I see a lot of liberal blogs crowing that Obama's really taking it to the hedge funds who are holding out on the Chrysler bankruptcy. Hedge fund managers, you see, have a civic duty to lose large amounts of other peoples' money in order to ensure that the UAW makes as few sacrifices as possible in a bankruptcy.Here's the thing: hedge fund managers don't care what the public thinks. The public isn't allowed to invest in them. And the holdouts are, basically definitionally, not direct beneficiaries of federal largesse.
No, hedge funds care what rich people think. And if you were a rich people, how would you react to the news that a hedge fund manager who had a senior lien had refused to allow his claim to be treated like unsecured debt in a bankruptcy? Would you be outraged and pull your money? Remember that as a rich people, you could have donated large sums to the UAW, or the US government, if you wanted to.
This might well be good publicity for the holdouts. I'd certainly rather put my money in with Oppenheimer than with someone manager who is going to toss his fiduciary duty to the winds and make large tax-free gifts to the United Auto Workers. But then, I'm not very patriotic.
Which brings us to the real question, which is, when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line? Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.
No, leave that aside for the nonce, and let's pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions. What do you think this is going to do to the supply of credit for industries with powerful unions? My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit. Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit. Though it may well be the last time they get it, on anything other than usurious terms.
"What do you think this is going to do to the supply of credit for industries with powerful unions?"
No longer a problem if we nationalize the banks...
The banks can underwrite or arrange the facilities, but you need the funds and others to buy those Term B Loans from those pet banks.
BofA and Citi are perfectly happy to eat the loss here. Why wouldn't they be willing to eat losses on future loans? The government has complete power over the banks, and can force them to make loans (or take losses on loans). And if they push back, the government can make the loans itself, as it's doing with the UAW's pension fund. Yes, the cost of capital from non-government-controlled entities will be higher. But that won't matter in the short term, and, if the gambit is successful it won't matter in the long term.
Yes, a government-run bank will have as little problem with losing money as would a government-run auto company, and if the management squawks about it, you can simply have the president publicly denounce them as evil. He could even give out their addresses and encourage mobs to visit them to show the people's displeasure.
"My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit."
Perhaps the liberal game plan (if there is one) is to have government owned banks (which we sort of have today) supplant the bond market as the main source of credit for unionized businesses. Of course, if government owned banks make loans based on political reasons and not sound business judgments, they'll end up with a pile of bad loans and eventually become insolvent.
None of the current liberal economic policies really make much sense if you extrapolate them a few steps forward. As I mentioned elsewhere recently ("How Not to Create Broad-Based Prosperity"), liberals may want to see more good-paying jobs for blue collar workers in the abstract, but in reality most liberal policies work against this goal. For example, raising energy prices via cap & trade will drive more energy-intensive employers (e.g., manufacturers) overseas; restricting mining and oil drilling prevents the creation of more high-paying blue collar jobs in those fields; importing millions more unskilled immigrants (Chamber of Commerce Republicans favor this too) which lowers wages for American workers, etc. Trying to stiff the bondholders of the automakers is of a piece with this.
when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?
Obama made an offer to Chrysler stakeholders which gave investors more than they could reasonably expect to receive from a bankruptcy judge. They rejected it. As is their right. End of (that) story.
Two things, first he offered them less than they think they'd get out of bankruptcy. Just as they aren't looking to donate to the UAW or the Obama administration, they're not spiteful either, just trying to maximize returns.
Second, when did the President of the United States get this job? Why on earth would we want the President and the Treasury at all involved in the financial affairs of a manufacturing company?
"Why on earth would we want the President and the Treasury at all involved in the financial affairs of a manufacturing company?"
Power. Obama wanted it. He is exercising it to keep it.
Before you spend too much time wailing about the pain felt by the hedge funds, perhaps you should look at how much of the approximately two billion they hold will be covered by Credit Default Swaps. If I were a cynic, it would almost seem like Driving Chrysler to bankruptcy was really in the hedge fund's best interest since they are likely to wind up getting paid at 100% of value from the taxpayer's money (a significantly better repayment than the UAW or the federal government can expect). Ahh, the free market in action....
