The Economy, stupid

[Balta1701]

Chrysler's bondholders refuse the deal, Chrysler is filing bankruptcy as we speak. The government seems to be trying to use the bankruptcy judge to enforce the deal that they wanted.

President Barack Obama said today that Chrysler LLC will file a historic bankruptcy shortly, backed by up to $3.5 billion in new government aid designed to allow a Chrysler-Fiat partnership to emerge from court in 30 to 60 days.

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The move also sends a strong signal to bondholders at General Motors Corp. that the Obama auto task force will act on its vow to take GM into a similar bankruptcy if they do not agree to swap their GM debt for shares in a reworked GM.

 

Under Chrysler's bankruptcy, to be filed in New York in a matter of hours, the two automakers along with the UAW, Fiat and a majority of lenders will ask a judge to force a swap of $6.9 billion in debt for $2 billion in cash. The number of Chrysler dealers, now about 3,200, will be reduced through bankruptcy, but the administration officials did not say how many would be eliminated.

 

The agreement with Fiat will allow the Italian company to take a 20% stake in Chrysler that will grow as Fiat meets certain milestones, such as building new models in Chrysler plants. In addition to the $3.5 billion in financing to keep Chrysler operating while in bankruptcy, the government will also provide up to $4.7 billion for the new Chrysler once it emerges.

 

The Obama administration will also give additional aid to GMAC so that it can take over lending to Chrysler's customers and dealers from Chrysler Financial, which the government has deemed not viable. And the Canadian government will also provide new financial aid to Chrysler's operations in that country in return for 2 per cent in the new Chrysler.

 

The administration portrays its "surgical" bankruptcy of one of Detroit’s major automakers as just a legal chore, rather than the threat to Chrysler’s existence and the entire U.S. auto industry that Chrysler itself had described less than three months ago. Administration officials said Chrysler would operate as usual during bankruptcy, and that no additional job cuts were anticipated as of now.

Small note...if you wanted to send a message to GM's bondholders, shouldn't you go to the bankruptcy procedure and argue for an even worse deal than the one you offered them? Make it clear that holding out only makes things worse for them.

[southsider2k5]

Chrysler's bondholders refuse the deal, Chrysler is filing bankruptcy as we speak. The government seems to be trying to use the bankruptcy judge to enforce the deal that they wanted.

Small note...if you wanted to send a message to GM's bondholders, shouldn't you go to the bankruptcy procedure and argue for an even worse deal than the one you offered them? Make it clear that holding out only makes things worse for them.

 

It was bound to happen. You can give the guys who are keeping the company afloat the worst deal out of everyone involved. Its shortsighted, and only encourages the further contraction of lending, especially in dangerous sectors, such as automotive.

[Cknolls]

It was bound to happen. You can give the guys who are keeping the company afloat the worst deal out of everyone involved. Its shortsighted, and only encourages the further contraction of lending, especially in dangerous sectors, such as automotive.

 

 

Not only automotive, how about a financial company that tries to sell some corporates? With this as a precedent who in their right mind would invest? The gov't will just throw debt holders under the bus like they are doing here.

 

 

Obama did seem a little perturbed at the presser today.

 

 

If the Chrysler debt holders were offered a reasonable deal, there is no way they would have turned it down. But, by insulting them, the gov't gave them no choice. And with the bankruptcy law on their side they feel they have a strong case going forward. Really, they have nothing to lose compared to the current offer.

[NorthSideSox72]

Not only automotive, how about a financial company that tries to sell some corporates? With this as a precedent who in their right mind would invest? The gov't will just throw debt holders under the bus like they are doing here.

 

 

Obama did seem a little perturbed at the presser today.

 

 

If the Chrysler debt holders were offered a reasonable deal, there is no way they would have turned it down. But, by insulting them, the gov't gave them no choice. And with the bankruptcy law on their side they feel they have a strong case going forward. Really, they have nothing to lose compared to the current offer.

 

What Obama is doing here is ultimately the best possible outcome. And the idea that they are being pushed unfairly into bankruptcy is ridiculous - they would be there by now anyway, UNcontrolled, if not for major government assistance. Anyone who bought bonds in Chrysler were going to lose anyway.

 

[Balta1701]

Another worth reading piece by Johnson linking the decision to take Chrysler to bankruptcy to the situation the banks are in.

