For the record, I have no problem with whatever cramdown those
debtholders--or any others--get in bankruptcy court. If the judge
thinks that the reorganization can't be done without making the UAW
basically whole, fine. I just think that the reorganization should be
done under the well-established procedures of the bankruptcy court, not
at the behest of an administration trying to reward its supporters.
It's all very well to say that most of the senior lenders are going
along, but of course, the leading senior lenders are doing this because
the administration has them over a barrel. I think most of the people
enthusing about this actually recognize that in other countries, when
the government uses the banking system as a slush fund to reward its
constituencies, this generally turns out badly--and makes the banking
system a lot more frail.
Nor will it fly to claim that the administration's threats--and note
that Perella Weinberg has most carefully not denied that they were
threatened--are just standard jawboning. Standard jawboning does not
involve the White House bloody press corps. It is true that DIP
financiers often get to demand serious concessions from creditors, but
those creditors are limited by what those creditors would get out of a
recession, and are aimed at either maximizing enterprise value, or
maximizing the likelihood that the loan will be repaid. This deal does
neither.
Perhaps it's idealistic
of me, but the American bankruptcy system actually works very, very
well. I think we should be very cautious about mucking with it,
particularly when there's no reason to. The administration didn't need
to beat up the creditors in order to reorganize the company--or at
least, they wouldn't have needed to do so, if they weren't trying to
make the creditors take less than they'd get in a liquidation. Nor did
it need to do so to keep the UAW at the table--unlike capital, the UAW
isn't going anywhere. The administration is beating up the creditors
because a) it wants to give the UAW a much better deal than they'd get
in liquidation and b) they'd like someone else to pay for it. I
recognize that the law is always kind of messy, but as far as I know,
this kind of blatant political intervention between debt claims is
unprecedented, and worse, it's a dress rehearsal for doing the same
thing at GM. I don't think this is good for the rule of law, I'm
pretty sure it will be bad for capital markets, and I'm nearly positive
it's going to make it hard for any heavily unionized company to get
substantial capital for the next decade. And why? It hasn't exactly enhanced Chrysler's already dicey chances of survival.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
The reason that Obama and others feel that they can make these demands of the bondholders is that the bondholders would get even less (or so it would seem) if the government hadn't already put money in.
The proper response (in the future) is to stop giving companies with (potentially) recalcitrant bondholders government money absent an understanding from those bondholders that the chance of getting more back via government carries the risk of getting less. Possibly by restructuring the debt to make the government the senior creditor. If the bondholders don't like it, they can force the company into bankruptcy right now and take what they can get.
Of course that might, depending on the company, piss off Congress. So in the long term that might be a bad idea.
What do you do when there are no good alternatives?
Derbyshire posted the view of a hedge fund guy at the Corner:
Read the rest here
Megan, its only now you realize that the government nationalizing and bailing out these businesses had *nothing* to do with saving the economy and *everything* to do with socialism?
The reason that Obama and others feel that they can make these demands of the bondholders is that the bondholders would get even less (or so it would seem) if the government hadn't already put money in.
But that's not clear. That is, it's not apparent that Chrysler has done anything with the government money it's been provided except to burn it keeping the company limping along for a few more months. Would the creditors have fared worse if Chrysler had been allowed to go Chapter 11 when it should have? I doubt it.
I did say "or so it would seem". The public perception is that the bondholders have benefited from the cash the government has given Chrysler, GM, and the Banks. So there is a public expectation that the bondholders "owe" the people Something.
There really is, I think, the danger of a large populist explosion if the bondholders of those institutions are perceived as getting unduly advantaged. Much heavier regulation, at the very least.
Megan,you make so many summary assumptions in this argument that are contestable that it's laughable.