I really don't see the problem with this. It just means that the counterparties to the CDSs should be negotiating with the government and with Chrysler's other debt-holders to work out a better solution. Otherwise, you're implying insurance is a bad thing for a market.
perhaps you should look at how much of the approximately two billion they hold will be covered by Credit Default Swap
And now we see the problem with Credit Default Swaps. It's in the bondholders best interest to send Chrysler to bankruptcy, instead of cutting a deal. It doesn't matter if the bankruptcy judge screws them, they'll get paid anyways. The big problem with CDS's is they seem to encourage bondholders to force a company into bankruptcy. Even if they get an offer from the company that's better than a bankruptcy judge would award (like now) they have no incentive to take it.
As I understand many of these hedge funds bought the loans for 50 to 70 cents on the dollar. That is, they knew they weren't going to get fully repaid, and they know what kind of terms they get in bankruptcy. So they were essentially betting on a government bailout of Chrysler to repay the loans at a higher rate than they'd get without government money. So spare me the outrage about Obama when it comes to companies trying to make money based on how generous a negotiator he is.
Obama is not supposed to be the one negotiating with the banks. The creditors bought these loans on an understanding of bankruptcy seniority that Obama is now trying to upend. Moreover, secondary capital markets are *very, very important* to the existence of primary credit markets. An asset you can't resell is an asset you're not willing to pay very much for.
Megan: Thanks for your article. Not being an expert, my question is why is the UAW being given an equity stake? Isn't this just Obama paying back a political ally? Stockholders have been wiped out, bondholders will also lose billions -- but the UAW gets an equity stake! In bankruptcy, don't employees get nothing? Are they even parties? Won't the judge just writedown UAW contractual entitlements, esp. as they are what is making Chrysler unviable? Seems to me this ought to happen, but Obama can turn to the UAW and say, "See, I did all I could for you, sorry." He has won a political victory without offering a plausible, legal alternative.
There are no stockholders. Chrysler is privately own by Cerberus and Daimler still had 19% which they gave back. Cerberus is seemingly getting the short end of the stick here. UAW gets 55% and Fiat gets most of the rest.
If they bought at 50c, then they probably thought that as first priority, senior secured creditors, that they would get at least that if not more in a bankruptcy. They made a bet - Obama (UAW negotiator in chief/community organizer) offered to let them out of their bet at less than 30c. They decided to see the hand through. If a first priority senior secured creditor is getting jammed down below unsecured creditors, then the markets will have even more trouble accurately pricing risk, which will make it even harder to emerge from this banking crisis.
Adam says: "As I understand many of these hedge funds bought the loans for 50 to 70 cents on the dollar. That is, they knew they weren't going to get fully repaid, and they know what kind of terms they get in bankruptcy."
Sadly, you're wrong on both counts here, Adam.
1) They knew they wouldn't be repaid.
There's lots of reasons you might want to buy loans at less than par value, not least of which is that you think it's a good deal because you WILL get fully repaid. Think about it, the credit market's gone to hell and a handbasket and you think some credit babies are getting thrown out with the bathwater. You can buy a loan for 50 cents on the dollar that gets repaid, and you've made yourself a good investment. Oh, and by the way, let's not forget that before it does pay off, you're getting a pretty nice interest rate yield.
2) They know what kind of terms they get in bankruptcy.
This is exactly Megan's point. They THOUGHT they knew what the terms were (i.e., if I'm first lien, I'm first in line), but now the rules are being changed in midstream. Because that's the other reason to buy loans at 50-70 cents: you think that you will realize more than that going through the bankruptcy process (under the rules in place at the time).
And realize too, that in your analysis of whether to pay that 50 cents for a loan, you estimated the likelihood of your being wrong about getting paid back (whether in or out of bankruptcy) and the amount you'd recover in bankruptcy if you were. Taking that whole mix together (upside of yield and payback vs. chance of default * recovery), you decided to make the investment. If you think the gov't may swoop in and "ask" you to take less, that changes the calculus a good bit (and as Megan says, could lead you not to provide the debt at all).
So a fund who probably has someone's pension money has one of two choices. Protect and maximize their investor's pension, or protect and maximize someone else.
I don't see any problem except political.
