In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees and their families and communities.

It really feels good to have the President of the United States say something like that. More, please.

Ezra - why are you calling what the hedge funds did a miscalculation? Those funds hold senior-secured debt, meaning that if Chrysler were liquidated, they would have to be paid in full from the sale Chrysler's factories, equipment, receivables, etc before anybody else would receive one red cent (including the union pension fund and healthcare fund, whose debt is "junior" to the ones held by the hedge funds). The hedge funds are simply counting on getting a better deal.

Now Chrysler is not being liquidated (Chapter 7) but is being reorganized under bankruptcy protection (Chapter 11). However the same rules apply. Hedge funds think they can get a better deal out of the bankruptcy court than they would have gotten out of Obama. Bankruptcy is an expensive, drawn out process - so it's obviously less preferable to a deal negotiated before hand. That being said, as I noted above those hedge funds have an extremely strong legal position in bankruptcy and so they're not losing any leverage by going into bankruptcy. They're only losing face.

TedK; I won't necessarily disagree with you, but I just want to ask how you know that the hedge funds' debt is senior-secured? Chrysler having been taken private after the split from Daimler, their position wouldn't be disclosed and can't be known for certain.

Rick - They released a statement to the WSJ yesterday.

http://blogs.wsj.com/deals/2009/04/30/statement-from-non-tarp-lenders-of-chrysler/

As someone who saw his dad's (underfunded) pension disappear in a company bankruptcy, fuck yeah.

TedK, you're an idiot. nobody wants Chryslers' North American factories. Nobody wants outdated industrial equipment that can't be modified to do anything. that crap isn't going to get 'sold'. It's going to sit there for a decade and rust.

Put aside the obvious cheerleading you're doing for these corrupt scumbags, you're an idiot because you can't tell the difference between 'on paper' and 'in real life'. On paper these guys are in a great position because Chrysler has a lot of crap that can be sold. In real life, nobody wants the crap so it won't get sold. So please, sell your corrupt hackery for the scumbag elite somewhere else.

Labor got suckered by mgmt when they accepted pensions and health care as, in effect, deferred compensation.

Why did mgmt. want to do this? First, it pushed some of the expenses way off into the future, making the quarterly/annual performance better in the short term. Second, and perhaps, primarily, mgmt. knew they could escape their contractual obligations to the workers - if nothing else by underfunding the trusts and/or declaring bankruptcy to wipe out the obligation.

In a bankruptcy, unpaid current wages have the first claim on the estate. Deferred compensation should have been given the same status to first claim. Note that the bailed out firms insist that they contracts for execs et.al. for bonuses can't be voided. Interesting asymetry.

The Vegas casinos probably don't stack the card decks, but the last 40 years of labor/management relations have been completely stacked for the corporations. And since the bankers make everything happen, and the bankers control Congress, the bankers rule.

I don't think Obama's team is going to get the outcome they want from BK because the precedents are loaded for the corporations as well, particularly in regard to future performance of pension and health plans for workers and retirees. In the end the banks will prevail, at least once in court, and probably once again in being paid for the default insurance CDSs they hold that will pay them 100% of face value simply because the default occured - and regardless of how the court decides. The CDSs are not part of the BK action.

Obama can be angry, but he's helpless. Congress does what Wall Street wants, full stop.

Apparently FIAT does. But I guess you couldn't be bothered to actually know what you're talking about before vomiting up your oh-so-clever commentary.

Putting that aside, where do you get that I'm doing obvious cheerleeding for "corrupt scumbags"? I simply made the point that these creditors weren't playing a game of chicken with the administration.

JimPortlandOR: Obama can be angry, but he's helpless. Congress does what Wall Street wants, full stop.

What makes you think that Obama is any less owned by Wall Street than congress is? His Summers/Geithner team have spent their careers giving Wall Street anything it wants.

This "get tough" thing is a joke. They're getting tough on what, compared to the money handed to the banks, is pocket change.

Fiat wanted the bankruptcy because it will benefit them as well.

soullite, I don't know where you get your data, but Chrysler led the Detroit Three in productivity, and has the most modern plants of the three of them. It also has the lowest labor costs, although that largely has to do with the fact that it has the fewest retirees, and therefore the lowest legacy costs.

