By on May 1, 2009

Announcing Chrysler’s bankruptcy, President Obama vilified the “investment firms and hedge funds” who decided to “hold out for the prospect of an unjustified taxpayer funded bailout.” No, not the existing unjustified taxpayer funded bailout. The new one. “Some demanded twice the return that we bludgeoned the other TARP-supported lenders into accepting.” Obama didn’t say that; but he would have if his daughter had made the same birthday wish as Max Reede. Anyway, it turns out the Presidential Task Force on Automobiles can’t stand losing, they can’t they can’t they cant stand losing, they can’t they can’t they can’t stand losing to hedge funds. “I don’t stand with those who held out when everybody else is making sacrifices,” Obama chided con multo vigore. As intended, Obama’s remarks triggered a shit storm from both his supporters and the business community.

“U.S. Tactics Spark Worries Over Lenders’ Rights” The Wall Street Journal reports/warns.

Banks, hedge funds and other investors that hold $6.9 billion in secured loans are being asked to release their contractual claims over Chrysler’s assets in exchange for a fraction of what they are owed. Many lenders see that as a raw deal, because in the bankruptcy code’s priority scheme, secured creditors are supposed to get paid before unsecured creditors such as employees.

Remember when Congressman Barney Frank confronted an expert on bankruptcy law during the second round of the so-called bailout hearings? [link help?] When the witness said it would be illegal for the feds to jump the queue to recover bailout bucks, Frank suggested that Congress could rewrite those pesky laws because, well, Congress wrote them (never mind the Constitution or common sense). Well, here we go . . .

Investors worry the government-led plan could rewrite the rulebook on corporate restructurings and the entitlements of creditors. They say that could make lending more expensive for corporations, while crimping lenders’ willingness to get involved with companies that have a connection to the government.

As of late Wednesday, about 20 of the 46 lenders were opposed to the government plan, according to a statement from a group of debtholders. If more than half the lenders oppose the reorganization, the Chrysler deal could be stuck in bankruptcy court for far longer than the government hopes.

Or not. After all, you have the President of the United States deciding with whom he does and doesn’t stand in a legal proceeding. Could the Prez use his political power to gazump secured debt holders? Yes he can! And that’s when this could get really, really ugly.

Of course, there are those who see beauty in the face of Gorgon (stoned as they are). How about Salon’s “A sob story from the vultures who forced Chrysler into bankruptcy.

According to reporter Serena Ng, Gwin, the “principal” of the Group G Capital hedge fund, “is wrestling with the knowledge that the retirement plans of some 80,000 Americans may rest in his hands.” 

Spare us the sob story, [Chrysler investor] Geoffrey Gwin. You’re in this game to make money by speculating on the bonds of companies that are in big financial trouble. Now you’ve found yourself smack in the middle of a major political showdown between a pissed-off public and a Wall Street that hasn’t had this little credibility since 1929. Too bad for you. Good luck sweet-talking the judge.

The Washington Post is down with that “reasoning.”

What you need to know about these vultures is that their idea of fairness is throwing 100,000 people out of work and denying retirees their pensions and their health benefits just so they can liquidate the company and maybe squeeze an extra 15 cents on the dollar from their Chrysler debt.

As you might expect, The Huffington Post is just as huffy.

On the 101st day of his Presidency, Barack Obama finally slapped the hedge funds across the face like they deserved . . . The President’s message was this: when labor, management, and taxpayers of multiple nations have stepped up to bat, the American public will not be held hostage by hedge fund managers stalling for profits. That is the message. And it is a message Americans have been waiting patiently to hear.”

As over 70 percent of the public opposed providing additional bailout billions to Detroit, I thought they were patiently waiting to hear that the United States government was getting out of the car business. If so, in this they were disappointed.

As in any good zombie movie, Chrysler’s liquidation—the only “viable” or indeed probable outcome in this—depends on a hero who stands for truth, justice and yes, the American way. In other words, it’s all coming down to the judge Arthur J. Gonzalez.