Derek
First, why would a distressed debt fund purchase a Credit Default Swap on Chrysler when the whole objective of this type of investment is to have name specific risk exposure? In fact, if they were hedged, they would have accepted any offer. Second, even if they did hedge their exposure to Chrysler via a CDS, an out of court restructuring is treated exactly the same as a bankruptcy filing, thus no incentive for one over the other. The 6 Credit Events under ISDA Definitions are:
1. Bankruptcy
2. Obligation Acceleration
3. Obligation Default
4. Failure to Pay
5. Repudiation/Moratorium
6. Restructuring
While there are certainly issues with Credit Default Swaps, I don't believe they drove the outcome in this particular case.
Is there some advantage to the CDS holders in moving the bankruptcy earlier? That is, I prefer getting paid off today to getting paid off tomorrow, so maybe the CDS holders have an incentive to take actions that will bring about the default event sooner rather than later? Or is there something about the way CDS are written that would make that not make any sense?
A couple of you need to look up the meaning of secured debt.
As for the recalcitrant lenders, they may or may not recover more with a contested bankruptcy, but it is their right to try. They aren't complete idiots- they clearly think they were getting the short end of the deal. What is particularly noteable about the entire matter is which lenders agreed with the govenrnment's plan and which did not- the divide cleanly cuts between those under the government's thumb and those who are not.
No, what is particularly notable about the plan is that the government is advancing a plan at all. It is not the job of the Federal government to craft bankruptcy plans for private companies. And the reason it's not the government's job is that the government would be corrupt doing it. The government would favor its political supporters at the expense of its political enemies.
That is what is notable. It's notably obscene that the Obama Administration is so drunk on its perceived power that it believes it can dictate terms to anybody.
It can't, and the sooner we burst that little bubble the better.
I worked briefly answering the phones at a large bankruptcy firm. The huge number of people applying for their second, third or even fourth bankruptcy, pretty much disproves your argument.
Obviously consumer credit is different from corporate credit, but the same basic logic applies. The general state of the market has a greater impact on the availability of credit to a borrower then the borrowers history. Once financial markets have regained confidence I have little doubt that Chrysler will be able to find new capital.
Several things:
1) You can't declare bankruptcy for eight years after you've filed. Yes, people can get credit after their bankruptcy starts to age off their credit report. This is not the same thing as saying they don't have credit impairment. Bankrupts pay very high rates for loans, if they can get them at all
2) Right now, they can't get them at all. The credit environment going forward is not going to look like the EXTREMELY loose markets that extended credits to bankrupt firms or individuals in recent years. I take this to be what you are saying--but the baseline market in your example simply isn't in the possible outcomes. It's like saying that Chrysler would be fine if the NASDAQ went back to 5,000
3) Firms that loan to bankrupts now do so under an orderly, predictible set of rules. That's very different from illustrating that there are no rules--that senior debt is subordinate to junior debt, as long as the junior creditors campaign hard for the party in power. Secured debt to firms with powerful unions just got a lot pricier, because, you see, it apparently isn't really secured as long as there's a Democrat in power.
Once financial markets have regained confidence I have little doubt that Chrysler will be able to find new capital to waste.
Dvb,
Just completing your thought.:~)
"liberals may want to see more good-paying jobs for blue collar workers in the abstract, but in reality most liberal policies work against this goal"
Yes, but this just shows that even more government control is needed. You don't seem to have the right mindset - unanticipated consequences of current policies prove that the government didn't go far enough.
It's like those arguing that the only reason communism didn't work was because there were still some non-communist countries around. If just one communist party controlled the entire planet, then everything would go according to plan!
I'm new to this site, so I can only guess you're joking. Just in case, though...
"...unanticipated consequences of current policies prove that the government didn't go far enough."
Let me restate:
1. Government makes a policy
2. Government realizes it's policy has unintended consequences
3. Repeat 1
I think you're missing step 4, which is:
4. Repeat 2
"...the only reason communism didn't work was because there were still some non-communist countries around. If just one communist party controlled the entire planet, then everything would go according to plan!"
I don't think anybody's argued that about Communism. I think most people understand that Communism collapsed because it was just a bunch of political elites granting favors to those they liked and punishing those they didn't. I don't think giving them the entire world to control would help that problem.
Which brings us to the real question, which is, when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line? Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.
The argument is the money going to the junior creditors is basically a gift from the government and the government can decide who it gives money to. As long as the senior creditors are not doing worse than if the government walked away and let Chrysler be liquidated it is hard to see the unfairness. Of course the senior creditors claim they would do better in liquidation but this is not entirely convincing. It seems doubtful that auto plants in Michigan have a lot of value at this point absent government support.
