect out of a liquidation.




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  51. Drew says:

    PD –

    I’m generally hesitant to play what I’m not. eg a lawyer.

    But your citation looks awfully correct in my experience, and layman’s (finance man’s) experience.

    Notice that the senior secured gets the ups, such as they might be: 1) you can compromise the lien holder IF HE RETAINS HIS LIEN AND FUTURE PAYMENTS, 2) you can force the liquidation, but he gets the benefit, or 3) I don’t know the legal meaning of indubitable, but one can clearly infer it means they get the benefit of their liquidated lien.

    None of this happened here.

    See the posts above. Bernard questions whether Obama is just muddling along.

    If “muddling” means butt-fxxxking the creditors and the taxpayers for the benefit of the unions……..I guess he’s got a point.




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  52. Phil Smith says:

    I was clearly talking about what they could expect out of a liquidation.

    Bullshit. Here’s what you said.

    Critics of what has happened are all assuming the the creditors just wanted to get what they were due and would get out of liquidation. But it is also possible they wanted to get more than they were due and were hoping to back the government into a corner in order to keep Chrysler out of bankruptcy.

    This is a pattern with you, Bernard. You imply that one party to a dispute is acting in bad faith. You’re always careful to use weaselly language that gives you an out. In this case it’s the hedge funds who are protecting their shareholders’ interests; previously it was the AIG bonus babies who you airily accused of committing felonies. So yes, Bernard, I’m being insulting; but it’s not on the basis of a semantic technicality, it’s on the basis of a clear reading of what you posted.




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  53. This is a pattern with you, Bernard. You imply that one party to a dispute is acting in bad faith.

    Steve understood what I was saying. How do you explain that?




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  54. For whatever the future equity might be worth (zero or bazillions) the prior capital providers should have been given this contingent asset, not the UAW.

    Yes, you are right.

    Of course, that path would kick UAW renegotiations down the road, right? And then you get into labor contracts, strike possibilities, and so on. So I can see why they chose this course and I don’t think it was just to promote socialism. But certainly it is squirrely enough that I can understand your skepticism.

    Bigger issue — I have been railing for years against Bush’s prioritizing convenience over the law… I should be more consistent about doing the same with Obama.

    So there you go Steve, you’ve convinced me.




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  55. Phil Smith says:

    I don’t see where Steve responded to that point at all, so it is going to be difficult to explain. In fact, the only exchange I see is where you chide him for the messiah comment. I see Drew kinda halfway going along with you, but that’s it.




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  56. I see Drew kinda halfway going along with you, but that’s it.

    You’re right. It was Drew. So, anyway, Drew understood my point… how do you explain that then?




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  57. Phil Smith says:

    I think he was just being charitable. Less so when he said of one of your comments

    If “muddling” means butt-fxxxking the creditors and the taxpayers for the benefit of the unions……..I guess he’s got a point.

    I got to thinking about why I’m so irritated with you in particular, and I figured it out. It’s because during the Bush years, you were genuinely principled opposition. For the last 100 days, you’ve just been a toady. If you can live up to your 5:24 post pledge, you won’t be anymore. Up to you.




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  58. sam says:

    @Drew

    People will try to characterize the VEBA as a concession. That’s BS. But set the BS aside and consider: The UAW gets 55% of the futures for forgiving a $4B asset worth zero??? And the taxpayers 10% for foregiving a $5B asset worth zero plus $6B in new money????

    Let me repeat: WTF!!!!???

    For whatever the future equity might be worth (zero or bazillions) the prior capital providers should have been given this contingent asset, not the UAW.

    But according to this story in BusinessWeek, GM owed the UAW far more than $4 billion:

    For months [story dateline is April 8], GM and its legal advisers have examined a quick bankruptcy in which the auto giant enters court and splits into two companies—a “good GM” with Cadillac, Chevrolet, Buick, and GMC—and a “bad GM” that has Hummer, Saturn, some shuttered factories, and a load of debt. The good GM would emerge quickly, sources say, while bondholders would be left to collect some portion of their collective $28 billion in debt from the assets in the bad GM.

    Before executing such a deal, GM would need to strike a deal with the union that would bring wages in line with those at Japanese plants in the U.S. and get the UAW to take stock instead of cash for a big chunk of a health-care trust to pay retiree benefits, beginning in 2010. GM owes the UAW $20 billion for the health-care trust, called a Voluntary Employee Benefits Assn., or VEBA. [my emphasis] GM has offered half in cash and half in stock to reduce its debt. But the Treasury Dept. said on Mar. 31 that GM needs to reduce that liability by much more. Treasury also concluded that GM needs to slash its $28 billion in bond debt by more than the two-thirds discount that was in GM’s original plan. GM has offered its bondholders two-thirds of their bond value in stock and the rest in cash.

    Does this change anything in your argument?




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  59. sam says:

    Ah, hell, nebbermine. You guys are talking about Chrysler. My bad. Sorry. Need more coffee when I first get up…




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  60. Drew says:

    Bernard –

    “Of course, that path would kick UAW renegotiations down the road, right? And then you get into labor contracts, strike possibilities, and so on. So I can see why they chose this course and I don’t think it was just to promote socialism.”

    PD Shaw correctly observed that the “right” thing to do often gets caught up in the brass knuckles of the negotiation. (So we can have another varian on an old saw: the two things in life you do not want to see are sausage being maed, and bankrupty decisions…)

    I can see the UAW getting a piece of the action here. Nothing is pure in these deals. But 55% to a non-frssh money player is one of the most outrageous things I have ever seen. Knowing the Chicago/Illinois culture of payoffs Obama wallowed in for years, about as far as I could go on understanding is to scrap the socialism notion and ascribe it to a raw political payoff.

    I’m not sure which is worse.




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  61. Drew says:

    Don’t worry, sam. In a short time we may be able to have the same discussion about GM. 🙁




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