And who chose Gonzalez? Art got the nod via a sealed envelope system known as “the wheel.” It is, literally, a wheel of fortune. You can’t make this shit up. Nor the confrontation to follow.

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51 Comments on “Chrysler Zombie Watch 2: Politics vs. The Rule of Law...”


  • avatar
    detroitroots

    hey rob. i just caught you on NPR. i look forward to explaining the auto industry to you in future comments. i promise to use terms you can understand.

  • avatar
    celebrity208

    dangerously close to flaming the site there huh‘roots?

    This editorial is right on point. Get into bed with the fed and you’ll be doing a long walk of shame with your head hung low… likely Chyrsler’s last step of that walk of shame will be into its own grave. Sad. Ch11 5 mo. ago would have put the US in the same situation it’s in now MINUS the billions the fed has pissed away already.

    I’m depressed to say the same fate likely exists for GM. Damn.

  • avatar
    gossard267

    Wouldn’t a move like this deliver yet another serious blow to the confidence of investors? Credit markets certainly won’t react well to the rules of secured debt being rewritten overnight.

  • avatar
    paris-dakar

    Our Community Organizer In Chief, deciding who is worthy of his advocacy and who isn’t.

    Of course, Obama doesn’t care about things like Rule of Law and confidence in the markets where it concerns who he decides to STAND WITH. Deep down, he probably doesn’t believe in any of those things anyway.

    I’m eagerly awaiting the Obama Spin Squad rushing in to this Thread to tell us how we just don’t understand how the world works.

  • avatar
    no_slushbox

    So, if a company is facing bankruptcy the creditors should lobby against the government bailing it out instead of lobbying for the government bailing it out?

    I can live with that precedent.

  • avatar
    PeteMoran

    @ RF

    The incident you’re looking for with Barney Frank and Prof Edward Altman is from 5 December’s House Committee Financial Services Government Assistance to Automotive Industry. It occurs at 05:00:17.

    Altman had previously suggested that you would be changing the very structure of Capital, that Government’s coming in to make themselves senior is what happens in other (Banana) countries.

    Barney didn’t like that too much;

    Frank: You are now before the body that wrote Chapter 11, and it can rewrite Chapter 11.

    Interestingly, Altman’s Z-Score system for predicting bankruptcy has long suggested GM was insolvent. During the same testimony he suggested their models had GM’s cash needs of upwards of $40b outside of bankruptcy and even then it would probably be insolvent.

    It’s not in my area, but working for a global advisory firm, I can tell you we have had clients with potentially billions of investment dollars wanting work done on what Frank’s “changes” would mean for their investments or proposed projects in the USA.

  • avatar
    bluecon

    Fair warning for investors to move their money out of the USSA.

    Unions will be coddled and handed billions with the investors picking up the tab.

    “Atlas Shrugged” comes to life.

  • avatar
    bill h.

    Another perspective here:

    http://www.washingtonpost.com/wp-dyn/content/article/2009/04/30/AR2009043003898.html?hpid=topnews

    My own view is wait and see, even if bloviating is so much easier, and makes for livelier blogging.

  • avatar
    jpcavanaugh

    I have seen nothing to suggest other than that the judge is a straight shooter. This is all we can hope for – that this saga unfold under the terms of the bankruptcy code.

    We can all quit worrying now. The thing is in front of a bankruptcy judge, and not being cooked politically. If there is a viable business, it will come out the other end. If not, it won’t. Creditors will all have the opportunity to have their claims considered and they will be resolved on their legal merits, not political ones. The biggest question was always would financing be available to run a reorganization. Feds say yes, so problem solved.

    This should have happened with both Chrysler and GM back in December. We (those of us who write checks to the government) could have saved a lot of money.

  • avatar
    troonbop

    Obozo appropriated private property and gave it to his backers in the UAW. This is genuine banana republic activity. Business is based on investment confidence.
    There is no “wait and see” element to this; the line has already been crossed.