Besides, the traditional career path for a salaried worker in Detroit has been to go to work for Ford or Chrysler early in your career, but retire from "Generous Motors".

It may well be Obama who miscalculated if the courts respect precedent of BK laws.

No one is arguing the workers and retirees don't have claims on Chrysler, but it's the PRIORITY of those claims that matters in a BK. Secured creditors are in a more senior position in the capital structure than unsecured creditors. This is a fundamental part of business.

Now in a regular BK, everyone usually takes a haircut. Technically secured debt gets paid in full before unsecured claims get a dime, but most judges will try and spread the pain...but not equally. If it's decided debt needs to be reduced, a secured creditor may get $0.70 on the dollar, an unsecured creditor may get $0.50 on the dollar, and a subordinated creditor may get $0.30.

The bondholders are, rightly, pissed off on two levels. 1) They were expected to take the deal that the banks took from the govt, even though they have completely different incentives (i.e. banks took TARP money and Obama had a gun to their heads); and 2) the $0.30 on the dollar may have been fine if creditors BELOW them in the capital structure were getting $0.20 or $0.10. But from what I understand the bondholders were being asked to take a WORSE haircut even though they had more seniority. That's a no-no, and any reasonable judge may determine that the govt offer should be thrown out and either the banks and the bondholders get a better deal or everyone else below them gets a worse deal.

According to the New York Times story this morning,

...administration officials said they believed that it was highly unlikely that a bankruptcy court judge would side with the minority when those holding 70 percent of the debt had signed off on the arrangement.

(Article here:http://www.nytimes.com/2009/05/01/business/01auto.html?_r=1&scp=2&sq=Chrysler&st=cse)

I'm not a bankruptcy lawyer, but could someone tell me if this is right? Would a court tend to defer to a supermajority of creditors in such cases? Obama's people seem to think it would.

What David68 said.

Ezra's post does a nice job helping us explain why Obama's team has a different perception of what a "fair" deal is compared to what the bankruptcy courts will likely decide. But these aren't the banks looking for an unusual bailout, it sounds like they were looking for terms consistent with a normal bankruptcy process.

We'll find out. After Obama threw the hedge funds under the bus, they'll undoubtedly leak the terms of Obama's offer if and when bankruptcy courts offer them significantly more, merely to show everyone how wrong Obama was. This does seem like ideology over sound practice.

"That put the onus on the remaining holdouts — including units of OppenheimerFunds, Xerion Capital Fund of Perella Weinberg Partners and Stairway Capital Management — which argued they were falling victim to the willingness of their big banking partners in Chrysler to play nice with a government that had helped bail them out as well."

soullite wrote: On paper these guys are in a great position because Chrysler has a lot of crap that can be sold. In real life, nobody wants the crap so it won't get sold.

Sounds eerily like the mess of CDOs, CDSs, and other paper held by the large banks and (yes) hedge funds. Pity Chrysler wasn't allowed to "mark-to-model" all their land, equipment, and patents. They could have shown themselves solvent, or at least, as solvent as most of the banks.

speaking of making hedge funds pissed, what is the status of closing the carried interest loophole?

Don't really understand how this is supposed to threaten the GM bondholders. They are being offered 5 cents on the dollar. At that rate I expect that 90% of them would take their chances in bankruptcy court.

Some of you guys seem to know a little about this. I'm offended by the sick regulations we have in this country that always always side with the rich investors/bankers/bond-holders etc. over anyone else (especially labor), but I'd definitely like to know if anyone has a non-ideological guess as to the likelihood that a bankruptcy judge would look at the situation, what the other debt-holders were agreeing to, current climate, whatever, and essentially hand down the legalese version of telling the holdouts to go piss themselves?

A potential issue here is that you typically don't see a BK situation where the workers/retirees hold such a large claim on the company, even though they are in a subordinate position vis a vis the secured creditors. The usual calculus may not apply if a judge looks at the situation and decides that all things considered it'd better to cut a better deal for the little guy.

This is where it's possible the bondholders are misreading the situation. This isn't a normal restructure where most of the debt/claims are held by financial institutions and it's a big food fight over who gets what. A judge may be sympathetic to the govt's case.

