Chrysler to File for Bankruptcy

[Admiral Yi]

They might take the position that the CDS holders are not the true party in interest and the writers of the insurance should have the say. 

You can't be serious.

They might decide the process was futile and tell the government there was no point in participating as long as the CDS holders have a say.

Is the process of voting yes or no to a settlement proposal really that onerous that it would make a difference?

[alfred russel]

CC is a creditor's committee

There are two issues here: what happens pre-filing and what happens post-filing.

Pre-filing it isn't uncommon for ad hoc creditor groups to come together to try to negotiate a settlement that keeps the case out of bankruptcy altogether.  That is what happened here.  The assumption is that the creditors have some incentive t oavoid bankruptcy because it is costly and uncertain.  The assumption is also that creditor incentives are roughly aligned.  This is not the case however if some creditors have undisclosed CDS holdings because their only incentive may be to make sure any settlement -- no matter how reasonable - is torpedoed.  This is the concern that Obama's comments seemed to be addressed to.

After filing, the CDS holders collect whatever they are entitled to collect, but there still may be mismatched incentives -- though not as serious as pre-bankruptcy.  That is because the CDS holders probably are interested in just getting whatever cash they can get right away for their bonds (having already been made whole thought the CDS and having little interest in actually holding long term equity states in a reorganizing entity).  Thus, they may have an incentive to vote against measures taken to enhance the long term prospects of the reorganizing entity if it means less cash up front - and more incentive to try to push things into a liquidation posture.

So I think we are close to being on the same page. Pre-filing, we are on the same page.

Post filing, I don't necessarily disagree with you in the general case, but in the case of Chrysler the easiest way for a creditor to extract themselves from this situation with cash may be to sign onto the previous plan. Basically, if the creditor objections to the previous plan were motivated by parties hedged with CDSs who wanted to force a filing, now that the filing has taken place they may not have a reason to continue their opposition.

[alfred russel]

Why?  Would they act differently if they knew this?

They might take the position that the CDS holders are not the true party in interest and the writers of the insurance should have the say.  They might decide the process was futile and tell the government there was no point in participating as long as the CDS holders have a say.

It would make sense to prohibit the splitting of creditor bankruptcy rights from the risks of default.

[Hansmeister]

b/c it is impossible to know a party's true agenda

Seems to me the only party that cares about the creditors' true agenda is the Obama administration, so that they don't waste any time proposing settlements that the covered creditors are not going to accept anyway.

No that is not entirely so.  The five big bank creditors all supported the deal and presumably they thought the deal was in the interests of creditors generally.  They would probably be interested to know who else in the creditors group had a secret or semi-secret agenda to crater any deal.

Alternatively, the big five bank creditors supported the deal because they were large recipient of TARP money and had to dance by the gov'ts tune.

[alfred russel]

Anyway, I thought that the reason Americans should support the Big Three was that we need American management and American engineering, not just the transplanted assembly line jobs. Under this plan, those attributes will be coming from Fiat. Plus we are putting billions into Chrysler to get it into a condition that Fiat will take it over for free.

[Sheilbh]

Anyway, I thought that the reason Americans should support the Big Three was that we need American management and American engineering, not just the transplanted assembly line jobs. Under this plan, those attributes will be coming from Fiat. Plus we are putting billions into Chrysler to get it into a condition that Fiat will take it over for free.

Indeed.  The engineering jobs will go and there's no sign that they come back (the assembly line jobs do return to the US in cheaper states).

Although I was reading a thing today about how weirdly preposterous it is that incredibly globalised companies still, overwhelmingly, have 'national' management - especially at the very top.  It seems like globalisation only goes so far up the payscale and, for some reason, it's essential that Nestle's run by a Swiss Gnome.

[alfred russel]

Anyway, I thought that the reason Americans should support the Big Three was that we need American management and American engineering, not just the transplanted assembly line jobs. Under this plan, those attributes will be coming from Fiat. Plus we are putting billions into Chrysler to get it into a condition that Fiat will take it over for free.

Indeed.  The engineering jobs will go and there's no sign that they come back (the assembly line jobs do return to the US in cheaper states).

Although I was reading a thing today about how weirdly preposterous it is that incredibly globalised companies still, overwhelmingly, have 'national' management - especially at the very top.  It seems like globalisation only goes so far up the payscale and, for some reason, it's essential that Nestle's run by a Swiss Gnome.

I don't know how true that is these days. There are a lot of companies in the U.S. that have foreign CEOs and management--mine for example as a British CEO.