  • avatar
    bluecon

    @troonbop

    This may be the most damaging thing yet done to the US economy. It is safer to invest in communist China than the USSA.

  • avatar
    Pch101

    Thanks to TTAC for documenting the rapid slide of the Wall Street Journal into becoming a business tabloid. Murdoch sure has a way of taking perfectly good media organizations and turning them into a joke.

  • avatar
    guyincognito

    Ok, this post is a perfect example of why I’m lost and why I never thought they would go to court in the first place.

    If the rules are to be re-written, why not create a whole new, out of court CH11 lite process? Why go before a judge using an established process that flies in the face of the results you have already announced?

    It seems to me that re-writing the rules for CH11 and setting the legal precident will result in more fundamental changes to how business is done in the US than an emergency out of court proceeding would. It may also be much more challenging to do this, without some serious shenanigans that even the general public may come to see as patently unfair and possibly corrupt.

  • avatar
    Pch101

    It seems to me that re-writing the rules for CH11 and setting the legal precident will result in more fundamental changes to how business is done in the US than an emergency out of court proceeding would.

    There’s no precedent here. The good/bad company concept is nothing new; this is how failed banks are reorganized.

    The legal issue is whether $2 billion was a fair price for the assets. It’s a debate over appraisals. If anything, $2 billion was probably too much; did you see anyone lined up out the door ready to buy used tool-and-die machines from the Old Chrysler?

  • avatar
    PeteMoran

    @ PCH101

    Just so we’re clear, are you wanting to suggest that airing the concerns of investors that changing the existing understanding of debt seniority is just tabloid reportage by the WSJ? I think it’s an important and genuine problem that could do with some serious discussion.

    (Otherwise, I agree, Murdoch has a handy knack of 4th Estate destruction).

    Also, I should have added previously, that to my knowledge Frank and Friends did not rewrite Ch11 (yet), but Government actions since speak for themselves.

  • avatar
    Pch101

    are you wanting to suggest that airing the concerns of investors that changing the existing understanding of debt seniority is just tabloid reportage by the WSJ?

    They are spewing a rather one-sided, rhetoric-laden take on it. As a news organization and a financial news outlet, they should present everyone’s story, and then try to analyze it from a business standpoint, rather than spewing the usual right-wing angle on it.

    It is simply factually wrong to argue that it is unprecedented, so they need to stop saying that, because that simply isn’t true. They want to make it sound radical, when this just happened a few months ago with the WaMu filing, at which point they didn’t mutter a word. At this point, they’re not reporting news, they’re just regurgitating the contents of the bondholder’s press kit. At the very least, that’s just lazy.

    As for the legal issue, there will be a predictable pissing contest about valuation. We can objectively reach that conclusion without taking sides about the valuation. It’s clear to me that both sides will have appraisals to defend their positions, and since appraisers know who butters their bread, we can bet that they’ll be far apart. That isn’t politics, that’s just business, which makes the reporters sound naive or stupid.

    I’ve dealt with these issues before, and they just aren’t that dramatic. They may sound like it to laypeople who have never heard of it before, but in practice, they aren’t. If people want to analyze the story, they’d do better if they’d drop the hysteria and politics, and just learn how the game is going to be played. We’ll see what happens, but my guess is that the bondholders gambled and lost.

  • avatar
    PeteMoran

    @ Pch101

    They want to make it sound radical, when this just happened a few months ago with the WaMu filing…

    The Government over-rode the existing debt seniority at Washington Mutual and put themselves first? That one certainly seems to be litigation mess and probably, being banking related, covered by FDIC legislation and the FDICs ability to act in the interests of account holders.

    But, yes, the WSJ has gone massively downhill.

  • avatar
    Pch101

    The Government over-rode the existing debt seniority at Washington Mutual and put themselves first?