First, to assign intent by way of "the government uses the banking system as a slush fund to reward its constituencies" is a bit "black helicopterish" and reeks of typical neo-con agitprop. Now it may be true that the unions may get some benefit from the government's proposal versus using standard bankruptcy procedures, but that may be coincidental. Of course, I'm one of those people who believe that coincidences happen and not everything is correlated. It might be true that the government is promoting this course of action because they believe it will cause the least amount of disruption to the entire value chain of the automobile industry. To summarily determine that this is not true is facile logic; a hallmark of neoconservative thinking.
Second, to argue that there are hard limits to what DIP lenders can negotiate for their involvement and support of a broken enterprise is a joke. "It is true that DIP financiers often get to demand serious concessions from creditors, but those creditors are limited by what those creditors would get out of a recession..." Get out of a recession? What does that even mean? "..and are aimed at either maximizing enterprise value, or maximizing the likelihood that the loan will be repaid." The government's plan may actually maximize enterprise value. You haven't shown that the alternative would maximize value. There are numerous instances of the bankruptcy process destroying value, not in the least through the tremendous legal fees incurred. As a former restructuring professional I find your assertion that the bankruptcy process to "work very, very well" to be amusing. The only consistent winner from our bankruptcy processes are the bankruptcy lawyers. I'm sure there are many, many investors and employees that can provide numerous examples of the transfer of wealth from the supposed beneficiaries to the legal community.
Third, your analysis of the outcomes doesn't hold water against reality either. "I'm nearly positive it's going to make it hard for any heavily unionized company to get substantial capital for the next decade." Truth is that capital goes where it wants to go for a variety of reasons, some related to sound economic and financial thought and some completely unrelated to an understanding of how profits and returns are made. And sometimes those turn out to be positive investments. Besides, if you are right, then what's the problem with that? We'll see a lot fewer unions as a result of being capital starved.
Fourth, the idea that exceptions to the system can't be made in cases that present a significant risk to the larger economy and citizenry is ludicrous. Exceptions will always be made, especially in the U.S.A., where politicians and lawyers rule the land. To argue otherwise it to argue for an ideal that does not exist and has never existed in reality. If you want utopia, go find an island.
Fifth, because Chapter 11 is a legal process, it is dominated by conflict; the very essence of our legal system. In cases where the workout is extremely complex and requires substantial coordination to ensure we don't experience worst-case scenarios, having a quarterback for the process makes good sense. Yes, some people will lose some of their rights, but the overall impact of keeping all parties invested and motivated to continue sustaining operations is worth much more than the rights of some people who bought debt at 30 cents and want to get 70 cents in liquidation instead of 55 cents in a managed process.
The idea that all problems can be solved through self-interest is short-sighted and makes for a barbaric society. As soon as the greedy are put in the corner for their crimes against society, the better.
You keep using that word "neo-con." I do not think it means what you think it means...
for their crimes against society
Yeah, those enemies of The People. This guy would be a boon as an AG for the likes of ya.
Delphi has been in Chapter 11 restructuring since October 2005. It's possible that constraining the argument over lenders' recovery with Chrysler is intended to avoid drawing out the process as it could well unfold in court.
If you want to speculatively assign political motives to that, then I'd propose Congressional mid-term elections and the 2012 election as a starting point. But then, if you just wanted to manage electoral pain and award Union voters, you could just start directing the (domestically produced) dump-trucks of cash to Detroit ad infinitum.
Since the dump-trucks are about to be called home, I'd suspect that an accelerated turnaround is to pull the unemployment band-aid.
Given that Fiat is now talking about buying GM Europe, give it another 5 years and the auto industry can cripple some other national government. Best to be well clear by then.
... The administration didn't need to beat up the creditors in order to reorganize the company--or at least, they wouldn't have needed to do so, if they weren't trying to make the creditors take less than they'd get in a liquidation. ...
So far you have offered zero evidence that the creditors are being asked to accept less than they would get in liquidation.
I don't think that Ms Mcardle is the one that needs to prove or be presented proof. If the bondholders were convinced that they would get more, why didn't they go along with it?
I would trust them as opposed to the politician.
