Special Report
Three Cheers for Chrysler’s Dissident Creditors
Bankruptcy court beats Obama nationalization any business day.
It was the biggest bankruptcy of an American automaker, as well as one of the biggest bankruptcies in U.S. history. Yet the stock market barely moved when Chrysler’s expected bankruptcy was announced early last Thursday morning and moved significantly upward on Friday after the Chapter 11 bankruptcy filing. And since then it’s just kept climbing.
There are many factors that move markets, but the Chrysler bankruptcy has been a dominant financial news story of late last week, so the simple fact that it hasn’t dragged the market downward is significant. So what does the market reaction tell us? That while there is concern about the effects of a Chrysler bankruptcy, many investors viewed the moving of Chrysler’s supervision to a federal bankruptcy court as the company’s last best hope to escape from President Obama’s planned nationalization with government and union ownership.
Despite Obama’s chest-thumping about the bankruptcy process being “quick,” “efficient” and a basic ratification of the administration’s plan, nothing can be done now without the express approval of Judge Arthur Gonzalez of the federal bankruptcy court in New York’s Southern District. And — given the complexity and size of the case — it probably won’t be quick. It will take many months, perhaps years. But whatever the courts decide can’t much worse than Obama’s own plans for Chrysler and the treatment of its creditors that would have far-reaching negative effects on job and business growth.
Obama’s grand design for U.S. automakers is the perfect opportunity to show where his moderate rhetoric varies from his big-government actions. He has said he doesn’t want the government to be a permanent owner of big companies, arguing — in part correctly — that he inherited the bailouts and partial nationalizations from the Bush administration. But Obama’s plans for Chrysler and General Motors belie his claims that he doesn’t want the government to dig in further. His actions show that he isn’t shy about using the powers he inherited to favor political allies such as Big Labor at the expense of millions of Americans with savings vehicles invested in auto company debt securities.
The government-union ownership structure — in which the United Auto Workers retiree health care fund would own 55 percent, Fiat would own 20 percent, the U.S. government would own 8 percent, and even the Canadian government would own 2 percent (Canada is “home to several large Chrysler facilities,” according to the Wall Street Journal) — also has little to do with repaying taxpayers.
As a Wall Street Journal editorial just before the bankruptcy announcement put it: “Taxpayer-shareholders are likely to be far better off with a smaller stake in a truly private company that is better insulated from political meddling. Private owners are more likely than the Treasury or the unions to try to run the company for profit, and so increase its equity value over time.”
The first Chrysler bailout approved under Jimmy Carter in 1980 (and managed under Ronald Reagan’s administration) — while a bad precedent for government saving industries in trouble — ended up with taxpayers being paid back without the government or unions taking any ownership stake in the company.
But the justification for government ownership is just one example of the Obama administration’s doublespeak on Chrysler. Obama’s speech castigating the approximately 20 creditors who refused to accept the government’s terms offers a textbook case of anti-market rhetoric, with some sentences saying the exact opposite of what was true.
Of the creditors, Obama said, “I don’t stand with those who held out while everybody else made sacrifices.”
Yet it is those secured creditors who were asked to make the brunt of the sacrifices and agreed to many of them. According to their statement, the holdout lenders said they were willing to take 40 percent haircuts on their loans, while other groups “lower down in the legal priority chain” for bankruptcy — such as unions and auto suppliers — “were being given recoveries of up to 50 percent or more and being allowed to take out billions of dollars” from the company’s assets.
Yet this wasn’t enough of a “haircut” for the Obama administration, which insisted that lenders take a cut of more than 65 percent of what they were owed and get a paltry 33 cents on the dollar. What particularly outraged these lenders, and made them think that they could get a better deal in the bankruptcy courts, was that the lending contracts they and Chrysler signed specifically state that they will get paid 100 cents on the dollar before anyone else is paid out if Chrysler were to liquidate.
As Tom Lauria, an attorney representing some of the creditors, said in an interview on Detroit radio station WJR (transcribed by the Media Research Center’s Newsbusters.org): “My clients bought a position in the Chrysler capital structure that entitles them to be paid ‘first dollars out.’ That is, they’re to be paid 100 cents of what they’re owed before any junior creditors get a penny.”
But forget these contracts, Obama says, because these creditors were “a group of investment firms and hedge funds” and “I stand with Chrysler’s employees and their families and communities.
But even if it is now permissible in Obama’s America to ignore valid contracts if they only benefit rich folks, the president’s logic still fails in this situation, because many of these investment firms and hedge funds manage money on behalf of other ordinary “families and communities.” As Financial Times columnist John Gapper explains, “some of these ‘speculators’ inconveniently manage money on behalf of pension plans and endowments, rather than rapacious rich people.”
Indeed, one of the holdout creditors is Colorado-based Oppenheimer Funds, which manages 401(k)s, IRAs, and colleges savings vehicles such as 529 plans. In a statement, Oppenheimer explains that it “rejected the Government’s offers because they unfairly asked our fund shareholders to make financial sacrifices greater than those being made by unsecured creditors.”