The senior creditors seem willing to risk liquidation, which makes their claims more convincing than the government's that they have to call and threaten the hedge funds for their own good.
Maybe, or maybe they are bluffing while holding the junior creditors hostage. I would like to see some analysis of what they could realistically expect to get if Chrysler was liquidated.
Well, they're clearly not bluffing. The company's in bankruptcy.
If we really want unions to become strong again, the best way to accomplish this is to make them compete. Monopolies lead to laziness and bad management. If unions were subject to anti-trust regulation and it was relatively easy for competing unions to enter and try to attract workers, then union management would be forced to try to accomplish something and workers might join voluntarily.
The fact that union supporters are headed in the opposite direction - trying to take away private ballots so that organizers can show up at people's homes late at night and intimidate them into joining - shows that they reject the very idea of actually giving workers something in exchange for their membership.
There are plenty of problems with unions, but it's hard to argue that they haven't given workers anything. In plenty of cases, they've given workers higher wages and benefits than they would have had without the union. Whether those wages and benefits are sustainable (in the case of the domestic automakers, they apparently weren't) is another issue. But any cursory comparison of the wages and benefits at, say, a unionized grocery store twenty years ago and the typical non-unionized one today will clarify the advantages to unionized workers of having a union.
As for your idea of multiple unions competing against each other, what unions give workers is the ability to bargain collectively. If you have multiple unions, each union has less bargaining power.
"... what unions give workers is the ability to bargain collectively."
Wrong!
Workers always have the ability to bargain collectively even without a union. They can band together and present demands to management at any time; and threaten to strike if their demands are not met.
Unions believe that's not enough.
Union members have been given something by the courts that normal everyday groups of people don't get: the legal freedom to commit crime in the furtherance of their union goals.
Union members are legally allowed to physically intimidate people who cross picket lines, for example - a crime that ordinary citizens would be jailed for.
Rock throwing, threats, physical confrontation ... all of these have been declared legal by judges sympathetic to - or even monetarily supported by unions. Unions have the legal power to bully OTHER workers without threat of arrest by the police. That is the source of a union's power. It is not over management, but rather over other workers.
"Wrong!
Workers always have the ability to bargain collectively even without a union."
How has that worked out for non-union workers who've tried this?
As I said, there are plenty of problems with unions, and there are plenty of legitimate criticisms of them. But the reality is that they have enabled certain groups of workers to get much higher pay and benefits than they would have otherwise. I don't see how you can deny that. Maybe you can offer some example of, say, non-unionized longshoremen that were able get themselves six-figure pay through collective bargaining. I doubt it, but if so, feel free to mention it here.
"In plenty of cases, they've given workers higher wages and benefits than they would have had without the union" which was great for awhile until they priced the industry out of the market and it moved overseas. And then there are no jobs and the PBGC is in charge of the benefits.
I agree that unions in the past have offered something to their members, and may still offer enough to induce some to want to join (although, as Holdfast points out, there's now a better understanding of the long term implications of the model that unions have adopted).
But the whole point behind the legislation to take away the right to a private ballot is to allow greater intimidation of those reluctant to join a union. They're not trying to attract workers, they're trying to force them to join. The actions of union leaders seem typical of those that have had a monopoly so long that they've forgotten the very idea of competition.
"If you have multiple unions, each union has less bargaining power."
Yes, but the same argument is true about competition vs. monopoly/oligopoly for companies within an industry. That's why so many people for so long thought that communism would inevitably outperform capitalism. The problem is that long term, you don't get hard work and innovation from monopolies, as we're seeing with unions.
Ann,
I'm not in favor of card check, and, as I mentioned before, in some cases the wages and benefits unions negotiated turned out to be economically unsustainable. That wasn't my point. My point was simply that unions have enabled certain groups of workers to get much higher pay and benefits than they would have otherwise. I think anyone tethered to reality has to acknowledge that.
"The problem is that long term, you don't get hard work and innovation from monopolies, as we're seeing with unions."
"The problem is that long term, you don't get hard work and innovation from monopolies, as we're seeing with unions."
