Chrysler Zombie Watch 2: Politics Vs. The Rule of Law

Robert Farago
by Robert Farago

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.

Robert Farago
Robert Farago

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  • Alex Nigro Alex Nigro on May 01, 2009

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

  • NBK-Boston NBK-Boston on May 03, 2009
    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.
  • VoGhost Key phrase: "The EV market has grown." Yup, EV sales are up yet again, contrary to what nearly every article on the topic has been claiming. It's almost as if the press gets 30% of ad revenues from oil companies and legacy ICE OEMs.
  • Leonard Ostrander Daniel J, you are making the assertion. It's up to you to produce the evidence.
  • VoGhost I remember all those years when the brilliant TTAC commenters told me over and over how easy it was for legacy automakers to switch to making EVs, and that Tesla was due to be crushed by them in just a few months.
  • D "smaller vehicles" - sorry, that's way too much common sense! Americans won't go along because clever marketing convinced us our egos need big@ss trucks, which give auto manufacturers the profit margin they want, and everybody feels vulnerable now unless they too have a huge vehicle. Lower speed limits could help, but no politician wants to push that losing policy. We'll just go on building more lanes and driving faster and faster behind our vehicle's tinted privacy glass. Visions of Slim Pickens riding a big black jacked up truck out of a B-52.
  • NotMyCircusNotMyMonkeys dudes off the rails on drugs and full of hate and retribution. so is musky.