Steve Jakubowski has a couple of posts on the Chrysler case worth reading, here and here. The second post, on the feasibility of a section 363 sale here, is especially interesting. A quick 363 sale as a going concern seems to be the key to the government's notion that the case can be essentially processed in 30-60 days.
Mark Roe in the WSJ today is more skeptical: "A Chrysler Bankruptcy Won't Be Quick." I tend to agree with Roe--I just can't imagine this case moving as quickly as the government hopes. Nor is it obvious to me why exactly such haste would be necessary.
I was confused by one point that Roe makes, though:
Meanwhile, Fiat will want to rationalize Chrysler's bloated dealership network. Indeed, this once seemed a core aspect of any effort to reconstruct Chrysler, so the last day's focus on a few secured creditors seems misplaced. But terminated dealers won't go quietly. They'll argue that their contracts can't be easily rejected by a bankruptcy judge because they're protected by state franchise laws. And in any event, they are entitled to some form of payment (reduced or otherwise) from a bankrupt Chrysler if their dealerships are terminated.
I would have thought that section 365 would preempt state franchise laws on this when it comes to rejection. I understand why 365 would be a problem for assumption, but do these laws erect a barrier in bankruptcy to rejection? Any insight appreciated.
Finally, I agree with the WSJ editorial board on the big picture: getting this out of the political process and into the bankruptcy process is the best way to try to rehabilitate Chrysler and get it to a satisfactory outcome.
"My Struggle" or "We Will Bury You"?
Or did Tony Soprano just take over New Jersey's largest restaurant, and kick back some points to his associated linen service and pork butcher?
Unfortunately, I don't think big changes like this are really likely. The new Chrysler will probably look a lot like a smaller version of the old Chrysler. Rather than a visionary remaking of the auto industry, we'll end up with the same crap in a new bag.
What's the rush to close on this deal prior to getting it all ironed out?
Emphasis mine. Unbelievably, Obama and the Congress seem to be interfering in a court case, haranguing the very guys they're writing checks to. Pass the popcorn, baby.
Fiat isn't putting up one thin dime, and I hear their name broached constantly. You gotta love these Washington guys, blind to the implications of that. Fiat will subsume the trucks, the only real profitable portion of Chrysler and a segment Fiat wants, and take a portion of dealerships to establish a Fiat rebirth in NA... and the rest? You own it, taxpayers.
A splendid performance. Tom claims the WH is threatening his clients with all but waterboarding.
How many states have an inventory tax? Not all. I heard that's how Amazon located its warehouse in Kentucky.
On the broader question of what the government is doing, I think it is important to focus on the apparent use of Section 363, rather than the processes under Chapter 11. We see in the Chrysler plan that the UAW ends up with 55% of the equity of Chrysler. Where did that come from? In bankruptcy, workers have things that Chrysler owes to them—pensions and health care and the like. To the extent it is for work done in the past, it is simply an unsecured obligation of Chrysler—nothing special. To the extent it is for work done in the future, it is part of the administrative expense priorities, but you “pay as you go,” you don’t both pay them and give them stock.
Perhaps this is justified on a different rationale. Sometimes, a company in bankruptcy needs to give equity to someone supplying a new, and necessary, ingredient. If the most valuable thing the firm owns is a new invention that is still in the head of the old owner/manager, it may be in the interest of the creditors to give that old owner/manager a piece of the new company—not because of the old interest but because of the need to keep the manager around in the future. But that doesn’t reflect what the government is doing in Chrysler—unless one views its debtor-in-possession funding as equivalent to that (which goes back to my question of “isn’t this exactly what the market is supposed to be testing”).
So, it is strange to see the UAW ending up as a 55% owner of Chrysler. It is also strange to see the other creditors getting squeezed out. The government has been trying to get the creditors—many of whom are TARP recipients, over whom the government seems to have a lot of leverage—to take 35 cents on the dollar and go away. These creditors are secured creditors. They are entitled to get paid in full (out of Chrysler’s assets) before anyone else, unsecured creditors included, get a cent. To the extent they are unsecured creditors, the government is trying to get them to take less. The class of creditors can agree to this in a reorganization—up to a point.
And this “up to a point” creates problems for the government. So it is taking a different tack. Although labeled a reorganization, and although occurring under Chapter 11, it really is a sale of assets under Section 363. This is the route being taken because it would be too difficult for the government to accomplish some of the things it wants in a reorganization, where the banks, funds, and other secured creditors could block too much of this from happening, even with the government having the agreement of several of the big banks.
