Spinning the Chrysler Bankruptcy

Thu, 30 Apr 2009 20:32:36 +0000

Why is Chrysler now frequently referred to as "storied?" Why is this bankruptcy any more "surgical" than any other bankruptcy with this much advanced negotiation? Let's get to the heart of the government's involvement -- the non-employee creditors, via The New York Times (the key paragraph is in bold):

Last-minute efforts by the Treasury Department to win over resistant Chrysler debtholders failed Wednesday night, and the administration’s frustration was evident in President Obama’s remarks.

But a group of Chrysler’s secured lenders asserted that the administration was skirting bankruptcy laws by forcing them to take a larger loss on their debt than other stakeholders in the company. They said their proposals to restructure Chrysler had been ignored by the government.

“The fact is, in this process and in its earnest effort to ensure the survival of Chrysler and the well-being of the company’s employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades,” the group, which calls itself the Committee of Non-TARP Lenders, said in a statement.

Members of the committee include units of Oppenheimer Funds, Perella Weinberg Partners’ Xerion Capital Fund and Stairway Capital Management. The funds emphasized that their investors were major pension funds, teachers’ unions and school endowments.

The lenders said they have been forced to negotiate through a group of big banks that have accepted government bailout money and are reticent to push back against the government’s proposal. They are particularly upset that the United Auto Workers will receive more for their debt even though the secured lenders should legally be paid before the union.

Many of the holdout lenders, primarily distressed-debt hedge funds who bought portions of Chrysler’s $6.9 billion of bank debt at a discount, will probably argue that they have the first claim to the carmaker’s assets that were pledged for those loans, according to people briefed on the matter.

They argue that they would see greater recovery in a liquidation of the car giant, which they contend would yield about 65 cents on the dollar. The most recent plan proposed Wednesday by the Treasury Department and Chrysler’s four main bank lenders — JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — would have given the creditors about 33 cents on the dollar.

The four big banks own 70 percent of Chrysler’s secured debt.

I have spent most of my time railing against bailout in lieu of bankruptcy -- I do not think that the creditors (or other stakeholders) of a distressed firm should be compensated by the American taxpayer, except through established forms of social insurance like the FDIC or the unemployment insurance system for which they have paid premiums. But nor do I think that it is appropriate for the executive branch of the government to try to steamroll them into accepting less than what they believe they could get from the established bankruptcy process in the hands of the judicial branch of government.