Bailout Watch 382: Feds to Chrysler, GM: Put Us Ahead of Other Creditors or We'll Throw Your Ass Into C11
Bloomberg reports that the rumors circulating around the autobologosphere are true: Uncle Sam “forgot” to put itself ahead of other creditors before writing $17.4b worth of “bridge loans” to Chrysler and GM. Of course, doing so would have rewritten bankruptcy law and pretty much turned the feds into something roughly akin to Chile in the copper-bottomed days of 1972. But, hey, the buffet must go on! “U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury’s Web site.” Doh! And so the government hired the flying Cadwaladers to correct that little problem, who’ve let it be known throughout the land that “If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid.” Well, they had that option all along. Anyway, what are the chances that the people holding the paper at Chrysler and GM won’t let Uncle Sam go to the head of the [they hope] theoretical queue? Actually, a lot higher than you might think . . .
The people who have to make this work are Chrysler’s STILL UNNAMED Cerberusian co-investors and GM bondholders. Although Cerberus can probably quell any internal insurrection about going to the back of the bus, GM’s meeting today with its bondholders to try to get that federally-mandated debt-for-equity deal happening, and those bondholders may like their current position a lot better than that which Uncle Sam’s now “requesting.”
It’s a kind of damned if they do, damned if they don’t deal, whereby the financiers on the sharp gladly pull the plug if they can make more money by doing so than by not. The flying Cadwaladers are negotiating to see if they can reach an agreement,” [Don] Workman, a bankruptcy lawyer based in Washington told Bloomies, “If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’ to be first in line for repayment.”
Stripped down to its basics, we have 10 days before the thumbs up thumbs down decision. Never mind the union wages, debt-for-equity and business plan provisions. A slam dunk has just hit the rim.
More by Robert Farago
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The question of whether federal bailout loans should/could/would have priority in bankruptcy was one of the issues analyzed in the Congressional Research Service paper. You might think the government was conscious of this issue at the beginning, but experience makes me doubt that. Politicians rarely bother to read such analytical documents; they make decisions on other bases. (Politics, mainly.) I should know; in a prior life I wrote those kind of reports.
@ Retardedsparks To quote Barney Frank “who do you think made that law to begin with? And we can make another one to say whatever we want it to say….” An unfortunate spray toward Prof Edward Altman who clearly stated that by re-ordering debt priority outside Chapter 11 such arrangements would most certainly be successfully challenged. He also reminded members that it would re-write the rules of investment in the US for any party with a current, or considering, an investment in the USA. Who would have thought Bush would "miss" that detail? Just put it on the pile of Reign-Of-Error mistakes.