    That isn’t happening with Chrysler. The government has a third position, even behind Daimler and Cerberus (which sounds stupid — why the Bush team didn’t force Daimler and Cerberus to subordinate, I don’t know).

    With WaMu, the assets were sold into a Good Bank, which was immediately acquired by JPM Chase, while all of the garbage was kept in the old bank, which effectively became the Bad Bank. The creditors got stuck with the bilge, while the good stuff that they’d want went into the new firm.

    This is what is happening here. The Good company paid the Bad company for what it got, so what they can complain about is the price. And again, good luck trying to defend in court a top dollar price for used machinery.

    The US government loans that still sit with what is now Bad Chrysler are going to be paid at only pennies on the dollar or won’t be paid at all. They took equity in the new company with that understanding, and I’m guessing that they capitalized the Good Company with new debt so that there would be the $2 billion to pay the Bad Chrysler.

    But at least the federal government didn’t get stuck with the pension obligations, which is what would have happened had Chrysler filed 7. The portrayal of this as a union victory is ignorant; the savings is going to Uncle Sam, who would have been stuck with the full ride had we not been able to punt it to the Good Chrysler.

  • avatar
    dejalma

    Obozo appropriated private property and gave it to his backers in the UAW. This is genuine banana republic activity. Business is based on investment confidence.
    There is no “wait and see” element to this; the line has already been crossed.

    Think Robert Mugabe, the president of Zimbabwe and the “war veterans” without the associated violence.

  • avatar
    Steve_S

    With as much money as we have given the banks, they can go to hell. The millions and billions that some of these people have pulled in over the years, they should just cut their losses before they piss off too many more people and then government steps in and really screws up their gravy train.

    Greedy bastards all of em.

  • avatar
    jkross22

    no-slush appears to have this right. After watching this kabuki theater play out, why would any creditor to a downward sloping company want the government involved when the possibility exists that the feds will simply cut in line?

  • avatar
    PeteMoran

    @ Pch101

    So the way you describe it, for Chrysler, the Government arrives late with another “loan”, and exits with “equal” access to the “Good” company equity suggesting an equivalent lien to the senior holders who get the same treatment?

    I think this is the concern being expressed via the WSJ. It’s certainly something we have heard from our clients.

  • avatar
    Morea

    But at least the federal government didn’t get stuck with the pension obligations, which is what would have happened had Chrysler filed 7. The portrayal of this as a union victory is ignorant; the savings is going to Uncle Sam, who would have been stuck with the full ride had we not been able to punt it to the Good Chrysler.

    Doesn’t this assume that the New Chrysler will succeed? Might not the Federal government still be stuck with these pensions in due time? Is the can just being kicked until past the next election?

  • avatar
    Pch101

    So the way you describe it, for Chrysler, the Government arrives late with another “loan”, and exits with “equal” access to the “Good” company equity suggesting an equivalent lien to the senior holders who get the same treatment?

    Not quite. The management of the old company (now known as the Bad Company) decided to sell assets. Managers have the right to make decisions like that.

    Creditors could argue that (a) they overstepped their bounds by selling them and/or (b) the price was too low. Argument (b) falls flat because the market value for these assets is low, which hurts Argument (a) because hanging on to the assets wasn’t a particularly better alternative for a firm that was failing.

    The bondholders have very little in the way of a cogent argument here. If the business is failing anyway and the assets aren’t worth much, then there isn’t a whole lot to talk about.

    Might not the Federal government still be stuck with these pensions in due time?

    Could be. This whole thing may prove to be a stall.

    The main thing is that VEBA’s failure won’t be our problem. It’s secured by equity that is currently worth nothing and will be worth nothing if New Chrysler turns into Dead Chrysler. By that time, some of the pension benefits should burn off as retirees pass away, and we can reduce the hit.

    It would have been nice if the prior administrations policed the pensions and segregated their funds so that they were adequately funded. But our glorious Republican watchdogs did no such thing, which leaves us with today’s mess.