Derek
Because they are trying to paid for their nuisance value rather any substantive rights. By filing numerous appeals they may be able to drive up the costs for everyone else (since delay is costly in this sort of situation) to the point that it is cheaper to pay them off even if they would likely lose in the end. Perhaps that is not what is happening in this case but it is common in bankruptcy cases and should at least be considered as possible which McArdle has not done.
'Lot' has found one of the 5 or 10 required honest men to save the Republic it appears, Judge Arthur Gonzales.
... but the American bankruptcy system actually works very, very well. ...
Says who? Lots of people think otherwise.
How many people must live in the head of James B. Shearer for that statement to be true?
There are other ways of doing bankruptcy. Many of them have even been discussed at length on this blog. The US way attempts to locate and extract the viable business within the deadwood, if one is present, and give it a chance to restore operations. If that fails, away it goes, but the option is still there, and it is not a generally controversial statement to claim that it works "well", whatever "well" means in the context.
For example, by way of adding context, there's the British approach of "Yours is now mine, toodles"; or there's the UAE way, which reduces to "Yours is now in prison, happy rotting". Would your inner legions prefer something more along those lines?
Among bankruptcy attorneys and economists who actually study bankruptcy systems, the US system is nearly universally viewed as the gold standard. Its generosity, its efficiency, its transparency, etc are the world leaders.
Said "generosity" is at the expense of debtholders. Making your current complaint hard to follow.
Her complaint isn't that debtholders (the usual word is "creditors") in general are being made to sacrifice. It's that the administration is trying to intervene to privlege one particular group of politically connected creditors (the UAW) over another particular group of politically reviled creditors (the hedge funds).
As far as I can see the adminstration is not diverting money to the UAW which otherwise would have gone to the senior creditors, it is just giving government money to the UAW. The government is not obligated to give handouts according to the same order of priority as the bankruptcy code.
James, there is more on the table than just the government taking over some of the company's obligations to the UAW. The government is pushing a combination of debt-for-equity swaps and haircuts which values $1 of debt to the UAW at substatially more than $1 of debt to the bondholders. From a "screw the jobs and America's future rhetoric and get the most cash value right now" perspective, a complete liquidation of Chrysler is likely to get the creditors more than they would get under the government plan; the company does, after all, have a lot of buildings and machinery that would be converted into cash under a liquidation, but not under a restructuring.
From a "screw the jobs and America's future rhetoric and get the most cash value right now" perspective, a complete liquidation of Chrysler is likely to get the creditors more than they would get under the government plan; the company does, after all, have a lot of buildings and machinery that would be converted into cash under a liquidation, but not under a restructuring.
That's what the creditors are claiming but I don't see any reason to believe them and McArdle hasn't offered any. The building are worthless because of environmental liabilities. The machinery has some value but it is expensive to move and the market for auto making machinery is not robust at the moment. In another thread I linked a report estimating liquidation value of 9% to 38% on senior debt as opposed to the 30% on offer. Of course the report was prepared for management and could be lowballed but I want to see a detailed critique not general whining before I side with the bondholders.
Sigh ...
Megan, clearly it has been a long time since you were an investment banker. The alleged "jawboning" by the government--threats and the like--was indeed just that: bare knuckled negotiation, which is what happens in highly contested bankruptcies. Nothing prevented the secured lenders from jawboning right back, if they had the balls to do it.
Oh, that's right: they got steamrolled because, in the words of one of their own, "It’s not a fair fight [because the government has] all the money and all the guns.” [from the WSJ today]. The negotiations were lopsided from the start, at least in part because the government's DIP lending was the only available source of ongoing value for the company. The secured lenders brought no leverage (literally and figuratively) to the table.
People are getting their panties in a twist because the bully who won this time is the government. No-one seems to complain about distortion of the bankruptcy process when this happens all the time with non-governmental parties.
Show me evidence that the administration wants to permanently own vast swathes of our economy. Then, and only then, can we talk about expropriation, "socialism," and--most ludicrous of all--"fascism."
http://epicureandealmaker.blogspot.com/2009/05/you-realithe-of-courth-thith-meanth-war.html
You're arguing with about 7 different people, none of whom are the author of this blog. I haven't heard her say "expropriation," "socialism" or "fascism" once. This post doesn't come near any of those allegations.