I'm not sure if anyone expects much innovation from the men on the shop floor. As for hard work, the point of unions was never to make workers work harder, but to get them paid more by giving them monopoly pricing power for their wages. There was a time though when "union-made" implied a certain level of skill or craftsmanship. To the extent that it doesn't anymore, I'm not sure this decline in the perception of craftsmanship is limited to unionized workers.
"I'm not sure if anyone expects much innovation from the men on the shop floor."
I have, from the beginning, been talking about the managers of unions, the 'leaders', not the men (or women) on the shop floor. I think that union leaders are focusing on rigging the game to force people to join, rather than asking themselves why people aren't joining voluntarily. As you have pointed out and I have agreed with, unions managed to get their members more money than those members could have gotten through skill or hard work alone. So why are unions having a harder time getting people to join?
A good parasite doesn't kill the host.
"I have, from the beginning, been talking about the managers of unions, the 'leaders', not the men (or women) on the shop floor."
I don't think anyone expects much innovation from union leaders either. Andy Stern is the only union leader who comes to mind as one who could be considered innovative, but given his work with low-margin industries, there's not much he can do to make his workers' share of the pie much bigger.
"So why are unions having a harder time getting people to join?"
Partly because many workers are happy to free-ride on the wage and benefit gains already won by unions and would rather not pay the union dues.
"A good parasite doesn't kill the host."
Quite a tendentious metaphor there, Ann, but I'm sure there are labor types who feel the same way about some corporate executives. I know there are shareholders who do.
Well, they're clearly not bluffing. The company's in bankruptcy.
In bankruptcy but not yet in liquidation. As long as the government's last offer is the same as what they want the bankruptcy judge to impose the senior creditors aren't risking much. Anyway bluffs don't always work.
Nor does playing chicken which may be a better description of what is happening.
I'm pretty sure all of us would rather see Chrysler liquidated (senior creditors included) than to see a precedent set where the government can subvert long-standing law and play Robin Hood to rob from the rightful owners and give to their favored classes (at least in such an overt way. Both parties have been doing this for a long time.)
If Obama had two brain cells to rub together, he'd see that liquidating an old dinosaur to make way for an innovative new company fits perfectly into his message about hope and the future. This cronyism just makes him look short-sighted and ignorant.
"As I understand many of these hedge funds bought the loans for 50 to 70 cents on the dollar. That is, they knew they weren't going to get fully repaid..."
I don't quite understand this statement. I work in investment management and routinely buy things for 50 to 70 cents and fully expect to get paid a dollar. I.E. I am investing because I think there is a very good chance I will make a good return on my money. Especially if I am taking on company specific risk. I need to be paid to hold risk, is this not the essence of capitalism?
"In bankruptcy but not yet in liquidation. As long as the government's last offer is the same as what they want the bankruptcy judge to impose the senior creditors aren't risking much. Anyway bluffs don't always work."
I am not the world's leading bankruptcy expert (and also not an expert on Chrysler per se), but it seems to me like the Non-TARP lenders are perfectly willing to let this go into liquidation. Yes the auto plants do not have a lot of value, but every industrial firm has other assets that can be sold.
- Inventory (Chrysler cars aren't great, but what if they sold off brand new sedans for $5,000. I bet they would move a lot of them).
- Steel, Rubber, Spare, Parts
- Real Estate
- Accounts Receivable
- Trademarks, brands (the Circuit City name brand recently got a bid in liquidation).
- Firm specific IP (may or may not have some)
Etc...
You aren't going to get anywhere near 100 cents on the dollar for this stuff. But if you could raise $5 billion via a liquidation, the secured creditors will be much better off.
I don't think this is chicken at all. The secured creditors seem to believe they can get 50 to 60 cents by liquidating the assets, and there is no real reason to take anything less. Those that have thrown in the towel are either TARP conflicted (GS, JPM, Etc...) or were pressured by the White House to take a terrible deal (Perella Weinberg).
Also, if I was an investor in one of these funds, and they took a cent less than a conservative estimate of liquidation. I would sue them to recover my losses. As an investor why should I be forced to pay for someone's else's political goals.
