Ignore Detroit's Bondholders' Whines 35 comments
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I’m frankly surprised at the amount of pushback against the entirely sensible notion that Chrysler’s creditors (and, by implication, GM’s as well) should accept an enormous haircut on their failed investment.
You can tell an argument in favor of the holdout bondholders is on thin ice when the people making it wheel out the old groaner about future capital access. Here’s Liam Denning:
If the current plan is pushed through, then good luck to any unionized firm trying to raise secured debt on decent terms in the future.
Here’s Breakingviews:
Years of bankruptcy law have put secured creditors at the top of the pecking order, inducing them to put capital at risk. Vilifying investors who held firm to this conviction may have the reverse effect.
And here’s Joe Wiesenthal:
It should certainly make anyone think twice before lending money to a company with a strong union.
Oh come on. When Detroit raised debt capital in the past, its lenders weren’t operating on the assumption that they would be paid off in full before the UAW got a penny — and if they were, they were being foolish in the extreme. The UAW, after all, is necessary for the continued existence of the company: they’re doing the equivalent of putting new money in to the operation, in the form of their labor going forwards. I don’t see the creditors offering to put up any new capital.
Sure, the creditors might have a point about seniority if the firms were to be liquidated with the loss of all jobs. But let’s not forget that a huge part of the reason why they lent their money in the first case was that the US auto industry is systemically important, and that the government would never allow it to be liquidated. They were making a moral hazard play, and believed the car companies when they said that bankruptcy would be disastrous, and so they assumed that the government would keep the car companies out of bankruptcy.
So now I can barely believe it when the creditors start talking about how much they might receive in liquidation. For one thing, I don’t believe them. If GM and Chrysler liquidate, their assets are worth very little if anything at all: how are you going to monetize a mothballed production line? And insofar as the liquidation value is positive, it only gets to that point by dint of taxpayers picking up most of the costs of liquidation: soaring unemployment in the rust belt, an even worse economic depression in the hardest-hit areas of the country, and so forth. It’s a bit like the Wal-Mart model of paying your employees so little that they’re eligible for Medicaid, thereby getting them “free” healthcare, and Barack Obama is absolutely right to reject it.
I also heard an interesting new twist in this argument last night: the idea that the government is repaying itself in full while imposing massive haircuts on other creditors. No it’s not. It’s getting an 8% stake in the new Chrysler, which is worth roughly zero, in return for the billions it’s pumping in to the company — and it’s worth remembering that the $2.25 billion that the creditors were going to receive was going to come directly from the government, not from Chrysler itself. And no, the creditors would not need to pay that money back.
Of course aggressive creditors are going to want to maximize the value of their claims, both in bankruptcy court and in the press. But if this is the best they can come up with, I think it’s safe to dismiss their whining as the bleating of the sore loser.
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And I'm betting that insurance company will be AIG, which means you and me and the rest of the American taxpayers will be paying off the banks and hedge funds that hold these bonds.
Ain't that great!
How do you know until you try? You might be surprised who'd buy it. US manufacturing of cars is in the toilet, but the equipment has value to someone, somewhere. Maybe not in the U.S. The SAARS is below 10 million. It'll eventually go up to 14 million, but it'll be a while and GM and Chrysler won't last that long under normal circumstances.
"and it’s worth remembering that the $2.25 billion that the creditors were going to receive was going to come directly from the government, not from Chrysler itself. And no, the creditors would not need to pay that money back." - LOL #2
Why would I, as a lendor, have any responsibility to pay money back from a borrower that is paying back his debt? The borrower (Chrysler) chose to take money from the Gov in exchange for ownership. Where they got the money to pay back their debts is irrelevant to the lendor.
The bondholders seem to wish the worst for shareholders so their stakes become more valuable, so when i hear some of them eating their shirts i don't really care because at the end of the day they wouldn't care if i lost my shirt.
I say buy some puts at this time to offset the losses all GM shareholders and debt holders will most certainly experience. I say let GM fend for themselves and sink to the bottom as in all forms of business.
On May 01 03:40 PM Flamecoach wrote:
> <i>If GM and Chrysler liquidate, their assets are worth very little
> if anything at all: how are you going to monetize a mothballed production
> line?</i>
>
> How do you know until you try? You might be surprised who'd buy it.
> US manufacturing of cars is in the toilet, but the equipment has
> value to someone, somewhere. Maybe not in the U.S. The SAARS is below
> 10 million. It'll eventually go up to 14 million, but it'll be a
> while and GM and Chrysler won't last that long under normal circumstances.
On May 01 03:40 PM Flamecoach wrote:
> <i>If GM and Chrysler liquidate, their assets are worth very little
> if anything at all: how are you going to monetize a mothballed production
> line?</i>
>
> How do you know until you try? You might be surprised who'd buy it.
> US manufacturing of cars is in the toilet, but the equipment has
> value to someone, somewhere. Maybe not in the U.S. The SAARS is below
> 10 million. It'll eventually go up to 14 million, but it'll be a
> while and GM and Chrysler won't last that long under normal circumstances.
Apparently the non-TARP secured debt holders were offering to take a 40% haircut - it's not true that they weren't willing to come to the table to work out a deal. Unfortunately, the auto task force refused to deal with them directly and shunned them.
Strongarming and avoidance isn't a way get a deal negotiated - this is simply incompentence and mismanagement at the Treasury.
The TARP bank debtholders were strongarmed and bullied into taking the roughly 30 cents on the dollar deal - one can argue whether they should have done this, and critique all the other conflicts of interest when government gets involved, but leave that as it is.
