According to reports, President Obama has forced Chrysler into the bankruptcy courts.
Obama claims he had no choice, that the lenders with a stake in Chrysler who refused to agree to the Administration's reorganization plan, which would have forced them to accept a two thirds write-down of the debt owed them by the company, forced the Administration's hand. Among the holdouts were Oppenheimer Funds, Perella Weinberg Partners' Xerion Capital Fund, and Stairway Capital Management, although Perella Weinberg Partners, under what management termed “intense pressure from the White House," has agreed to accept the terms. The New York Times quotes Obama: “They were hoping that everybody else would make sacrifices, and they would have to make none,” Mr. Obama said of the creditors, among them several hedge funds and boutique investment funds. “I don’t stand with them.” The holdouts, however, countered with the very cogent argument that they are secured creditors, who, under US bankruptcy law, are entitled to being paid in full before unsecured creditors (in this case the UAW's Retirees Health Care Fund) are paid anything. They further argued that they were agreeable to taking a 60% writedown on the debt owed them for certain concessions, but that the Administration would not negotiate directly with them, preferring instead to deal only through J.P. Morgan Chase, which, as a recipient of TARP funds, is beholden to the White House, and therefore more pliable. The bankruptcy plan proposed by the Administration will grant the UAW's Retiree Health Care Fund, the primary cause of most of Chrysler's financial woes, a 55% control of Chrysler, in exchange for the union's accepting company stock for 50% of what the automaker owes to the fund. For its part, the Administration agreed to lend the ailing manufacturer another $8 billion, above the $4 billion of taxpayer funds already provided it, and accept a role as a junior partner to the UAW, along with Italian automaker, Fiat, which will kick in its expertise in small car technology in exchange for a minority stake in Chrysler, reported to be 35%. Fiat is supportive of the bankruptcy plan because it will offer that company an opportunity to significantly prune its dealer network, which it sorely needs to do to remain viable itself.
Article comments
— go to most recent comments1 - Ruvy
Clavos,
The AFL-CIO formula of "more" has been the nemesis of intelligent business management in the United States for decades. It killed off the newspaper industry, and is now killing off the auto industry.
Ironically, the Obama administration is forcing down the UAU's throat the very strategy it should have been pursuing 50 years ago, a strategy of seeking control of the voting shares AND the board of directors. By the way, that strategy was pursued successfully in Germany and worked for many years - until the Germans annexed East Germany. East Germans were used to pretending to work while the government pretended to pay them. Now, former East Germans are just plain dysfunctional in the German economy and are dragging it down all the time. The West Germans got what they wanted - and it went all wrong....
Are you beginning to enjoy these constant ironies popping up all over the place? The United States finally seems willing to enact universal health care - and is too broke to pull it off? The United States reaches out its hand in friendship to Iran - only to have the Persians spit at it.
I know you don't believe in G-d - but for my money, G-d has one nasty sense of humor.
2 - M a rk
Clavos, you report that the Funds, "...argued that they were agreeable to taking a 60% writedown on the debt owed them for certain concessions..."
Do we know what these concessions were?
3 - Clavos
M a rk, the principal sticking point seems to be that the lenders are more in favor of a liquidation of Chrysler, which they assert would mean considerably better payout than the government is offering. According to this WSJ article, the payout would jump from 15 cents on the dollar offered by the Administration to up to 70 cents in a liquidation.
4 - M a rk
How would a liquidation impact the workforce compared to this 'restructuring'. Sounds like the administration is hoping to save jobs.
5 - Clavos
The impact would depend on how the liquidation was structured; for example, the Jeep division would likely be sold off in toto, because it's viable and profitable, but I don't think any details have been worked out for that scenario.
The Administration might be trying to "save jobs;" they owe the UAW, as I pointed out in the article, however, the saving of jobs in the scenario of a bankruptcy is marginal at best, since Chrysler's problems stem from obligations to retirees, who aren't working anyway, so saving active jobs has already been relegated by the Administration to a secondary position vis-a-vis the retirees Fund.
The point is, the lenders have secured notes, which under the law, are preferential, and they rightfully are insisting that they be paid before any deals are made with the UAW.
Obama will of course insist that his intent is to save jobs, but my point is that, with the deal he's proposed, in reality he's trying to pay back the union for its support at the expense of Chrysler's secured lenders and the taxpayers. Unless he offers a bankruptcy plan under which the company can get out from under the payouts to the retirees, the bankruptcy scheme is doomed to failure anyway because Chrysler's financial obligations will not be sufficiently lessened.