    Giving the union a bunch of worthless stocks and a lone seat on a large board was a great deal for us, and a terrible deal for them.

  • avatar
    AG

    From what I heard, Chrysler won’t file a plan until at least late August, and their factories won’t reopen until after that because they don’t know which ones will ever reopen.

    It has finally reached the point where the UAW, now in possession of a controlling interest in Chrysler, can no longer be called a union. Ron Gettlefinger is no more a union leader than Bob Nardelli.

    And Bluecon:
    Feel free to move your money out of the “USSA” and rest assured, you’d probably be the only one. There is a reason the Dollar is up over 30% in the past year against every major currency, and it ain’t because people are moving it overseas for fear of Bushbama.

  • avatar
    PeteMoran

    @ AG

    There is a reason the Dollar is up over 30% in the past year against every major currency

    30%? Could you elaborate? Available data doesn’t seem to support that statement. Try a few here;

    Historic Exchange Rates

  • avatar
    NBK-Boston

    I have to agree with Pch101’s views here.

    President Obama “vilified” the hedge funds who held out for more. Fine. He didn’t take anything from them (though he tried to talk them into taking less, like anyone would in negotiations), and there is no evidence that he’s trying to bend the bankruptcy judge to take positions that are against settled bankruptcy law. There’s not much of a “banana republic” story here unless or until he does.

    Imagine, for a moment, that instead of President Obama and the U.S. Treasury, we had GE Capital’s Restructuring Finance arm providing private Debtor-in-Possession financing. They would also argue strenuously against the old senior secured creditors, since a higher cash recovery for those creditors would likely make for a costlier and riskier DIP restructuring, and (in the alternative), a higher equity stake in the NewCo would leave less of that pie for everyone else (the DIP financiers, old equity owners, other creditor groups, etc.). The point is, Obama is doing nothing that a private DIP financier would not do, and for the same motives.

    It remains the case that the U.S. Government is not usually in the business of running or financing industrial companies, and the Presidency gives Obama a fairly unique and high-profile bully pulpit from which to make his point of view heard. Perhaps a more refined sense of propriety would have urged him to reserve comment on these issues, in favor of letting his Car Czar make these auto-industry-specific arguments to the public. But that is of little consequence, and does not amount to “banana republic” behavior.

    The real story here is that a bunch of hedge funds and investment advisors could thumb their noses at the President of the United States, get dressed down by that same President live on national TV, and still wake up the next morning to get their day in court. The system still works, and if the bankruptcy judge runs this thing in a reasonbly open and honest fashion, the system will continue to work.

    On the related subject of Barney Frank — his proposals to amend the bankruptcy code may well be misguided. If they unsettle already entered-into commercial contracts, that would be pretty horrible. But I give him a little more credit then most people on this site seem to, and I’m willing to take a wait-and-see approach until something concrete is actually before Congress or a relevant committee.

  • avatar
    PeteMoran

    @ NBK-Boston

    I think the issue, such as it pertains to the question raised by what has played out with Chrysler is this;

    Management of Chrysler invite another lender in, which happens to be The Government, who without negotiation with the existing debt seniority take at least an equivalent position in the suggested Good/Bad equity outcome. To borrow another phrase “they cut in line”.

    Ultimately, as Pch101 says if the business is failing anyway and the assets aren’t worth much, then there isn’t a whole lot to talk about.

  • avatar
    Pch101

    To borrow another phrase “they cut in line”.

    They didn’t. The government retains the third position that it had in the now-Bad Chrysler. That hasn’t changed at all.

    The bondholders were invited to partake in the Good Chrysler, but they rejected that. The fact that the government capitalized Good Chrysler with fresh cash isn’t really relevant unless they can show some sort of malfeasance. And if the court decides that Bad Chrysler got a fair price for its assets, there won’t be much to debate after that.

  • avatar
    nonce

    With as much money as we have given the banks, they can go to hell

    Banks, shmanks.

