Chrysler to File for Bankruptcy

[DGuller]

Another key difference between CDS and insurance: if CDS were real insurance, then those who sold the CDS contracts would be the one involved in negotiations, not the ones who bought them.  If you have liability coverage and are sued, you can't just refuse to defend yourself, quickly lose, and then stick your insurer with the judgement against you, for extremely obvious reasons.  That's why insurance company defends you when you're sued.

[DGuller]

Whether or not CDS are considered insurance, they are used as a part of risk management strategies and most of the problems discussed here would be present with traditional bond insurance.

Actually, even traditional bond insurance doesn't not truly qualify as an insurance product.  True insurance cannot be speculative.

[DontSayBanana]

Why should anyone cast a vote that goes against their own vested interest?

It wouldn't be. It would be a vote where they have no substantial interest in either outcome, so the voter simply targets the most divisive outcome. If their primary interests would be served by a breakdown of the process rather than by utilizing the process, then they should be forced to remain in abstention until that occurs.

My issue is not with the process of the CC's voting, but that some disclosure by the creditor should be required before that creditor is admitted to the CC; there's no way to tell how many as of now, but this situation has probably allowed bad actors into Chrysler's CC who are going to act counter to the CC's interests and try to grind the system into a halt so that they can collect on the insurance and screw the other actors on the CC who are playing by the rules.

[alfred russel]

Why should anyone cast a vote that goes against their own vested interest?

It wouldn't be. It would be a vote where they have no substantial interest in either outcome, so the voter simply targets the most divisive outcome. If their primary interests would be served by a breakdown of the process rather than by utilizing the process, then they should be forced to remain in abstention until that occurs.

My issue is not with the process of the CC's voting, but that some disclosure by the creditor should be required before that creditor is admitted to the CC; there's no way to tell how many as of now, but this situation has probably allowed bad actors into Chrysler's CC who are going to act counter to the CC's interests and try to grind the system into a halt so that they can collect on the insurance and screw the other actors on the CC who are playing by the rules.

I doubt anyone is against the deal just to blow up the process, or not playing by the rules. Why would you do that, especially when your investors that you have a fiduciary duty to probably have some other exposure to Chrysler and you are facing political pressure.

Out of bankruptcy some may have been motivated to allow Chrysler to enter bankruptcy to be paid out on their CDS, but as those probably pay out on bankruptcy, I doubt they have that incentive anymore.

Any opposition to the plan is probably because some of the secured creditors think the amount they are getting isn't enough in excess of the amount they would get in liquidation to not put pressure on other parties to give them a bigger piece.

[DontSayBanana]

I doubt anyone is against the deal just to blow up the process, or not playing by the rules. Why would you do that, especially when your investors that you have a fiduciary duty to probably have some other exposure to Chrysler and you are facing political pressure.

Out of bankruptcy some may have been motivated to allow Chrysler to enter bankruptcy to be paid out on their CDS, but as those probably pay out on bankruptcy, I doubt they have that incentive anymore.

Any opposition to the plan is probably because some of the secured creditors think the amount they are getting isn't enough in excess of the amount they would get in liquidation to not put pressure on other parties to give them a bigger piece.

Granted, but the fact that there are secured creditors willing to try this means there's a dangerous element of stupidity and ignorance playing a part in this bankruptcy. Chrysler's numbers are so ugly so far that insolvency seems a serious possibility. If those secured creditors are holding out for value higher than liquidation when there's an even chance that the declaration could come down where they only have a right to the collateral they've fronted, then the only options are that the SCs are being endlessly optimistic/idiotic, or else that they've got concerns about a solvent Chrysler paying up and are deliberately stalling, knowing insolvency would make them the only ones with any entitlements.

[alfred russel]

Granted, but the fact that there are secured creditors willing to try this means there's a dangerous element of stupidity and ignorance playing a part in this bankruptcy. Chrysler's numbers are so ugly so far that insolvency seems a serious possibility. If those secured creditors are holding out for value higher than liquidation when there's an even chance that the declaration could come down where they only have a right to the collateral they've fronted, then the only options are that the SCs are being endlessly optimistic/idiotic, or else that they've got concerns about a solvent Chrysler paying up and are deliberately stalling, knowing insolvency would make them the only ones with any entitlements.