Beyond that, let this be a lesson that defined benefit pension plans are a bad deal. As an employee and retiree all you end up with is an unsecured claim on the company that gets trumped by the bank debt and you are taking too much risk that the company will be able to make good on it's promises down the road.

Ted K -- The hedge funds say they offered to take a 40% haircut.

Is that from the book value of the bonds, or from the value they actually paid?

These bonds are reportedly trading in the market at about $0.10 on the dollar and I know of no reason to assume that that is not about what these Hedge funds recently bought the bonds at.

The Hedge funds knowingly bought the bonds at a deep discount because they believed they could holdout in the bankruptcy, or pre-bankruptcy negotiations for a higher return.

So why should the taxpayers reward them for this type of speculation?

>> In particular, a group of
>> investment firms and hedge
>> funds decided to hold out
>> for the prospect of an
>> unjustified taxpayer-funded
>> bailout. They were hoping
>> that everybody else would
>> make sacrifices, and they
>> would have to make none.
>> Some demanded twice the
>>return that other lenders
>>were getting.

And why shouldn't they have? That tactic worked quite well for the Wall Street and City financial firms; in the end Gunthier and Obama blinked and gave them everything they asked for and more at US taxpayers' expense. It would have been foolish for the hedge funds holding Chrysler not to have tried the same thing.

Of course, those hedge funds should have realized that they were holding assets that supported real jobs making real stuff, not bonus-generating machines for Gunthier's friends. So their position was much weaker.

Cranky

1. The hedge funds held leverage because they thought the gov't was risk averse to bankruptcy.

2. The issue of priority is just the "technical" justification for the hedge fund's position. Outside of BK, and even in a non-liquidation BK, each and every one of these hedge funds knows that technical priority can and usually will be changed based on non-technical issues, including, you know, what the entity financing the company in and out of BK wants -- and in this case, that entity is the gov't. The so-called "cramdown" provisions mean that where a clear majority of the creditors have settled on a plan, the minority have to suck it up. That, alone, will ensure that these hedge funds won't do better in than out of BK. As investors and speculators, the court is unlikely to entertain a lot of special pleading out of a sense of equity and fairness on their part.

3. The hedge funds are also risk averse to BK, they just thought the gov't was more so. They know that they will never get a better deal out of BK, especially a Chapter 7. (One of them tried to change their position at the last minute when they realized that it had failed.)

As they say, this is business and the hedge funds appeal to fairness is almost comical. It's like a hitman expecting sympathy when he accidentally shot himself during a hit.

What a shameful quid pro quo. The PBGC is good enough for everyone else, but not those special interests that donated in massive amounts to Obama's campaign.

Karen, what do you know about the PBGC?

The specter of an auto manufacturer bankruptcy has haunted the PBGC for more than a decade because there is almost no dispute that such a BK would also bankrupt the PBGC and wipe out its utility altogether. If Chrysler went bankrupt and its pensions were steered through PBGC, then there would have to be a government intervention in the PBGC. I am not calling the UAW blameless, but the PBGC is underfunded and its underfunding is the result of the political influence of employer types, not unions. Basically, no private company outside of the auto industry would be willing to pay the dues necessary to actually make the PBGC viable for the auto industry.

Barbara, what you just made is a strong case for the gov't to guarantee auto worker pensions at the PBGC levels. There is absolutely no reason to pick and choose certain constituencies of bankrupt companies to receive full pensions while others do not, other than for political payback.

Karen, it's been a while since I had to know the technical PBGC rules, but I don't think there is a "fixed" PBGC level (or there didn't used to be -- there may be now).

Having said that, the auto industry has basically held up the PBGC because of the magnitude of its dues, even though the PBGC would never be strong enough to support an auto bankruptcy.

But honestly, I think the PBGC alternative is just an extraneous consideration. When you are in BK, everything is up for grabs and negotiation. BK is supposed to be fair, but that doesn't mean there will not be winners and losers.

I mean, it's hardly fair that AIG, et al. have been held up by taxpayers. And I am sure many of these hedge funds are direct beneficiaries of our largesse to AIG. If I knew more I could probably give a more considered response, but it seems off point to just pick on the pensioners as not being deserving.

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