    It doesn’t matter (well, it shouldn’t matter) who owns the bonds. If the bondholders are black or white or banks or Jews or non-profits or foreigners or individuals or hedge funds or ice cream salesmen or felons, they all have the same rights.

  • avatar
    motownr

    @pch:

    Prediction for the time in chapter before emergence?

  • avatar
    Pch101

    Prediction for the time in chapter before emergence?

    If the bondholders fight, it could take awhile. I wouldn’t assume that it will be quick. It’s really up to them.

    Personally, I don’t think that it matters. If the Good Chrysler controls the assets, they’ve already won the game. Possession really is 9/10th’s of the law.

  • avatar
    motownr

    The floorplan lenders are sending out termination letters citing the filing. What happens to the Plan if the distribution channel implodes sufficiently?

  • avatar
    Pch101

    What happens to the Plan if the distribution channel implodes sufficiently?

    That would be ideal for a smaller Good Chrysler.

    I would guess that the franchise agreements go into the bad company BK. They will have to be renegotiated individually, I suppose. My guess is that not everyone is going to be receiving a “welcome back!” letter…

  • avatar
    Kevin

    PeteMoran : @ AG ‘There is a reason the Dollar is up over 30% in the past year against every major currency’

    30%? Could you elaborate? Available data doesn’t seem to support that statement. Try a few here

    Yes what a gross exaggeration. It’s only up TWENTY percent against every major currency. Well aside from being up thirty-FIVE percent against the British pound.

  • avatar
    ihatetrees

    Pch101:
    The bondholders were invited to partake in the Good Chrysler, but they rejected that.

    Or did the bondholders reject a disproportionately small share in the Good Chrysler (compared to other politically connected claimants)?

  • avatar
    wsn

    1) OK, the company was run into dust, and it was the creditors fault? I thought Obama should be smarter than that. Will the good Chrysler be better off if there are no evil creditors to lend it money any more?

    2) “Secured debt” means debt that it has physical property put down as collateral. The secured debt owner of top priority are the first ones to get paid back in full, in case of a business failure. If they are denied that right, will there be “secured debt” any more in the US? I mean, your mortgage is a secured debt.

    3) Confiscating (or threat to do so) private property has been done many times in the history. Castro did that to many American companies, such as Coca Cola.

  • avatar
    ihatetrees

    What you need to know about these vultures is that their idea of fairness is throwing 100,000 people out of work and denying retirees their pensions and their health benefits …

    Unionized steelworkers, airline employees, miners, truckers, and other blue collar workers have seen Cadillac-grade pensions crushed to a PGBC mandated reality over the past 20+ years. The fact is, employees speculated that their firms would last forever and were immune from market forces.

    Why is the UAW so different?

  • avatar
    wsn

    The Washington Post is down with that “reasoning.”

    What you need to know about these vultures is that their idea of fairness is throwing 100,000 people out of work and denying retirees their pensions and their health benefits just so they can liquidate the company and maybe squeeze an extra 15 cents on the dollar from their Chrysler debt.

    What you need to know about these banks is that their idea of fairness is throwing 1,000,000 subprime house flippers home owners out of their homes and denying their children a safe and warm shelter to squeeze an extra $1 per house.

    We should pass a law overnight to ban banks from repossessing properties (i.e. house, cars, etc) of people who cannot make payments any more.

  • avatar
    Pch101

    Or did the bondholders reject a disproportionately small share in the Good Chrysler (compared to other politically connected claimants)?

    Not at all. The bondholders wanted more cash than the bankrupting party was prepared to pay. (That would have been your cash and mine, by the way.)

    There seem to be some basic disconnects here.

    -The UAW took a no cash deal, which is perfect for the government.

    -The pensions get shifted into Good Chrysler, which is ideal for the government. (Otherwise, those pensions would go onto the government’s balance sheet and become a government obligation. Surely you didn’t want that, too.)