Lets grossly simplify this: Chrysler is bankrupt, with the following details:
AR: Secured Creditor owed $15
UAW: Unsecured Creditor owed $15
Chrysler value in liquidation: $5
Chrysler value if reorganized (needing UAW support): $12

A plan is presented to offer me $5.50 and the UAW $6.50. Yes I'm better off under this plan, but I'm going to try to scuttle it and counterpropose terms more like me $11 and the UAW $1. Sure, time may be short and the stakes high, but if I can scuttle the deal that will only serve to increase the despiration of the other party and make them more likely to cave to my demands. I would want more money to play along. That is negotiating 101.

A couple of complicating factors: the US government is probably willing to pony up a lot of money ot keep Chrysler from liquidating, and the government is on the side of the UAW. If I'm a lender that is depending on the government for survival the second point may dominate my thinking: I may not want to push the issue. But if I'm a secured lender that is relatively immune from political pressure, if this deal is scuttled the government will possibly pay for any agreement I can get the judge to go along with. I may be thinking I may not only be able to extract concessions from the unsecured lenders, but also from the government.

[DontSayBanana]

Lets grossly simplify this: Chrysler is bankrupt, with the following details:
AR: Secured Creditor owed $15
UAW: Unsecured Creditor owed $15
Chrysler value in liquidation: $5
Chrysler value if reorganized (needing UAW support): $12

A plan is presented to offer me $5.50 and the UAW $6.50. Yes I'm better off under this plan, but I'm going to try to scuttle it and counterpropose terms more like me $11 and the UAW $1. Sure, time may be short and the stakes high, but if I can scuttle the deal that will only serve to increase the despiration of the other party and make them more likely to cave to my demands. I would want more money to play along. That is negotiating 101.

A couple of complicating factors: the US government is probably willing to pony up a lot of money ot keep Chrysler from liquidating, and the government is on the side of the UAW. If I'm a lender that is depending on the government for survival the second point may dominate my thinking: I may not want to push the issue. But if I'm a secured lender that is relatively immune from political pressure, if this deal is scuttled the government will possibly pay for any agreement I can get the judge to go along with. I may be thinking I may not only be able to extract concessions from the unsecured lenders, but also from the government.

What I'm afraid of is, using your setup as an example, AR is already somewhat desperate, decides to get greedy, and remain firm on 11/1, AR/UAW, while UAW decides to take a stand and refuse to settle for less than 7/5. That's a fairly large gap, and the broader the gap, the more likely this becomes to break down if both parties become entrenched.

[alfred russel]

What I'm afraid of is, using your setup as an example, AR is already somewhat desperate, decides to get greedy, and remain firm on 11/1, AR/UAW, while UAW decides to take a stand and refuse to settle for less than 7/5. That's a fairly large gap, and the broader the gap, the more likely this becomes to break down if both parties become entrenched.

That could happen, but then they are both shooting themselves in the foot. They have more skin in this game than we do, and if the creditors are dumb enough to take each other down, they probably wouldn't do to well as the majority owners of Chrysler anyway.

Plus the current deal may get approved and not get modified at all.

[DontSayBanana]

That could happen, but then they are both shooting themselves in the foot. They have more skin in this game than we do, and if the creditors are dumb enough to take each other down, they probably wouldn't do to well as the majority owners of Chrysler anyway.

Plus the current deal may get approved and not get modified at all.

Yup. Considering my armchair enthusiast positioning, I'd be more than content with my projections amounting to mental masturbation. It would be nice to see a spirit of progress where I was expecting a spirit of face-saving run amok.

[Admiral Yi]

If their primary interests would be served by a breakdown of the process rather than by utilizing the process, then they should be forced to remain in abstention until that occurs.

My issue is not with the process of the CC's voting, but that some disclosure by the creditor should be required before that creditor is admitted to the CC; there's no way to tell how many as of now, but this situation has probably allowed bad actors into Chrysler's CC who are going to act counter to the CC's interests and try to grind the system into a halt so that they can collect on the insurance and screw the other actors on the CC who are playing by the rules.

Both groups are playing by the rules.  The rules are everybody votes their interest and a settlement requires a 90% majority.

Your proposal makes as much sense as saying that if covered investors were a majority uncovered investors should not be allowed to vote.

[MadImmortalMan]

Lets grossly simplify this: Chrysler is bankrupt, with the following details:
AR: Secured Creditor owed $15
UAW: Unsecured Creditor owed $15
Chrysler value in liquidation: $5
Chrysler value if reorganized (needing UAW support): $12

A plan is presented to offer me $5.50 and the UAW $6.50. Yes I'm better off under this plan, but I'm going to try to scuttle it and counterpropose terms more like me $11 and the UAW $1. Sure, time may be short and the stakes high, but if I can scuttle the deal that will only serve to increase the despiration of the other party and make them more likely to cave to my demands. I would want more money to play along. That is negotiating 101.

