So is that the point we’ve reached with the Obama Administration? No longer ‘hope and change’ but now a repeat of all the worst policies of the Bush Administration under the justification “He did it first”?

Why didn’t he just run with the motto ‘It’s our turn now’?

Whether the banks’ intransigence is in the strategic interest of the stockholders isn’t the only point here: some gratitude toward the public and the public’s representatives might be appreciated. Instead, the banks take the money, run, and then spend money lobbying Congress to block a credit cardholder’s “Bill of Rights” and a first-mortgage-modification addition to bankruptcy law.

Put your money where your mouth is, because you already took mine to play that last hand.

This really gets to the crux of the misunderstanding.

If you were to think this through, you’ll find that if they just let everything go and subsequently we get massive devaluation and unemployment, it wouldn’t be such a fun game to play.

This isn’t just about making money. Not everything is about making money.

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Ok, Ok, we want to protect existing jobs at the cost of sacrificing the very economic principles that made us the center of the economic world?

Given that productivity also hinges on employment, I’m pretty sure you’re reading those off the wrong list.

Oh, the product.

Um, no.

The idealistic nature of protecting American union jobs when many folks struggle to survive?

Um, no. I hate that anyone endures hardship, but why enslave the rest of us only to delay enforcement of the now global economic rules?

Is it the RAM and that tool box thing for sure eh?
Hybrid HEMI? Man, that’s like Nth generation technology.

Um, no.

Ok, Ok, we want to protect existing jobs at the cost of sacrificing the very economic principles that made us the center of the economic world?

Um, maybe. Here’s the thing…by protecting what isn’t independently viable we are only delaying a worse economic fate. I understand the ‘free lunch’ these companies are enjoying and why they would welcome it…I’m just puzzled why intelligent and educated people would dump more than any of us that read this site will ever comprehend or earn financially into sustaining business models or implementations that are not viable…

I hope Obama is playing his cards and he’s near the end of his hand with these un-viable businesses. If I had my way as taxpayer, and they took from me 5 figures in 2008, I’d require all lawmakers to have 10% of their pay invested into a mutual fund consisting of all the TARP and other federally supported private companies. Maybe their private retirement program could invest? Oh, but mine should?

Put your money where your mouth is, because you already took mine to play that last hand. Thanks-

-Joe Public

Wait, so between your money and some bondholder’s, you’d rather lose your money?

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I would also argue that all of these free market folks who have opposed any sensible regulation of the financial world pretty much caused the current terrible economic situation we are in…

Well, they advocated building the new house extension out of cardboard because it’s more profitable, then set about playing with matches, and now apparently it’s the government’s fault because they’re trying to prevent the whole thing from burning down.

Sad, but possible. And it sets a disturbing precedent – this is hardly a case of National Security where the feds deserve some deference. It’s a car company – a rather lousy car company in a declining market.

Hmmmm… a $6 billion dowry; must be one ugly bride.

I think the idea is that the riskier the bond, the lower the price but the higher the interest rate, so bonds trading at par would have fairly low interest rates.

While I agree with you in general, in the specific case the bondholders have already earned interest on the bonds so they may turn a total profit even if they have to take a haircut on exchanging the bonds for equity.

It is widely believed that the banks have purchased insurance–now backed by the full faith of the US Government–that will pay for any losses incurred should Chrysler go into default (bankruptcy in this case).

This is the heart of the debt restructuring problem for the senior debt–the taxpayer is on the hook either way.

What makes this financial crisis unique is the role of credit default swaps in the scheme of things. It goes beyond AIG; the government can’t know until it’s too late whether a bankruptcy could produce some nuclear results with the swap obligations that were much greater than expected, that trigger a ripple effect throughout the institutional holders that hold them.

They can talk all they want about saving the auto industry, jobs, suppliers, etc., but the greatest concern, one that they can’t talk about publicly, is how they’re trying to avoid the financial system meltdown that might occur if these swaps come into play. The effects of the Lehman failure were a shock to just about everyone, and nobody wants a repeat of that.

The original risk was when Cerberus bought Chrysler in the first place, and apparently had no idea what it was really buying…

Actually, I think that they did know. Chrysler had a potential to be a huge home run — pick up a company for nothing, throw some working capital into it, and potentially turn it into a business worth tens of billions of dollars.

That is the sort of thing that venture capital firms usually do, placing bets that either fizzle out or else do extremely well. A bit risky for a firm like Cerberus, but the sorts of risks that sophisticated investors should have understood.

Being a tree hugger I want an openness to allow all kinds of new ideas to emerge. Strong lightweight carbon fiber car bodies, hydrogen/electric/bio fuels, experiments in tires, and refinements in aerodynamics.

Don’t forget unicorns and world peace.

You really have no idea how much research the auto industry does in exactly those fields. Take away the existing auto companies and you’re left with a bunch of struggling startups like Tesla and Aptera. Almost all the research in those fields being done today is being done by the existing auto industry including the OEMs and their suppliers.

We have had 100+ years to play with noisy, dirty, inefficient, and clumsy vehicles it is time to move on.

Cars are 99% cleaner than they were in the early 1970s. They are also far more efficient in terms of specific power and mileage (when additional weight for mandatory safety systems is factored in). As far as noise is concerned, Lotus just announced a deal with Harman International to develop and produce active noise control systems (think an audio based muffler using noise canceling technology) that will also include noise synthesizers for pedestrian safety with EVs.