    The bondholders played, and probably lost. They were never guaranteed full payment. When you buy bonds in a new enterprise as was Chrysler LLC under the auspices of a PE fund, you pays your money and takes your chances.

    Their security doesn’t mean squat, because the value of the liquidated collateral is minimal. I hope that they have fun selling those factories that are staying in Bad Chrysler; they won’t be getting anything close to 65 cents on the dollar for those, despite their protestations to the contrary.

  • avatar
    ihatetrees

    Pch101:
    There seem to be some basic disconnects here.

    -The UAW took a no cash deal, which is perfect for the government.

    The bondholders should have been given access to the same terms. The Government played hardball.

    Admittedly, the UAW has the advantage of being one large entity. It’s not as messy as the bondholders’ often conflicting positions.

    -The pensions get shifted into Good Chrysler, which is ideal for the government. (Otherwise, those pensions would go onto the government’s balance sheet and become a government obligation. Surely you didn’t want that, too.)

    I think it’s only a matter of time. Good Chrysler will be a risky venture. But if I had speculated in old Chrysler bonds, I’d be willing to speculate in Good Chrysler equity.

  • avatar
    wsn

    Pch101 :
    May 1st, 2009 at 3:53 pm

    Not at all. The bondholders wanted more cash than the bankrupting party was prepared to pay. (That would have been your cash and mine, by the way.)

    ———————————————

    Wrong.

    The bondholders wanted more cash, or a liquidation (preferred by first secured debt owners in line).

    I have no problem with that.

  • avatar
    Pch101

    The bondholders should have been given access to the same terms.

    The bondholders wanted cash. The UAW, being in a weaker position, didn’t even try to get any cash.

    Equity is not a gift. Unless Fiat turns it around, the equity is basically worthless. I’d prefer dollars over a promise, and guess what? So would the bondholders.

    Too late, though. They overplayed their hands and lost, because the proceeds raised from liquidation will probably be less than what they would have made from the last offer. You can’t win them all.

    But if I had speculated in old Chrysler bonds, I’d be willing to speculate in Good Chrysler equity.

    They didn’t buy the bonds for that purpose. They would have bought equity or convertibles if that’s what they wanted.

    The problem for bondholders in these situations is that the non-cash collateral isn’t worth very much. It’s not like real estate, for example, where most of the value is available through a sale. A used factory with an EPA advisory on it just isn’t all that; its value is derived from producing profitable products, not by selling it.

  • avatar
    ihatetrees

    Pch101:
    The bondholders wanted cash. The UAW, being in a weaker position, didn’t even try to get any cash.

    All bondholders wanted cash? They were given no options?

    They didn’t buy the bonds for that purpose. They would have bought equity or convertibles if that’s what they wanted.

    How do you know why anyone bought the bonds? Many informed investors probably assumed that Chrysler (or GM) bonds were speculative. They probably assumed (evidently falsely) that they’d be given the same terms as other creditors (like Uncle Sam) if things went tango uniform.

    The UAW is speculating that they’ll have a viable VEBA with Good Chrysler equity. But why shouldn’t other creditors get access to the same (admittedly, speculative) deal?

  • avatar
    Pch101

    All bondholders wanted cash?

    Bonds are bought for the coupon clipping, i.e, cash. High risk = higher interest rate. It’s a distinguishing factor from equity (stock.)

    How do you know why anyone bought the bonds?

    Because that is bondholder behavior. Bond buyers want a coupon with a priority over equity. They would have bought stock if they wanted the benefits and risks of equity.

    The UAW is speculating that they’ll have a viable VEBA with Good Chrysler equity.

    They have no choice. Their options are to take next to zero now, or else to maybe (but only maybe) get something later. They are in a rotten position.

    You guys don’t seem to understand that you should be celebrating this. What you are witnessing as we speak is the death of the UAW. They are much like the Monty Python Black Knight, losing body parts while pretending to put up a fight.