"Nor will it fly to claim that the administration's threats--and note that Perella Weinberg has most carefully not denied that they were threatened--are just standard jawboning. Standard jawboning does not involve the White House bloody press corps."
I am sure Megan appreciates your defending her, but it strikes me that the quote above was the very argument I was addressing in re "jawboning" (her word).
And, not to parse the rest of the original post for you, DB, but Megan's argument runs along the very same lines as those of many others, including the secured lenders making a fuss in the press (which, by the way, I fully support their right to do). That is, somehow the bankruptcy process works, and it is okay for parties to bully each other in advance of an actual filing to agree a prepackaged agreement, unless one of parties is the government. To argue such necessarily introduces the idea of the government's intent. Megan stops short of saying expropriation or socialism, but the thought hangs heavy in the air. Others criticizing the government have not been so shy as she to bandy such words about.
There is more. See my original post appended to my prior comment if you seek elaboration.
The same administration which appoints regulators and can recommend legislation, which is actively dictating major terms of operation to the country's largest banks, and which never met a populist talking point it didn't like regardless of facts it previously had a hand in negotiating (some of the AIG execs reportedly got standard-issue death threats as a result of the distorted 'bonus' publicity), is not a uniquely worrisome opponent when it has essentially staked its flag on one "side" of the bankruptcy table?
Are you serious?
You seem very comfortable with a government being the bully.
What basis do you have to be in such state of comfort?
Derek
Exactly right. The government drove a hard bargain, and then it badmouthed the other guy in order to pave the way for better deals in similar circumstances in the future. Perhaps businesspeople are used to governments being represented by shrinking violets who fail to negotiate for their own interests. Perhaps they will have to adjust their expectations. It's not a "fair" fight when I try to negotiate with the telephone company, either; they're bigger than I am and they have more power. Nobody ever said the stronger negotiator has an obligation to take it easy on the weaker one.
If the telephone company abuses the process, you can appeal to a higher authority for review and intervention. In this case, the higher authority has already pulled a chair up on one side of the table and is attempting to dictate nigh-extralegal terms. Slight difference.
Also, you've got the direction of creditor/debtor obligations completely muddled in that analogy, but IMO your analogies never were very inspiring.
If the telephone company abuses the process, you can appeal to a higher authority for review and intervention.
Ha, ha, ha, right. Look. In general the corporate mode of conduct is to pussy-whip the government by buying legislators through the lobbying and campaign contribution process, then writing into legislation that government can't negotiate in its own interests. (See: Medicare Plan D.) Or to capture regulators and use them to turn the government into a corporate welfare machine. Here, for once, you have a government that's actually trying to negotiate a good deal for taxpayers and workers, and drive the creditors to the lowest level they'll accept. It's a standard carpet sale situation: the hedge funds didn't believe the government was willing to walk out of the store without the carpet, so they refused to accept the offer. And the government walked away, and brought down the consequences. Now the creditors are whining: no fair! The government isn't supposed to do that! The outrage I'm hearing from the financial class reminds me of the way union leaders reacted when Reagan fired the air traffic controllers, or when Thatcher closed down the mines. They can't accept that the political alignment has shifted and they are facing a decisive leader with a mandate to seek the general interest over their particular ones.
Here is an interesting little bit of news. Shortly after Obama referred to the creditors who want Chrysler judged by the law and the courts rather than have the creditors' assets seized and given to Obama's contributors by executive fiat, as 'anti-American obstructionists'; said creditors have begun receiving death threats.
http://www.businessinsider.com/chrysler-hedge-funds-getting-death-threats-2009-5
It is also being covered at the Times of London and The Daily Telegraph. So it is not some prank posting.