The current plan—as I understand it (and this is pretty darn tentative) is that there will be a sale of Chrysler assets to a new entity (“Chrysler 2”) that while it occurs in Chapter 11, is actually taking place under Section 363, which could also be used (and commonly is) in Chapter 7 as well. The government will fund the purchase price by providing $2 billion. That $2 billion will be used to pay off the banks and other secured creditors that are owed (for sake of simplicity) $6 billion—33 cents on the dollar. After that, the Chapter 11 reorganization is finished—an important point. Everything else that takes place takes place in the new entity, Chrysler 2, which the government has decided to set up with the UAW owning 55%, Fiat owing 35%, and with the government having the status as a creditor for the interim financing it is providing. And Chrysler 2 isn’t in bankruptcy or subject to the bankruptcy court.
The government’s gamble is that the dissenting banks, hedge funds, and other secured creditors can’t come up with a better purchase price for the assets being sold. Say that $1.5 billion of such creditors (25% of the $6 billion of secured creditors) haven’t agreed to the government’s deal going in. They can bid their claims against the assets. But instead of coming up with another $500 million (to make $2 billion—and a bid that equals the government’s), they need to come up with another $1.5 billion, as they can’t leave the other creditors, similarly situated to them, worse off than under the government’s bid.
So, they need to top the government’s bid with at least something like $1.5 billion cash. These funds are pretty good at coming up with money, so that isn’t necessarily the problem—if they think the government’s bid is lowball. But here’s where the government sitting on all sides of the deal makes it increasingly unlikely that the government’s bid will, in fact, be topped.
For starters, the UAW’s deal with the government goes by the wayside. You want to be the owner of Chrysler 2? Well, have fun negotiating with the union—which, by the way, will strike if you don’t give them the same kind of stuff the government is planning to give them, such as 55% ownership of Chrysler 2. And don’t count on any government support to help you with things like retiree health care benefits—or, for that matter, car warranties for all the Chrysler owners who bought their cars before Chrysler filed for bankruptcy and who will get zero in the reorganization (remember, all the money from the 363 sale is going to the secured creditors). (By the way, the UAW’s 55% equity stake in Chrysler 2 is “for” its retiree health care benefits—not pensions (which are picked up by all of us under the Pension Benefit Guarantee Corporation). So it is a majority ownership for one particular unsecured claim. Pretty amazing.)
So, the government is likely to win—at least, that’s my quick read of the tea leaves. Is this a bad outcome? From the standpoint of taxpayers, this is spending a lot of our money on people who would lose in a standard reorganization. A bankruptcy judge is very unlikely to give 55% of the equity to the UAW, on top of their future wages. So, the government is providing them with something that the market wouldn’t. And this whole deal works only because, through TARP and other mechanisms, the government has been able to break the ranks of the secured creditors, who—for all intents and purposes—should be considered to “own” Chrysler, lock, stock, and barrel.
From my perspective, it is troublesome because the government, ultimately, gets to “hide” what it is doing from the straight up-and-down votes of the political process. If the government wants to send money to the UAW to pay for retiree health care benefits after it loses out in a reorganization, it can, but it is politically harder. Moreover, left to the market, a fair amount of the excess capacity is going to come out of Chrysler. (The gorilla in the corner is the need to pull excess capacity out of the system. This should come from the least efficient manufacturers, of which Chrysler must be heading almost anyone’s list.) Indeed, it might not survive. From the long-run perspective of the health of the automotive industry, that’s the right decision. The government, however, is also ensuring that while Chrysler is going to get smaller, it is going to subsidize it so as to make sure that the excess capacity pain is “spread around.” Indeed, although it is subject to various interpretations, I saw one chilling comment, as run through the filter of the New York Times, to the effect that “[t]he administration . . . did not expect significant white or blue-collar job cuts as a result of the bankruptcy,” see Micheline Maynard, “Chrysler Bankruptcy Plan is Announced,” NY Times May 1st. Too, this may all be too neat. Chrysler 2 is certainly going to want to start without certain franchisees. Under the current scheme, they get zero. Is that politically palatable in the long run? I doubt it but, hey, my expertise is bankruptcy, not politics.