The bottom line is that this bankruptcy proposal is doomed to failure down the line, but first the company's preferred lenders and the taxpayers will be screwed some more.
6 - M a rk
The point is, the lenders have secured notes, which under the law, are preferential, and they rightfully are insisting that they be paid before any deals are made with the UAW.
I understand that The Law prefers to pay off the Capitalist class at the expense of workers. Whose law is it, after all? Maybe this flu will become a real killer and knock off a few percent of the population...employment problem solved.
Remember to remember: 500,000,000 or Bust!
7 - Clavos
M a rk,
I understand that The Law prefers to pay off the Capitalist class at the expense of workers. Whose law is it, after all?
Be that as it may, but I recall reading somewhere that ours is a system of laws, so until we change the system to something else (or change the laws themselves), the secured lenders are correct (and lawful) in their stance.
I do keep in mind the 500,000,000 idea.
8 - Dan(Miller)
Clav,
Well, yes. But we old farts must now doff our hats and bow as the parade passes us by. A nation of laws was good while it lasted, but apparently it is time to Moveon.
Dan(Miller)
9 - The FIAT Guy
FIAT cars are, in fact, excellent. I’ve spent a lot of time in Europe, and know, have owned, and rented FIAT and Alfa Romeo cars. The technology and quality is very good, the style is fantastic, and If you thought having more small cars in America will be a boring hell, then you’ve never driven a FIAT.
Forget what your college roomate told you in 1974, most of the problems arose from US safety and emissions regs, dealer issues in the US, and Russian steel which the company unfortunately obtained in a deal for a factory there. I myself had a 1978 FIAT 131 sedan that was the most enjoyable economy car you could imagine… still on the road 30 years later, too.
Any portrayal of FIAT as a producer of antiquidated junk is just nonsense from the uninformed… and they make midsized cars, trucks, and commercial vehicles too- not just little 500s.
IMO, they are going to surprise a whole lot of people.
10 - Clavos
Dan(Miller),
Nice pun!
I am reminded of the old admonition: "Hire a teenager, while they still know everything." These days, that extends to the thirty-somethings and even into the...oh, hell -- never mind.
11 - Clavos
Any portrayal of FIAT as a producer of antiquidated junk is just nonsense from the uninformed…
Hmmm. Did someone say that?
12 - Ruvy
Just thought I'd remind you folks - fiat has a meaning other than a brand of car. Just reminding myself what a really old fart I am, I guess....
13 - Clavos
Yes it does, Ruvy, and it's one that is quite appropriate to the article when it's is used to modify "money."
14 - Dave Nalle
Word is that Fiat is expecting to get Opel out of this deal somehow, which is fascinating since Opel is owned by GM.
I'm just glad I can count my Dodge truck as the third Fiat I've owned along with my old 124 Spyder and 131 Station Wagon.
Dave
15 - Clavos
Word is that Fiat is expecting to get Opel out of this deal somehow, which is fascinating since Opel is owned by GM.
Well since Obama will be running both Chrysler and GM, he shouldn't have too much problem giving Opel to Fiat.
My Dad had a Spyder, back in the 60s. It was a POS.
16 - art
$12 billon government capital injection divided by Chrysler's 54,000 employees = $22,000 per employee. Why do they deserve so much more to save their jobs than America's 3-million, and growing, unemployed?
17 - Dave Nalle
Because their union gave more to the Democrats than anyone else.
End of story.
Dave
18 - Doug Hunter
"I understand that The Law prefers to pay off the Capitalist class at the expense of workers."
It makes sense if you forget the size of the company. Equity partners are simply the owners. The owners borrow money for the business. In the event of bankruptcy you pay off the debt, not divide assets among the owners to keep, or hand out the money to your favorite employee. The law makes sense and without it, it would cripple the ability of businesses to borrow money. People with hundreds of millions or billions would still be rich and even more barrier to competition so they still win.
19 - Clavos
Here's a cogent editorial followup from The New York Times about the Chrysler deal, which says in part:
Chrysler workers’ concessions, similar to those granted earlier this year at Ford Motor, form the basis of a prenegotiated labor agreement with the new Chrysler, people involved in the negotiations said.
Chrysler’s pension liability will shift from the defunct company to the new one, these people said, and workers will continue to have a lucrative contract.