About the Author
John Berlau is Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute and blogs at OpenMarket.org.
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Bill| 5.8.09 @ 7:47AM
Contracts are stated promises to do something in exchange for something. They provide order and agreements. If unfairly taken apart why would anyone ever trust them again? Trust is earned and from my perspective Obama and many in congress have demonstrated that they can not be trusted. May the few with back bone and integrity stand firm for what is the law and what is right.
Indiana Alex| 5.8.09 @ 8:08AM
Contracts and laws are meaningless to liberals as they have no natural empathy.
Steve| 5.8.09 @ 8:20AM
Laws, contracts, whaddayou talking about? This is Chicago....er, Venezuela.....er, Obama's America. Gimme a break.
Son Of Sam | 5.8.09 @ 8:25AM
The TelePrompter In Chief and his idiot regime of traitors and tax cheats should take a "haircut" on their salaries AND the size of the so-called stimulus AND the omnibus spending bill. Seriously, why the hell is it that all of US have to "have some skin in the game" but this rat pack of envy coddling tax lice never have to give back ANYTHING?
stay strong until freedom dawns
Son Of Sam
http://www.geocities.com/samadamssos
Howard| 5.8.09 @ 9:18AM
I have clients who are liberal Democrats who have to take a huge haircut on their GM holdings because of the Obama rope-a-dope regarding greedy "speculators", i.e. bond holders. What a Hobson's choice, interest income needed for retirement, or helping out the proletariat, UAW workers.
WillG | 5.8.09 @ 9:35AM
First, a criticism, the senior debt holders are not dissident! They deserve their rights under the law, and that a dissident doesn't make!!
Second, congratulations to rule of the law. President Teleprompter may think he runs a banana republic, but he has lawyers and creditors to contend with.
I read an article last week titled "Killing Chrysler" at http://economicefficiency.blogspot.com/2009/04/killing-chrysler.html It really highlighted how bankruptcy is the best alternative for everybody, except holders of common stock.
GM may be wise to consider bankruptcy, if anything, it will keep President Teleprompters hooks from fulling sinking in.
Becky| 5.8.09 @ 9:39AM
If he'll steal for you, he'll steal from you.
UAW members have no shame, certainly its leadership doesn't. Now that they got what they wanted, why should anyone feel charitable enough to patronize their showrooms?
The chances of selling cars at the profits they want to the segment they want (sardine can lovers) and the amount they want has just been reduced.
Kenneth Ford| 5.8.09 @ 9:49AM
The future of the Chrysler bankruptcy in the court is undetermined. The senior creditors can sue for 100% return of their money and if the Obama administration pressures the judge to overrule the law and steal a large portion of their money that is subornation of a crime, an impeachable offense. That should give the President pause.
Ken
Anthony| 5.8.09 @ 10:04AM
The share holders and the bond holders, those who pay the freight, were going to be the big losers in Obama's socialist takeover paradise. This was a remarkable revelation and insight into how radical a president 52 % of Americans voted for. Yet, this brazen attempt at banana republic jurisprudence, practiced by the Harvard trained community organizer, was given a big yawn by the MSM.
A big BRAVO to the holdouts, finally, people with guts enough to stand up to this tyranny. Now it's time for the rest of us to do our part; remember the adage about what happens when good people do nothing... Yes, Ms. Napolitano, do take notice.
Dustoff| 5.8.09 @ 10:26AM
Obama takes care of the unions, but slaps our dead law officers familes in the face.
+++++++++++++++++
The Obama administration wants to cut almost in half a benefits program for the families of slain police and safety officers.
The president's proposed budget calls for cutting the Public Safety Officers' Death Benefits Program from $110 million to $60 million.
Bruce Thompson| 5.8.09 @ 12:24PM
A White Knight candidate would be Exxon/Mobil.
What does Exxon/Mobil bring to the table?
Money, money & more money.
Strong ties to the industry through mutually attractive enterprises such as Kurt Busch's Mobil 1 Dodge
http://www.nascar.com/drivers/dps/kbusch00/cup/
Strong, experienced management, something sorely lacking in the Obama administration!
It is an American company with the ability to easily outbid Fiat, an Italian company, in cash.
The ability to pay off the dealers it intends to drop and thereby avoid expensive and wasteful lawsuits.
The ability to pay off current liabilites to the dealers that will continue, thereby strengthening those dealer's balance sheets.
The ability to provide Exxon/Mobil customers with the kind of gas guzzling vehicles they have come to know and love, Dodge Hemi Chargers, Ram pickups, Jeep Grand Chrokees and Chrysler Gran Caravan minivans.
And they are used to being publicly reviled and still pressing forward.