Here (large pdf file) is an analysis of Chrysler's plan (prepared by a consultant to Chrysler and submitted to the bankruptcy court) which estimates a liquidation value of 9% to 38% for first lien holders. The car inventory is estimated to bring $1 billion to $1.4 billion as opposed to a nominal value of $5.6 billion. No doubt the first lien holders will come up with higher estimates but I doubt they actually want to see Chrysler liquidated although this could happen if they miscalculate (especially since an irrational minority may be enough to force liquidation).
That's interesting and I will have to read that. Although it is important to note,
1) These consultants are working for Chrysler, which is in essence a subsidiary of the US Government at this point. I was previously a consultant at McKinsey & Company, and I must say that results can often have a bias towards your client.
2) There analysis is made to support the quick 363 sale.
3) I have no doubt the creditors will come up with their own analysis, which is likely to show much higher recovery.
4) Even in this analysis 1.4 billion is close to the $2 billion that was offered to the secured creditors, and that does not include any of the other assets.
4) Even in this analysis 1.4 billion is close to the $2 billion that was offered to the secured creditors, and that does not include any of the other assets.
It also does not include any of the expenses which were estimated to be substantial.
What expenses?
Aside from DIP financing and legal fees?
Page 21 of the link I gave estimates expenses as follows:
Total liquidation costs are anticipated to range from $1.9 billion to $2.7 billion. Wind down costs include payroll related expenses of between $711 million to $1 billion, plant maintenance and security costs of between $1 billion to $1.6 billion, and bankruptcy related costs of approximately $200 million.
Another thing, does anyone really believe that a combination of Chrysler (a money losing, high cost manufacturer that is constantly losing market share). In combination with a medicore european car manufacturer (FIAT) will be able to compete effectively against Toyota, Honda and the like?
Don't they already make small cars, with terrific gas mileage that, you know, consumers like to purchase. And aren't they, you know, profitable entities?
when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?
Sometime around November.
I look forward to much taxpayer-financed hilarity at the new UAW/Obama-run GM.
And the alternative to a Government managed Bankruptcy of Chrysler is?.... Don't worry I'll wait.
Word of warning: if this has anything to do with the philosophy of consequences, then let me sort nudge you back into the current Paradigm. The minute the stock market started taking large scale capital infusions in one form (401k, Roth IRA's) or another (private online accounts, Edward Jones branches out in the middle of nowhere)from people outside the investment club, it no longer was a wholly market determined. The minute it became a broad club, meaning that the consequences of it failing would fall more broadly on people, it ceased having that risk impetus. I don't celebrate that, it just is.
That is just a lovely socialist idealism poster you have provided. It hovers in an unthought of propaganda space with Russian revolutionary art and that of Nazism. Could only a workers' patriot could know of such art? The rule of law you endorse even more. Perhaps that will interfere with the political leanings of the president. Todd Zywicki at Volokh illustrates with a nice article and links.
Government interference, or arbitrary enforcement of the rule of law is a hallmark of bankruptcies in banana republics, and france. When lenders have confidence that the government will enforce bankruptcy laws (ie the rules of the game) will be consistently upheld, they will lend more freely. When lenders fear their contractual rights will be summarily ignored, they will demand equity-like rates of interest, thus stifling economic activity. Credit is a sacred trust.
The point here is not which party is more "deserving" of more or less of a shrunken pie, lazy unions or heartless hedge funds. Lots of folks fundamentally believe the government should do whatever the hell it wants (eg upend absolute priority in bankruptcy) to effect the "greater good", as defined by a self-designated minority of people. But all government policies have a cost, and those same folks like to pretend that those costs don't exist. When the Government flouts the rule of law to fit its preferred special interest groups, that has a real cost.
Megan,
I had raised the same concerns last night in reply to one of Conor's posts here: http://business.theatlantic.com/2009/05/casting_the_hedge_funds_as_villains.php
Fiat's position is just too pat. I've got a feeling that when this comes out of BK, they are going to leverage the UAW as majority shareholder to come up with the operating cash on their own, and stick the UAW with the bill. Since they have no cash in the deal, Fiat can threaten to walk, and the Obama administration cant really take anything away from them.
In the end, the UAW is going to be forced to sell their new equity at substantially below market rates in order to raise cash. Lets be honest - who is going to come in and pay dollar for dollar when there is a chance the government might come back and take the equity away?
Any how, do the little biscuits at the Berkshire meeting come with jam? If they have blackberry, it might be worth the price of admission.