A couple of complicating factors: the US government is probably willing to pony up a lot of money ot keep Chrysler from liquidating, and the government is on the side of the UAW. If I'm a lender that is depending on the government for survival the second point may dominate my thinking: I may not want to push the issue. But if I'm a secured lender that is relatively immune from political pressure, if this deal is scuttled the government will possibly pay for any agreement I can get the judge to go along with. I may be thinking I may not only be able to extract concessions from the unsecured lenders, but also from the government.

Wouldn't the fact that UAW is unsecured mean that the default option legally would be AR $12, UAW $0?

Otherwise, what's the point of paying the premium for secured debt?


Edit: Or AR $5, UAW $0. Whichever. This might actually be the better option for alfred russel, as the assets can change in value in the future, and he would own them and not the UAW.

[alfred russel]

Lets grossly simplify this: Chrysler is bankrupt, with the following details:
AR: Secured Creditor owed $15
UAW: Unsecured Creditor owed $15
Chrysler value in liquidation: $5
Chrysler value if reorganized (needing UAW support): $12

A plan is presented to offer me $5.50 and the UAW $6.50. Yes I'm better off under this plan, but I'm going to try to scuttle it and counterpropose terms more like me $11 and the UAW $1. Sure, time may be short and the stakes high, but if I can scuttle the deal that will only serve to increase the despiration of the other party and make them more likely to cave to my demands. I would want more money to play along. That is negotiating 101.

A couple of complicating factors: the US government is probably willing to pony up a lot of money ot keep Chrysler from liquidating, and the government is on the side of the UAW. If I'm a lender that is depending on the government for survival the second point may dominate my thinking: I may not want to push the issue. But if I'm a secured lender that is relatively immune from political pressure, if this deal is scuttled the government will possibly pay for any agreement I can get the judge to go along with. I may be thinking I may not only be able to extract concessions from the unsecured lenders, but also from the government.

Wouldn't the fact that UAW is unsecured mean that the default option legally would be AR $12, UAW $0?

Otherwise, what's the point of paying the premium for secured debt?

Three things about this: first, Fiat probably wants the UAW on board with the deal, so you have to make the UAW happy to avoid liquidation. Second, the government is providing significant subsidies to make this happen, and they are probably more comfortable with the UAW benefiting from those subsidies than bondholders (and hence they may threaten to walk if the UAW gets treated too harshly). And third, though I'm not sure of the legal aspects of bankruptcy (a lawyer may be able to fill in here), I do know that it isn't so harsh that those at the top of the priority list get everything while those downstream get nothing. Even equity holders usually get something, though it is a very meager payout.

[KRonn]

I'm not shedding too many tears for Chrysler.  But on a systemic level, it is true that the ability to insure via CDS increases systemic instability and combined with confidentiality, complicates the ability to reach pre-bankruptcy filing settlements.  It is also true that to the extent CDS can be written in amount far exceeding the actual outstanding debt issuance, in extreme cases it can start to look like selling fire insurance to arsonists.  Or at least little boys who are very careless with matches.

Hehe... I just found out that your sig pic is Ponzi, the guy the scheme is named after.       Kind of appropriate in these times, with several other notable names lately.

[KRonn]

I just saw that Chrysler won't pay back the billions given to it. Just a news blurb on tv news, and I don't know the details. But earlier I had posted it was said they would pay back the money. Anyhow, too early to know how things will go. Chrysler may not be around anyway, but I'm thinking they will continue to limp along.

[DontSayBanana]

Wouldn't the fact that UAW is unsecured mean that the default option legally would be AR $12, UAW $0?

Otherwise, what's the point of paying the premium for secured debt?


Edit: Or AR $5, UAW $0. Whichever. This might actually be the better option for alfred russel, as the assets can change in value in the future, and he would own them and not the UAW.

Not exactly. There's three ways a bankruptcy could go: restructuring with settlements, liquidation with fire sales or insolvency. AR and I are being optimistic and assuming the first option. My comments about insolvency are drawn from the SEC reference I posted earlier- if insolvency is declared, that would be the scenario where secured creditors are typically the only ones repaid, and the amount repaid would be based on the collateral they fronted rather than liquidation value.