Cars also are not nearly as clumsy as they were a generation or two ago. Economy sedans handle and corner better than most sports cars from the 1960s and 1970s. Hell, we had a Ford Explorer that was very sure footed (ok, so it had a limited slip rear end, but it handled emergency maneuvers well).

Progress goes on.

The original risk was when Cerberus bought Chrysler in the first place, and apparently had no idea what it was really buying…

Lawyers can argue all they want about fairness under the law, but that can amount to a hill of beans when the rules seem to change daily.

Right. If forced to go into BK, the government would be expected to create a Good Chrysler and Bad Chrysler before filing, at which point only Bad Chrysler would actually be subject to the BK filing. Good Chrysler would get everything of value, and Bad Chrysler would get the garbage, including the debt.

The bondholders would dispute this, because they would claim that Good Chrysler is also theirs to liquidate. If Uncle Sam wasn’t involved, they’d probably be right — in a civil case, the bondholders would argue for something equivalent to fraudulent conveyance, i.e. transferring assets illegally away from the rightful owner just to dodge their obligations.

The problem here is that the feds have a bit more power. The courts would probably be predisposed to find reasons to rule for Uncle Sam, even if the same court would do the opposite if the government wasn’t involved.

The bondholders must certainly know this. That was the risk they took when Cerberus went begging for money. I don’t pity them; it was a calculated risk, and if they miscalculated, that’s just how it goes.

It’s complicated — I would suggest doing your own research to get a thorough answer — but the simple answer is that the yield of a bond increases by paying less for it.

Here’s an incomplete, overly simplistic example for the sake of brevity. Let’s suppose that Company A issues a bond for $1 million, for which it pays simple interest of 10%, meaning that it will dole out $100,000 per year in interest payments.

As an investor, I have to decide what “10%” (or more accurately, whatever share of the $100,000 that I would get if I owned the bonds) means to me. If Company A is strong and returns on other investments are low, then 10% might be worth a premium to me. If Company A or its industry are weak, or if 10% is relatively low by current standards, then I will expect to pay less than par.

Company A is obliged to pay $100,000 per year in interest on these bonds, irrespective of how good the company is or what typical returns are. So since Company A’s obligation doesn’t change, it’s up to the investor to adjust the price accordingly. The investor who pays par (face value) gets a return of 10%. If he pays more, he earns less than 10%. If he pays less, he makes more.

Bond prices fluctuate, just as stock prices do. They can fluctuate a lot when things are turning badly.

Par value is a reference point for the sake of discussion, but it isn’t really the value of the bond, per se. The value is whatever somebody will pay for it, and for something like this, that value is highly speculative because Chrysler is clearly f**ked.

Very good posts.

Another likely reason that the debtholders wish to restructure outside of bankruptcy is the mere threat of Executive Branch intervention in the legal process.

Lawyers can argue all they want about fairness under the law, but that can amount to a hill of beans when the rules seem to change daily.

Both sides are doing a good job of representing their respective interests.

If I was a bondholder, I’d be doing what they’re doing. If I was representing the federal government, I’d be doing what they’re doing.

Some people are so skewed politically that they insist on turning this into a diatribe against the Obama administration. That is misguided. It’s a financial chess game, and both sides have to play to win. Enjoy the match; they’re both pretty good at it.

Part of the problem, most of the bondholders are SECURED bondholders, against actual assets.

I wouldn’t assume that. The liquidation value of these assets can’t be worth much.

If the bondholders were in such great shape, they wouldn’t have come back with an offer that includes a split of debt and equity. Obviously, they don’t want bankruptcy, either, or else they’d avoid the equity entirely.

It comes down to who blinks first. The government clearly doesn’t want bankruptcy, either, yet they need to look serious about it if they expect to have any negotiating leverage. Both sides have something to lose from BK. The government has the upperhand here, IF they are willing to accept the political fallout that could come from a bankruptcy. That’s the calculus in the bondholder’s equation.

Which means “F-that-S***”, you get a better deal in Chapter 11 or Chapter 7.

Another point to consider is that the Administration is playing a weak hand due to the presence of credit default insurance underwritten by another ward of the state, AIG.

It is widely believed that the banks have purchased insurance–now backed by the full faith of the US Government–that will pay for any losses incurred should Chrysler go into default (bankruptcy in this case).

This is the heart of the debt restructuring problem for the senior debt–the taxpayer is on the hook either way. So you get into a situation where the only clear losers will be the workers and retirees…and the thousands of small suppliers and communities that depend on the company’s survival.

Left unsaid: what sort of haircut was demanded of more politically sensitive creditors (cough UAW cough).

Furthermore, the bondholders may be smart in not wanting to show weakness if they think their legal position is strong. Or, if they think Granholm and Co. will pony up more tax dollars.

The whole thing is nutty. Liquidate Chrysler.

I never quite got that.

Because an uncontrolled bankruptcy is not the optimal alternative, as it creates the lowest likelihood of the federal government being repaid. They’re your tax dollars, don’t you want a shot at getting at least some of them back?

If the bondholders are so confident that the bonds are truly valued at 65 cents, then they should trade the bonds in the market today and cash out. Good luck with that.

Again, that’s my point. The current holders will either make or lose money as this unfolds. Why the cram-down? Let it go Ch 7.

The rhetoric Obama and Granholm are using is out of line.