    The deal that they get from GM will be just as bad. You should be thrilled, buying popcorn, and sending condolences cards to your local shop steward, because they’re hosed.

  • avatar
    ihatetrees

    Bonds are bought for the coupon clipping, i.e, cash. High risk = higher interest rate.

    Bonds are, at times, speculative. Especially those of the domestic auto manufacturers. Or the Government of Argentina.

    Because that is bondholder behavior. Bond buyers want a coupon with a priority over equity.

    Nice try. That’s your assumption about all bondholders’ behavior.

    They would have bought stock if they wanted the benefits and risks of equity

    No. They would have bought stock it they wanted GREATER risk than the bonds.

    They have no choice. Their options are to take next to zero now, or else to maybe (but only maybe) get something later. They are in a rotten position.

    Agreed. The UAW is in a rotten position. But, they will have an equity position in a Good Chrysler that has the favor of the US Government. As a bondholder, I may desire the same (speculative) deal.

    Who knows. It may work out. Why not give bondholders the same speculative Good Chrysler stock rights as the UAW?

    You guys don’t seem to understand that you should be celebrating this. What you are witnessing as we speak is the death of the UAW.

    What happens to the UAW isn’t relevant. What’s relevant is that they are getting an option not offered to other legitimate creditors.

  • avatar
    Pch101

    Why not give bondholders the same speculative Good Chrysler stock rights as the UAW?

    The bondholders were offered a better deal, after getting an all-equity offer that they rejected.

    You act as if the UAW got some terrific offer that no one could possibly refuse. In fact, they got a terrible offer that they have no choice but to take, while the bondholders have leverage to do better.

    If the bondholders wanted an all-equity deal, they would have asked for it. They’ve counteroffered with cash as a key element; they obviously want money. The UAW would have been so lucky, but as we can see, the UAW is getting zippo and has to deal with it.

  • avatar
    michaelC

    Question: Are all bondholders treated the same? Did the bondholders that signaled an agreement to take the cash wind up with a deal/position that is better than the recalcitrant bondholders?

    Can the B judge differentiate between bondholders in their claims to whatever assets BadChryCo has?

  • avatar

    I have to ask, did any of the hedge fund managers get death threats yet? I have a funny feeling that they did.

  • avatar
    NBK-Boston

    Why not give bondholders the same speculative Good Chrysler stock rights as the UAW?

    1. By all accounts, the bondholders probably did get an equity exchange offer, or at least had plenty of time to ask for one, and make public howls of protest when their “reasonable” equity offer was not accepted. Do you hear the bondholders making such a complaint? No.

    GM is trying an exchange right now with their bondholders — it’s common practice, and usually beneficial to the company. That it didn’t happen here, and that the bondholders have not publicly complained about its absence, is circumstantial evidence that the bondholder’s didn’t want it, not that the company didn’t want to do it.

    2. But even if the bondholders didn’t / couldn’t get such an offer during the pre-Chapter 11 phase despite their wanting one, who cares? ChryCo, the gov’t, Fiat, etc., were under no obligation to offer equal terms or an equity swap to every different class of claimant. (Though the prospective bankrupt is under an obligation not to fradulently convey assets away from his estate in anticipation of bankruptcy.) There is nothing fundamentally wrong with letting them all play hardball, come to an impasse, and sort it out in court.

    Which is what’s happening. Maybe at this point the bondholders will ask for and / or get stuck with an equity settlement instead of a (relatively) rich cash recovery.

    I think that the key thing to remember here is that these pre-bankruptcy negotiations and dealings are just that — free-form attempts to settle a set of overwhelming obligations that, taken at face value, would overwhelm the company. In many respects, it is close to a zero-sum game, and everyone is and should be playing hardball with everyone else, because letting you have more means I’ll have less. Everyone has the “nuclear option” of saying “no” and letting the thing go before a judge — which is what often happens, and what happened here.

    The crucial test of our system starts now, when we see if the judge handles this thing in an open and fair way.


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