God, I hope you are right. The next worst situation other than the government owning and running a car company is the union that forced it into bankruptcy to start with.
If you are wrong, CDM, I say there is no way Chrysler or GM get credit at normal rates after the BK process, given the way bondholders have been treated in this process. Would you invest in either company?
We will see them back in BK within 5 years because the union-dominated board will force their stupid work rules and pay schemes on the new management. And their cars will still suck accordingly.
So let's go pass card check while we are at it to make America stronger.
I think that it is almost a given now that GM and Chrysler are going to get very unfavorable rates. That's why I think the UAW will be forced to sell equity at an unfavorable price in order to raise cash.
The only wild card here is the TARP banks. The government could force them to lend to Chrysler at market rates.
By the way, i think that they will be back to insolvency faster than 5 years. i just think the projections for the US marketplace are off. I think that we are looking at a 10-12 million unit marketplace for a while.
"i just think the projections for the US marketplace are off."
Did you see their turnaround plan they submitted to the government? They were CF positive at the end of FY09. They may as well have had fairies and unicorns on the cover...
There's no way they can hope to emerge from bankruptcy for any length of time without significant cash injections from the government.
"Which brings us to the real question, which is, when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?"
It became the government's job on January 20, 2009 when Barack Obama was sworn in as the President of the United States. Everything that his Administration is doing is as a result of the policies that he himself espouses and advances.
The United States is no longer a nation of laws. It is a nation of men.
It is a nation where your legal standing is not what counts, but rather how you can be manipulated by the political process weilded by those who drunk on their temporary power.
It is not about contracts; it is about strong-arm thugs who have no compunction about using people like yourself - the mainstream media - to destroy your career if you use laws to oppose them.
You will do as they say; or they will crush you or someone you love. It's corrupt Chicago politics, writ large.
You understand now, don't you Megan?
This government is undertaking, in my opinion, a criminal action in the Chrysler bankruptcy. Moreover, Obama is fully aware that what he is doing is illegal, which is why he hasn't asked Congress to intervene, but doing it through his twisted executive schemes. His actions would cause a huge scandal if exposed to the political process.
First of all, this isn't the normal method of Chapter 11 bankruptcy; instead, the Administration is negotiating a sale to another, different entity, a "Chrysler 2", under section 363. This is a conflict of interest because it is collusive bidding - the government is a stakeholder, as an equity holder and also as the recipient of political contributions, but is engineering the bid to the company that is ostensibly going to assume control of Chrysler, Fiat. Fiat will receive 15% of the equity, but it is strange that receives this control without putting up ANY MONEY AT ALL. Very typically, increasing the size of its stake will require politically-minded ideas like location of a Chrysler plant within the US. The UAW is owed unsecured claims of their health care fund, the VEBA, which under the government plan they will be "forced" to convert to 55% of the equity of the "New" Chrysler. For all this, they are offering $2 billion to the secured creditors.
Why is the Administration so eager for this bankruptcy to occur? Well, the general rule in Chapter 11 bankruptcy is that all creditors must agree to a re-organization plan or be proscribed one by the bankruptcy judge. However, the Administration wants a rapid-fire sale to Chrysler 2, because in order to effectively "block" the sale, the small number of dissenting creditors in question would have to put up more money in total ($2 billion) to bid on the assets than the Administration is offering. I will get to why there is no legal remedy in this situation later. Here is another conflict of interest, since the Administration is financing several of the larger creditors, the illegally-financed TARP banks, who will tend to accept less money than they would without this yoke. This is a collective action problem: under normal bankruptcy, you can block by dissent; under the Administration plan, there needs to be a kind of coordination between the secured creditors.
First of all, understand that Fiat, the company, isn't important to the scheme. That begs another question - why are they participating, and what is their relationship to the Administration? They are not actually putting up any money, because the Treasury is going to competely finance the sale of the assets that will be received by "New" Chrysler. You could call it a "shill" bid, there is essentially no third-party bidder. Indeed, why would anyone want to get involved in this messy political situation, especially if the UAW will strike if you don't give them the same kind of exorbitant deal they would receive under the government? Note also that that same question also hampers the dissenting creditors' bid. Not only will the UAW get a 55% stake in "New" Chrysler, after Daimler pays $600 million into the pension plan, the Pension Benefit Guaranty Corporation will assume the liabilities of "Old" Chrysler, on the taxpayer's dime. They get to appoint a director to the board, and the supposedly "neutral" government will get to appoint 4 directors.