[mr_genius]

Another 8 billion pissed away. President Obama, please stop giving Chrysler billions of dollars.

Edited May 1, 2009 by mr_genius

[Rex Kickass]

It was bound to happen. You can give the guys who are keeping the company afloat the worst deal out of everyone involved. Its shortsighted, and only encourages the further contraction of lending, especially in dangerous sectors, such as automotive.

 

No it's fine, won't these bondholders get 100% of their loss back from the government anyway in the form of AIG Credit Default Swaps?

[Cknolls]

So with the left hand the Administration wants to protect investors, and with the right it wants to f*** invetsors in Oppenheimer funds who through their investments own Chrysler debt. Well played Messiah, well played.

[NorthSideSox72]

So with the left hand the Administration wants to protect investors, and with the right it wants to f*** invetsors in Oppenheimer funds who through their investments own Chrysler debt. Well played Messiah, well played.

It was the best option available. Tell me what you would have done instead.

 

[Cknolls]

It was the best option available. Tell me what you would have done instead.

 

 

Tell me how you would feel if you own one of the funds? He told you yesterday he is against you. I would offer the bondholders a fairer slice of the pie.

[NorthSideSox72]

Tell me how you would feel if you own one of the funds? He told you yesterday he is against you. I would offer the bondholders a fairer slice of the pie.

Bondholders are investors. Investors take on risk. They expect equities to be honored, but also accept the risk of default. You can't have it both ways. Obama has done nothing I am aware of to cause this - Chrysler caused this.

 

So I ask again... you are the President, you have to do what is best for the country as a whole - citizens in the economy, investors in Chrysler debt, and employees of Chrysler and their related industry... what would you do differently?

[Rex Kickass]

Let me get this straight:

 

Bailing out Chrysler: a mistake.

Letting Chrysler go bankrupt: a mistake.

Doing nothing and letting Chrysler liquidate: a mistake.

[NorthSideSox72]

Let me get this straight:

 

Bailing out Chrysler: a mistake.

Letting Chrysler go bankrupt: a mistake.

Doing nothing and letting Chrysler liquidate: a mistake.

That seems to be the conservative company line.

 

Of course, none of the alternatives are rosy. But this controlled bankruptcy is the best of those available.

 

 

[mr_genius]

they don't need another 8 billion to go bankrupt.

Edited May 1, 2009 by mr_genius

[mr_genius]

Bondholders are investors. Investors take on risk. They expect equities to be honored, but also accept the risk of default. You can't have it both ways.

 

i agree with you. investors in chrysler are screwed, thats how it works when your investment goes belly up.

Edited May 1, 2009 by mr_genius

[southsider2k5]

Let me get this straight:

 

Bailing out Chrysler: a mistake.

Letting Chrysler go bankrupt: a mistake.

Doing nothing and letting Chrysler liquidate: a mistake.

 

They should have gone into bankruptcy from Day One. The entire planet knew they weren't going to be able to "restructure" without cutting costs for real.

[Rex Kickass]

So if they went bankrupt, the same bondholders now crying foul would be receiving a similar if not worse deal. Especially, if the company went into liquidation.

[kapkomet]

So if they went bankrupt, the same bondholders now crying foul would be receiving a similar if not worse deal. Especially, if the company went into liquidation.

I need to chime in here because there's a lot of stuff that's not true being posted here.

 

No, Rex.

 

Under a regular reorganization (Chap 11) bankruptcy, these bondholders are secured creditors. That means they would have gotten "proceeds" before anyone else - most likely with the equity that the UAW is getting without any monetary investment. These people were guaranteed a lot more money contractually, even in this bankruptcy proceeding scenario, before the government stepped in and is now stiff-arming their plan through.

 

Bankruptcy is what should have happened a long, long time ago before the government got involved. To your point about liquidation (Chap 7), they all are screwed anyway, so that is a moot point because no one gets a thing anyway except the proceeds of the sale of the company - and even then, the secured bondholders get paid first.

 

And, for the record, since I'm chiming in here, I DO agree with the UAW getting a piece of the pie simply because now they get to manage the company in real partnership with the rest of management and they cannot blame their management anymore for their wrongs after the restructure. Frankly, it worked "rather" well in the steel industry - not in total, but at least it was a step in the right direction.