Dustoff| 5.8.09 @ 12:31PM
I wonder how many people had 401K with the loan compaines who were just told to take a hike on what Chrylers owes them?
Thanks Obama. You just blew the banking system out of the water.
Pat| 5.8.09 @ 12:47PM
Two more dissident lenders caved in today with Oppenheimer being the more severly affected of the two - which leaves only 3 lenders reamining as holdouts on the Chrysler bankruptcy offer. But the Rule of Law has become the Rule of Special Interests. And we can gauge to what extent the special interests are running our government by grabbing the popcorn and watching this little comedy spin out.
The UAW are the winners here so far, it was ordained in advance last fall, even before the election and the resulting actions since then are just going through the motions with a few clever dance numbers. And the union isn't really wrong, that's what special interests do, their entire reason for existence is to promote the interests of their members over everyone else's. Some will say: "But they cheated, they didn't play fair, they bought their lawmakers". Yeah, but given today's America, your point is what?
Treasury Dept. officials called the various lenders to threaten them - Washington claims no way did they threaten, but then what was the purpose of the phone calls? "Hi, this is the Treasury Dept., how's the weather, any exciting plans for the weekend?"
The question might be how can an average citizen, an everyday taxpaying Joe or Jill, like ourselves, join a Special Interest and bribe Washington to throw some goodies our way? Many Americans and a majority of Conservatives still believe in the Rule of Law despite all recent evidence to the contrary. But, when everyday politics becomes "Play for Pay" and without even minor embarrassment, how long can we cling to our illusions?
Richard Baker| 5.8.09 @ 1:02PM
De Toqueville said (paraphrasing) that when the people in America discover that they can vote themselves money from "the public purse" then our system would crumble. Barack the dictator is feeding this notion, for power, that everyone is owed something and that the government will just go out and get it for you. Nothing is built or advanced except the sharing of misery, as Churchill said. As they say in New Hampshire, "Live Free or die!"
2 Guns, AZ| 5.8.09 @ 3:55PM
I give Fystler 2, 3 years, tops.
DaveS| 5.8.09 @ 4:31PM
BHO is playing all-in with everyone else's money. Even if there are no 'dissidents' (i.e. Americans with spine to go against the government) left, Chrysler is dead as a doornail. Let that be the first albatross across the President's neck.
ds80| 5.8.09 @ 6:25PM
Gosh, with the diss'in he took from Chrylser's secured creditors, Michelle O'Mama will prolly have to kiss the Pre-School President's boo-boos.
Hmmm. Can teleprompters cry?
Ty Knoy| 5.8.09 @ 6:58PM
Wouldn't this Chrysler deal, if rammed through, destroy credit markets? Who in their right mind would ever buy a bond again? Could this become a model for financially distressed school districts? Repudiate bonds and give the bond servicing money to teachers unions? No money could ever be raised again for the construction of a school building.
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Gazinya| 5.8.09 @ 8:24PM
Now this is precisley why The Obama has decided not to help his African brother. Brother Obama makes $1 a month. Now if The Obama were to give his brother a 'bail-out' of, oh let's say, $3 a month how would that show a proper use of empathy.
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Richard Baker| 5.10.09 @ 7:47PM
Hooray for the dissident creditors! While these fund managers do make commissions off of their activities, they represent millions of, usually, small investors who put their money in to get a decent return on investment for retirements, educations for their kids, and such. The attempts of the Communists in DC is to buy more votes and tell the investors to go buzz off, it's not your money. Keep your powder dry, folks. We are headed for tragedy as between the productive millions and the non-productive leeches. Oh, don't think this is a racial thing. I had a black senior NCO in the Army, years ago, tell me that being a jerk doesn't have a color. Bad actors don't have a color either.
Christopher Holland| 5.11.09 @ 1:36AM
So union members are supposed to feel good that their union owns majority stock in GM and Chrysler! If that isn't drinking from a poisoned chalice then nothing is. Personally, I don't think much can be done when people are that stupid. They rarely have to wait long before reality catches up to them and kicks them in the backside.
Richard Baker| 5.14.09 @ 2:17AM
My Detroit cousins told me in 1985 that Americans should buy American cars no matter what. When I said that the American cars were not as well built as the foreign cars they said what about us? That mentality then and now has the UAW acting as if destroying the auto business is their right regardless as long as they got theirs. Did my cousins think that overpricing and underproducing were going to last forever? The Detroit auto companies are disappearing because the manufacturers gave in for "Labor Peace" and the UAW din't care about the future. Well. the future is NOW and Detroit did it to itself.
Richard Baker| 5.14.09 @ 2:19AM
didn't, not din't.
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Stone| 1.26.10 @ 1:53AM
Absolutely agree with William.They deserve their rights under the law.And congratulations to rule of the law. President Teleprompter may think he runs a banana republic, but he has lawyers and creditors to contend with. acer batterycompaq battery
394224-001 | 3.9.10 @ 11:23PM
Come on,you will get more!