Given the instant irate mobs that the administration was able to generate outside AIG's employees' houses [and the direct threat of mobs with pitchforks from Obama himself]; there is the obvious consideration that the threats could be coming from, or directed by the administration itself ... as part of what some have referred to as part of the normal bankruptcy negotiation process. Some normal process, government death threats. And those who are the recipients have to consider the possibility that from either the government or from Obama's devotee's the threats are real.
Who needs a rule of law, when you have power, and a complaisant media?
Subotai Bahadur
Wait, I thought Fiat was a car company, not an executive.
Nor will it fly to claim that the administration's threats--and note that Perella Weinberg has most carefully not denied that they were threatened--are just standard jawboning. Standard jawboning does not involve the White House bloody press corps.
A firm's goodwill is an asset. We are constantly being told that companies will naturally do good for society in order to increase the value of their public image. Similarly, a firm's badwill is a negative asset. The government has the ability to decrease a firm's goodwill through its public stature and its ability to use the media. Companies need to take this account when bargaining with the government. The government has a duty to the citizens of the country to get the best possible deal when it does business. It has an obligation to use all of its assets, including political and moral suasion, to get that best deal in the interests of the country.
It was said in the old days that it is a bad idea to start an argument with anyone who buys ink by the barrel. Similarly, it is a bad idea for companies involved in businesses that deal with the government to start an argument with a president with a popularity rating in the high 60s. When two organizations come to the table to enter a negotiation, each brings different kinds of assets. One asset the government has is its ability to communicate to voters. Companies should be aware of this fact.
Businesspeople like to say that governments have to recognize that markets are real -- that if you change rules, prices will respond accordingly. True. And guess what? Businesses have to recognize that politics is real. If your business takes actions that serve their own financial interests but hurt the country, they will be pilloried in the public square. This is America. We all live here. Wake up and deal with it.
Businesses have to recognize that politics is real. If your business takes actions that serve their own financial interests but hurt the country, they will be pilloried in the public square. This is America. We all live here. Wake up and deal with it.
Funny how you can produce all these gems and yet not one setting in which to mount them. I think if you had any experience wherein you speak you would find that businesses are quite well aware of politics. They're also aware that the government, historically, was primarily a regulator that makes sure the parties are playing evenly, and then let them duke it out within the limits of law. Said limits include a stanadard, orderly, and lawful procedure for bankruptcy.
What the Obama administration has done is inject money into an institution to basically sustain its burn rate without altering the fundamentals even slightly, then turn populist rhetoric into service to demand that creditors from an unfavored political constituency take a haircut all the way down to somewhere below eyebrow level in order to provide favorable terms to a favored political constituency. If even you cannot see where there might be some fundamentally problematic elements in that -- try it on this way, "What if BUSH was doing it?" -- then Jonah Goldberg was an accidental prophet of the apocalypse.
My understanding is that the hedge funds in question were offered the same terms which numerous other creditors accepted. They didn't like it, they thought they could get a better deal, so they turned it down. They lost; they can't get a better deal. Too bad. In addition, however, they might have considered that by agreeing to take a smaller profit on the debt they purchased at marked-down secondary-market terms, they could be saving a lot of people's jobs, people who happen to belong to the same polity they belong to and whose economic and social fates are thus tied to their own. Some businesses would have taken such issues into consideration in the name of corporate citizenship. These guys didn't. That makes them bad citizens. They are perfectly entitled to act as bad citizens in the search for higher profits; it's not illegal. But they should expect to be labeled bad citizens when they act as bad citizens. If they're such tough guys ("people pay us to make them money not to meet a political goal. So Obama had better think long and hard before he tries to bully us like he did the banks") then they should shut up and take their lumps instead of bitching and whining that everyone's being mean to them.
a) The fund runners have a fiduciary duty to their shareholders. They are not legally allowed to use the investors' money for charity.
b) The numerous other creditors are disproportionately (as far as we can tell), TARP recipients and non-profits under considerable government pressure.
"a) The fund runners have a fiduciary duty to their shareholders. They are not legally allowed to use the investors' money for charity."