Despite the concessions, Chrysler’s most senior workers, like those at Ford, still have healthy wages and benefits; bountiful health care coverage, at least until it is adjusted; and subsidies to help bolster unemployment benefits they receive while plants are closed, as they will be at Chrysler for weeks until the sale is final.
That carryover is unusual, Ms. Dowd said, since the buyers of assets in bankruptcy cases normally try to purchase them free and clear of their existing liabilities.
It also means the union will not have to come to terms with Fiat once it takes over the company, or risk having its contracts abrogated.
As I pointed out in the article, the UAW is getting a real sweetheart of a deal; a reward for its unflinching (and financially generous) support of the Democratic Party, and in particular of Mr. Obama.
20 - Bliffle
It certainly appears that the Obama administration is arbitrarily putting the interests of the UAW ahead of interests of certain 'preferred' investors, but this is simply a case of 'turnabout is fair play' since previously the interests of those certain investors were arbitrarily put ahead of the UAW.
Historically, when the management of Chrysler defended against salary demands of employees they diverted immediate rewards into deferred rewards by creating retirement plans and medical benefits. At that time these liabilities (which were unfunded, the supposition being that Chrysler would always be making suitable profits that could pay into the funds later, a risky proposition) were 'preferred', i.e., they were first in line in case of bankruptcy.
But, with the passage of the time and the various dips in the auto industry, Chrysler had financial problems and turned to investors for support. In each case they had to sweeten the deal offered to capitalists by offering new equity on a 'preferred' basis, i.e., putting the investor first in line at liquidation.
Indeed, when the USA bailed out Chrysler with a debt-for-equity deal thirty years ago they made the US Treasury 'preferred' (along with other smart demands, which we would do well to imitate now) which paid off well for the treasury.
Thus, the new investors elbowed aside the old investors, whose objections were weak since denying 'preferred' status to new capital would probably cause a ruinous liquidation. Notice that old investors get pushed back in the line, too, unless, of course, they pony up new money to be part of the preferred class.
How can they do that? Well, the Board Of Directors are the supreme law of any corporation. They can do anything they want to do, make any offer they want to make. Plenty power. Which is what leads to all the games and wars and finagling that goes on in the BoD.
Every citizen should make themselves familiar with this stuff since it is at the heart of our economic system. They should teach it in the schools. TV should explain/reveal it in the dramas and soap operas that flood the airwaves (I think they are in too much hurry to get to the juicy sexy parts of corporate shenanigans). I had hopes for "Dallas" at one time, until it degenerated into standard soap opera.
As for political alliances, one can hardly doubt that previous capital investors failed to back their favorites and make their interests forcibly known to those politicians as well. Indeed, they would have been remiss not to.
So this article is basically 'much ado about nothing'. Clavos is simply exploiting the pathetic ignorance of BC auditors to advance a political position.
21 - Clavos
Good recap of the Chrysler's financial contretemps over the past several decades, bliffle, but it doesn't refute my points that:
The bondholders are legally entitled to preference, however they may have attained that status, and:
Obama, by giving the UAW a preferential majority stockholder stake is simply repaying their substantial contributions to the party and to his own campaign; he's not acting in the best interests of either the corporation nor, especially, the taxpayers, who are footing the bill for the $12 billion being handed gratis to Chrysler, and by extension the UAW.
For the record, the UAW gave the Dems a total of $25 Million between 1989 and 2008, but even so, was far from the biggest labor donor to the party, that slot belongs to AFSCME, The American Federation of State, County, and Municipal Employees (the bureaucrats), with a total of $40 Million.
22 - Bliffle
"...he's not acting in the best interests of either the corporation ..."
But nobody actually acts in the best interests of the corporation!
The premise of the Free Market system is that when each party acts totally in self-interest then benefits to the corporation will follow.
It's the good ole' "invisible hand"!
Is it not so?
23 - Bliffle
"...The bondholders are legally entitled to preference, however they may have attained that status,..."
Not exactly. Only if one issue of preferred stock was issued. Seldom the case as a corp matures.
Successive issues of preferred are called something like "Preferred issue B" or "preferred issue C", etc., and successive issues pre-empt the lead position in the liquidation queue.
24 - Dave Nalle
Bliffle, the whole invisible hand you mention in 23 went out the window with the bailouts.
Dave
25 - Bliffle
The Invisible Hand was destroyed 30 years ago as Tyro Execs discovered that they didn't have to make the corp successful FIRST to become successful and rich themselves. In fact, they targeted successful companies where they could enrich themselves fabulously while destroying the corp itself.