[Balta1701]

Bondholders are investors. Investors take on risk. They expect equities to be honored, but also accept the risk of default. You can't have it both ways. Obama has done nothing I am aware of to cause this - Chrysler caused this.

 

So I ask again... you are the President, you have to do what is best for the country as a whole - citizens in the economy, investors in Chrysler debt, and employees of Chrysler and their related industry... what would you do differently?

Another point worth noting is that a lot of the current bondholders are people who bought those bonds expecting that they could get a solid return on their investment because they were buying in when Chrysler was looking like it was going to go totally bankrupt and they were anticipating that the government would give them an assist.

[kapkomet]

Another point worth noting is that a lot of the current bondholders are people who bought those bonds expecting that they could get a solid return on their investment because they were buying in when Chrysler was looking like it was going to go totally bankrupt and they were anticipating that the government would give them an assist.

Yes. Good call... except I would re-phrase - the government doesn't have to give them an assist, per se, because under normal reorganization, the secured holders are at the top of the food chain.

 

[Balta1701]

Yes. Good call... except I would re-phrase - the government doesn't have to give them an assist, per se, because under normal reorganization, the secured holders are at the top of the food chain.

That assumes though that Chrysler has a lot of assets that could be sold off. If the company has to shutter itself completely, the only assets it has are auto production lines, but those are pretty worthless if you're not building cars. The top of the food chain would get basically a bunch of empty buildings, to my eyes...if it wasn't for the guarantee of government help that they believed they were getting when they bought whatever bonds have exchanged hands in the last 8 months or so.

[kapkomet]

That assumes though that Chrysler has a lot of assets that could be sold off. If the company has to shutter itself completely, the only assets it has are auto production lines, but those are pretty worthless if you're not building cars. The top of the food chain would get basically a bunch of empty buildings, to my eyes...if it wasn't for the guarantee of government help that they believed they were getting when they bought whatever bonds have exchanged hands in the last 8 months or so.

You are confusing two very distinct issues.

 

Liquidation (Chap 7) vs. Reorganization (Chap 11). There was always very little chance of Chapter 7... they were holding out (aka buying secured notes) for Chapter 11.

 

Again, under a liquidation, no one gets anything, period, except the proceeds, which as you note is nearly worthless. You are co-mingling the two, as was Rex it would appear based on his post...

[Balta1701]

You are confusing two very distinct issues.

 

Liquidation (Chap 7) vs. Reorganization (Chap 11). There was always very little chance of Chapter 7... they were holding out (aka buying secured notes) for Chapter 11.

 

Again, under a liquidation, no one gets anything, period, except the proceeds, which as you note is nearly worthless. You are co-mingling the two, as was Rex it would appear based on his post...

My key point...without the Federal government stepping in, it would wind up in chapter 7. The only reason why it is not in chapter 7 is the actions of the government. No one is buying a car from a bankrupt company if they think there's a 10% chance their warranty is going to suddenly vanish because the car company went up in smoke. But if the government guarantees to keep the company running and guarantees the warranties and uses its funds as the bridge loan that the company can't get otherwise right now because of the credit market, then the company has a chance to survive chapter 11.

 

In other words, the only reason those bondholders are getting anything is that the government stepped in. Otherwise, it was going to chapter 7 and its doors would already have been shut.

[kapkomet]

My key point...without the Federal government stepping in, it would wind up in chapter 7. The only reason why it is not in chapter 7 is the actions of the government. No one is buying a car from a bankrupt company if they think there's a 10% chance their warranty is going to suddenly vanish because the car company went up in smoke. But if the government guarantees to keep the company running and guarantees the warranties and uses its funds as the bridge loan that the company can't get otherwise right now because of the credit market, then the company has a chance to survive chapter 11.

 

In other words, the only reason those bondholders are getting anything is that the government stepped in. Otherwise, it was going to chapter 7 and its doors would already have been shut.

I seriously doubt it. There could have been deals made - without the government help. Credit "crunch" or not.

[Balta1701]

I seriously doubt it. There could have been deals made - without the government help. Credit "crunch" or not.

Between the mess that Chrysler is in general and the economic conditions right now, I simply disagree, and I'll leave it at that.