One hear this kind of thing a lot, and yet it doesn't actually seem to impede many publicly owned businesses from 1. establishing charities to which they donate part of their profits, 2. building "green" headquarters that cost more than regular ones (or just building expensive headquarters designed by pricey big-name architects that don't generate any value for shareholders), or 3. paying their CEOs and COOs and CFOs salaries three times as high as their French and German competitors, for no obvious reason. I'll start caring about this objection when I see a few shareholders taking the CEOs of the companies they own to court for paying themselves too much money. Meanwhile, it seems to me that agreeing to the same terms as every other creditor could be justified to shareholders as either "building public goodwill" or "avoiding negative interventions by government against the investors' interests" (which, in fact, is what it would have been).
The three guys who were waterboarded had it done to them when Bush's popularity was in the high 60s. Wake up and deal with it.
Which is a crime against humanity: 1. Strapping you to a board and pouring water down your throat until your choke reflex sets in. 2. Mentioning you in a negative light in a press conference.
Hm, hm, hard to decide. They're both just so awfully mean.
Neither. [1] sounds like assault and battery, [2] like corruption/abuse of office (based on events as they appeared to happen, not as you described them).
WTF is crime against humanity, anyway? Releasing the Shiva virus?
"Goodwill" is not what you think it means. "Goodwill" is an accounting term used to cover the difference between the purchase price of an asset and the book value of its components. Companies are not allowed to make up their own goodwill assets; it's just a convenient way to account for intangibles like brands and customer relationships.
Hedge funds do not survive on the "goodwill" of the general public, who can't invest with them. They shouldn't have to survive on the "goodwill" of the government.
I apologize for misusing the term of art. Let us call this "positive public image". It remains true that firms with good public images are worth more than firms with bad ones. There are numerous ways to cultivate a good public image and numerous ways to earn yourself a really bad one. It is true that hedge funds do not survive on their good public images -- up to a point. At some point they may earn themselves such a toxic public image that they invite regulatory changes or specific interventions which damage their business. This is true of any business: it's not a good idea to pursue your financial advantage very aggressively to the detriment of the public interest, in a very high-profile situation. Basically, the hedge funds' position was: we don't care if a few hundred thousand American workers lose their jobs, because it may result in a higher payout for us. The American government, which represents those workers on a one-man-one-vote basis rather than a one-dollar-one-vote basis, has a different set of interests, and it is pursuing those interests accordingly, all well within the law.
These guys bought Chrysler debt because they figured the company was so big the government wouldn't let it fail, which inflated the value of the debt. They failed to realize that the company was also so big that the government would be a big, powerful, active partner in negotiations over the value of the debt in case of acquisition or bankruptcy. That lowered the value of the debt. They're in business. They made a bad bet. Boo hoo. They also negotiated against the interests of society. They should shut up, and next time, investors should recognize that aggressively negotiating against the interests of American workers has a potential down side.
The telephone company does not ultimately rely upon men with guns who can imprison or kill you to carry out its will. At least you admit you support the government's use of that power freely as long as it's against people you don't like for ends you do like. Most would rather contrive arguments like that the government knows better than bondholders what their bonds are worth.
"rely upon men with guns who can imprison or kill you "
I'm sorry -- is the White House press corps armed? We were talking about the fact that the administration is calling out and chastising the hedge funds that refused to take the terms it offered. I still find it amazing that these supposed big swinging dicks of the financial world turn out to be such wimps that they fall into a swoon because the President mentions them in a negative light during a press conference, but that is in fact what we're talking about here: the propriety of the President CRITICIZING financial officers for socially destructive but financially defensible behavior. I realize libertarians love to hyperventilate about gummint agents with guns, but it's singularly misplaced here.
Socially destructive? How is it socially destructive for them to reject giving up their legal rights for the benefit of the UAW? Regardless of whether people are overreacting to the alleged threats/criticisms by the administration, I'm not sure how the debt holders are the ones being socially destructive.