The Treasury could have had a deal to avoid bankruptcy for about $500-600M simply by dealing separately and directly with the non-TARP funds who refused to accept the deal that the 4 big TARP banks who hold 70% of the secured debt were pushed into - that's the difference it would have been to cover the remaining 30% of the debt to meet the counteroffer.
In context of the big picture and all the costs of bankruptcy, plus the unforeseen consequences and other unfolding consequences, this would have been an elegant solution, a tactical masterpiece, an equitable result, and a smart thing to do.
Either the auto task force, Treasury, or Obama gave the wrong advice or direction - whether out of blindness, idealism or orthodoxy - and instead insisted that every kid in the debtholder playground had to be treated exactly the same, while ironically giving the unsecured claims of UAW priority and rights that they don't have.
This is either blind, foolish or incompetent, in the big picture of things and in detail.
This is what happens when politics gets in the middle of rule of law - bizarre outcomes. Had the task force simply structured an offer or final agreement in proportion to what bankruptcy law calls for, there would be no need to bully and label certain stakeholders the enemy who "I can not stand by".
A deal could have been had. If this isn't mismanagement and incompetence, one can only be cynical and conclude that Obama is pandering to the UAW while blaming others and ducking responsibility by letting a judge tell the UAW the bad news.
This will be viewed in next weeks and months as a significant failure and lost opportunity - the threat of bankruptcy had achieved a respectable restructuring (even with an extra $500-600M for the non-TARP holdouts) that would have avoided all the risks that bankruptcy will create, with unknowns and unnecessary unintended consequences that will result. The avoidance of these costs to the economy and everyone involved would have been worth the additional rather miniscule cost.
The auto task force and Treasury need to rethink the GM deal - this Treasury imposed deal is even more skewed and screwed than the Chrysler case, and frankly outrageous . There too, the auto task force has incompetently ignored direct negotiations with the bondholders, for the most part, and frankly, the bondholder counteroffer is equitable (by percentage balance) and makes more policy sense than the GM offer.
A deal can be had with GM bondholders if Treasury would "get real" and set realistic expectations vs what they are attempting to impose now without any negotiation or openness to better ideas on a way forward. A bankruptcy judge will likely drive them to it anyway.
Hopefully a grown-up will take over at Treasury or in the White House who isn't ideologically tainted and can incentivise the bondholders and UAW statkeholders with what's possible rather than stick with their current offer which is unrealistic and inequitable in bankruptcy.
Isn't this just throwing good money after bad?
On May 01 11:52 AM Jeff B. wrote:
> You guys know way more than I do about secured creditors and what
> stakeholders will get what. All I have to say is that when you slice
> a pile of dog poop seventy different ways, it's still dog poop. I
> can see why some creditors are trying to get anything they can out
> of Chrysler --now -- because I see the chances of "Chryiat" surviving
> beyond more infusions of taxpayer money as zero. The least reliable,
> least recommended domestic car company partners with the least reliable,
> least recommended European car company, and gives the union a 55%
> stake in running the thing? Can anyone come up with a worse way to
> run a car business?
We have a winner!
On May 01 02:33 PM Lilguy wrote:
> I'm thinking this doesn't have anything to do with the bonds or unions
> or Chrysler's value (nada). It's all about CDSs. Now (or soon)
> the bondholders who have "protected" their holding with CDS insurance
> can tell the insurance company to pay up at full face value.
>
> And I'm betting that insurance company will be AIG, which means you
> and me and the rest of the American taxpayers will be paying off
> the banks and hedge funds that hold these bonds.
>
> Ain't that great!
(just had to write that one down.)
considering the deliberate polarization of the electorate that began in 1980 and has contnued after 2000 it has become very difficult to reach a reasonable accommodation "happy medium" on many issues.
> jack
The government screwed the pooch (with its empathy :) and is about to do it again with GM bondholders. Don't underestimate the american spirit. The attitude of "Don't tread on me" was just demonstrated to Obama and crew.
I hope they (The peoples republic of DC) modify their motus operandi before they destroy any more of our institutions (capitalism, rule of law, etc).
P.S Union and white collar are going to take another cut, 3 month vacation this summer at 75% pay. WOW could I use a cut like that!
Wonderful article, written from the standpoint of a loyal subject of the Crown, wearing rose colored glasses.
I find it incredible that the author of this article fails to grasp that.
I hope the courts show more sense than what this administration has shown and especially the presidency.
I wonder if the secured creditholders can be cleaned out in such fashion, where does it leave the unsecured credit holders like for instance the folks who hold the T-Bills, T-Bonds etc. I wonder what fate awaits them. That amount is far larger around $11 trillion worth. What would happen to them, think about it.
I wonder what kind of kind of message it sends in the larger bond market, when the law is subverted by the president who is suppose to to uphold it.
"White House "Directly Threatened" Perella Weinberg"
www.businessinsider.co...
I'm developing a new theory as to why this went down the way it did: unlike unions, bondholders are passive players. They are not seen as doing anything; they normally just wait for coupon payments and don't even interact with management or labor. Bondholders are not seen as *working* to help dig Chrysler out of the hole it's in. My theory is this passive position worked agasint them; it made them seem more of outsiders -- to a group of negotiators not specifically skilled in corporate reorganizations.
Then you can buy a Sept $1 put for $0.55, making your shates worth $101.25.
I guess this shows the market thinks the exchange is not going through.