The sale under section 363 is designed to pre-empt another rule under section section 1129(a)(7) of the bankruptcy code. It reads,
"With respect to each impaired class of claims or interests – (A)
each holder of a claim or interest of such class . . . (ii) will receive
or retain under the plan on account of such claim or interest
property of a value, as of the effective date of the plan, that is not
less than the amount that such holder would so receive or retain if
the debtor were liquidated under chapter 7 of this title on such
date. "
So basically, it is a rule that says any reorganization plan should get maximum value for priority level of claims. If it prevailed, the dissenting secured bondholders would be made as whole as possible. But, if the company is sold under the more majoritarian section 363 sale, they never get to exercise those claims; if the trumping bid is the government's $2 billion, all secured creditors are paid pro-rata, and their claims cease. That's why the Obama Administration is speaking its Double Speak: "surgical" and "quick" really means "illegal" and "fraudulent". But the Federal Government is playing both sides, so that's A-OK.
The success of this plan critically hinges on whether it is judged "sub-rosa" by the presiding judge, which offers remedy for the "fear that a debtor-in-possession will enter into transactions that will, in effect, “short circuit the requirements of [C]hapter 11 for confirmation of a reorganization plan.” So, instead of the alternative where we could have had an open, private process between many stake-holders, we are having a secretive and political process between compromised and possibly corrupt stake-holders.
I like the part where Obama threatened to use "his" White House Press Corps to destroy the reputation of the lenders he is screwing.
(Plausibly denied, of course, but the threat's there.)
What's really amazing is that the Press Corpse didn't disagree or even react.
Takes "in the tank" to a whole new level.
Miss McArdle,
With respect, you know your own degree of patriotism far better than any of us can; but could you consider the possibility that, just perhaps?, you may well be much more patriotic than the UAW?
Do the senior debtors have the ability to tie this up in court, or is this a cram-down??
The government is trying to circumvent both, by ramming through an emergency sale (via sec 363) that strips out the good assets, taking them forever out of the reach of lenders, and hands them to the UAW/Fiat. The idea is that the sale will be approved and done before anybody can object.
This isn't a cram-down, where the debtor goes through the exercise of trying to allocate value fairly (ie through the bankruptcy laws), and a judge approves the plan as the best compromise despite not satisfying dissenting creditor classes. A cram-down pre-supposes that the creditors have had their day in court, have had a chance to negotiate the plan of reorg, and most importantly, have been given the opportunity to vote on the plan. But none of that is happening here -- the government is trying to skip all of the above. A cram-down involves a degree of fairness, which the government is desperately trying to avoid here.
Blah blah blah. "I can't believe the Uber-socialist I endorsed is an Uber-socialist who doesn't respect the rule of law".
You're the 3-4% who put this man in power. We will all now reap the whirlwind, but most will not suffer to hear the complaints of the likes of you.
By all means, keep blogging about matters economic, both the esoteric and the mundane. But politics . . . clearly your judgment in such thinks is of little import or interest.
I think the publicity that the UAW is getting from all this is great. Watching what's happening here will make workers all over the country think twice before letting their shops go union. Sadly this is going to really screw over the current workers in UAW shops.
Why do you even bother to write about unions, Megan? I'm asking you honestly. You have made it perfectly clear: there is no situation, at all, on earth, ever, never ever ever, when your opinion on them will be anything other than: destroy them all. So why do you weigh in at all? We get it.
Freddie,
Is there ever a time when you question your apparent belief that unions are a panacea for all of the problems you see in the world?
The UAW has been the a drain on any and all companies that it is associated with. The corrupt leadership of the union is betond a proven fact. The abuse that the members must suffer to allow the leadership to act and live the high life is dispicable.
A FORMER union member
If you were a vulture investor and you really thought the Chrysler endgame was going to play out exactly according to the rulebook, maybe it's time to become a chartist or an index investor. As Megan points out in a later post, in this climate there are some activities that are investing and some that are gambling. This is gambling. The federal gov't is dropping off bags of money at Chrysler's front door; these guys thought they could quietly carry it out the back door? Come on.
Go, Obama! You so gangsta!