But I do have a bottom line of all of this: Under almost any way I can slice this, that’s the wrong outcome for the automotive industry, and for society, in general. Bankruptcy, left to its own devices, without the heavy-hand of the government on all sides of the issue, could have sorted out the issue of capacity and future. And the government could then have dealt with the serious issues that it can, and should, be dealing with—such as retraining those that lose jobs, figuring out the role of other safety nets, and the like, and exposing things—such as the decision to “make whole” previous private-party promises about retiree health care benefits—to the daylight of political debate over that issue, rather than the more amorphous, cover-a-million-sins- approach of “saving” Chrysler through some combination of bailout (which is government controlled) and bankruptcy (which also looks like it will be government controlled).
I welcome reactions to this, because I’m trying to figure all of this out based on news reports and the like, which aren’t particularly clear.
Since, in this reorganization, we seem to be blasting by the rights of owners and all creditors in favor of the interests of a particular class of "stakeholders," it might be worth addressing the question of the value of retaining the goodwill of this group.
My understanding of the advantages of the foreign-owned US-based auto industry is that, fairly reasonable wages to one side, outmoded and wasteful work rules do not exist. I suppose we can add to that the workers' identification with and loyalty to their employer, rather than a disruptive intermediator with a checkered, at best, past.
Is artificially propping up the union in the interests of those who are funding this massive undertaking?
Given the state of the economy, oughtn't we to be encouraging the most skilled and dedicated workers regardless of their affiliation or lack thereof with a communal pressure group? A group whose purpose has been rendered moot by OSHA and the prevailing wages for qualified workers, even in the rural South?
blank mind, we can't let the UAW off the hook here. They have not bargained with a longterm eye. In 2005, they refused to grant Chrysler the same concessions they'd just granted GM and Ford, because they averred that they'd never grant those to companies making a profit.
Chrysler has been flirting with bankruptcy for decades now, and the UAW knew this, but refused to consider it. Daimler responded immediately, by walking away, and I fully expect Fiat to have taken notice of this, and to act in their own interests (which aren't those of the taxpayers).
The only fair way in this is to have the judge rank-order the parties, but the parties appear to be using political muscle to move up in the order.
We made a huge mistake bailing out out Chrysler 30 years ago, thus subsidizing overcapacity. We should have let Ford and GM pick over the carcass, take on the strong assets, and spare 50-90% of them for productive use. Chrysler absorbed American Motors 10 years later, further acknowledgement of the overcapacity problem, but we didn't take notice then, either.
Let's see if this judge can fish through this and execute the law, and I certainly hope the law doesn't allow Beltway bandits to bully the law into a subsidization of the historical problem.
All of these auto companies are multinationals. They care about making money, wherever they can... and taxpayer cash is fine with them.
And in this particular case, the "encouragement" for Fiat, Chrysler 2 and the debt cramdowns is being provided by the US government, and that encouragement sure ain't indirect, as we see.
Clearly, the original Washington plan was to avoid bankruptcy, and pressure the investors to succumb. They didn't, and chose to take their chances in court. The new government plan is to go into bankruptcy, and pressure the investors to succumb... la meme chose.
This judge did Enron, so hopefully he learned how to get it right. He's a marathon runner, and once taught school in the NYC public school system. Sounds like a pretty good resume for this case, because I can't imagine this is gonna go down in 4-6 weeks like they claim, unless Obama coughs up enough cash to settle it. And he's obviously said no to that already, or the case wouldn't have been filed.
I will say this, Obama is playing with fire here. Chrysler is scheduling a 60 day shutdown as of right now (the sword of dummy-ocles hanging over this proceeding). If he overeaches, and forces Chrysler into a more prolonged shutdown or even possibly liquidation, with all of the attendant supplier disruptions, the political fallout will fly in many directions, even to him.
In liquidation, the evil "hedge funds" will still be sitting there in their assigned spot in the rank order... waiting to get paid. However, where will Obama be, if the tea parties start including laid off OEM employees and partsmakers for the 2,000,000 vehicles per year that Chrysler will no longer be producing?
And there will be no way out for him, at that point. There will be a fire sale, the Chrysler-UAW contract will be in the dumpster, and the PBGF will kick in on the taxpayers' dime... and it'll all be his fault, or so his enemies will claim. They'll be pointing out that he was tilting towards Paulson's buddies over at Sach's, while Chrysler was going bust, small investors were getting screwed and employees were losing their jobs
Presidents do stupid things, and one never knows which of them is gonna blow up, and when.
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