But it may be more true in more political industries.

[The Minsky Moment]

You can't be serious.

This is all pretty new stuff and bankruptcy judges have pretty broad equitable powers.   Who the hell knows what might happen?

Is the process of voting yes or no to a settlement proposal really that onerous that it would make a difference?

If the biggest unsecured creditors all said they refused to negotiate in the first place because they figured the CDS holders would sink the deal anyways, it would have made big news.

[The Minsky Moment]

Alternatively, the big five bank creditors supported the deal because they were large recipient of TARP money and had to dance by the gov'ts tune.

That's a fair point.  It's safe to say the existing system did not take into account the present realities.

I still think the US govt should have nationalized the two sick men late last year before they burned through another 30 billion or so in cash.  It would have been cheaper and more honest.

[alfred russel]

Anyway, I thought that the reason Americans should support the Big Three was that we need American management and American engineering, not just the transplanted assembly line jobs. Under this plan, those attributes will be coming from Fiat. Plus we are putting billions into Chrysler to get it into a condition that Fiat will take it over for free.

Indeed.  The engineering jobs will go and there's no sign that they come back (the assembly line jobs do return to the US in cheaper states).

Although I was reading a thing today about how weirdly preposterous it is that incredibly globalised companies still, overwhelmingly, have 'national' management - especially at the very top.  It seems like globalisation only goes so far up the payscale and, for some reason, it's essential that Nestle's run by a Swiss Gnome.

I changed my mind--I agree with you. I was looking through a list of large american companies and few seem to have non american ceos.

[Hansmeister]

Alternatively, the big five bank creditors supported the deal because they were large recipient of TARP money and had to dance by the gov'ts tune.

That's a fair point.  It's safe to say the existing system did not take into account the present realities.

I still think the US govt should have nationalized the two sick men late last year before they burned through another 30 billion or so in cash.  It would have been cheaper and more honest.

Agreed, particularly since giving TARP money to GM and Crysler was actually illegal.  The worst decision of the Bush presidency, imho.  Bush basically gave cover to Obama to engage in further broadly illegal conduct in regards to the economy.

[Hansmeister]

From the NYTimes:

Union Takes Rare Front Seat in Deal for Chrysler
By MICHELINE MAYNARD
DETROIT — Labor unions usually dread bankruptcy, and for good reason. Their pay, benefits and pensions typically suffer significant cuts, as airline and steel workers can attest.

But for the United Automobile Workers union, Chrysler's Chapter 11 case, which began in New York on Friday, could turn out to be — if the company survives and thrives — the Cadillac of bankruptcies.

The U.A.W., for example, has received upfront protection from the Treasury Department for its pension plan and the fund that will take over responsibility for retiree medical benefits.

Moreover, that fund, called the voluntary employee beneficiary association, or VEBA, will control 55 percent of the equity in the new Chrysler once it emerges from bankruptcy, and hold a seat on the Chrysler board.

Of course, those hard-fought gains, and the big ownership stake, could be worthless if Chrysler does not make it. And the company's fortunes continued to sag in April, when sales fell 48 percent compared with the same month in 2008. Chrysler will also have to wait roughly two years or more for new cars designed by its partner, the Italian automaker Fiat, to show up in Chrysler dealerships.

But for now, even though Chrysler workers had to agree to lower pay and less generous benefits as part of the deal, the U.A.W. appears to be enjoying relative safety in helping steer the course of the Chrysler bankruptcy.

"I'm very comfortable," Ron Gettelfinger, the U.A.W.'s president, said Friday on National Public Radio. "It's not like we're going into this bankruptcy fighting with Chrysler and Fiat and the U.S. Treasury. We're going in there in lockstep to put our agreements in place."

Labor and restructuring lawyers said such a comprehensive deal going into bankruptcy was rare.

"This is extraordinary, truly extraordinary," said Mary Jo Dowd, a partner in the financial and bankruptcy restructuring practice at Arent Fox in Washington. "I never would have thought a year ago that this would occur. These are truly unusual times."

Asked if he could recall any other union that fared as well, David L. Gregory, a labor law professor at St. John's University, replied: "Nobody's even close."

But the U.A.W. is also no ordinary union. Even though its membership at the Detroit automakers has shrunk to a quarter of its size in 1990, it still maintains tremendous influence in Washington, partly because of its heavy political contributions.

The government, in assessing what was needed to make Chrysler viable, decided it needed to support workers, as well as suppliers, and guarantee the warranties on Chrysler vehicles.

Because the union agreed to negotiate, it was made a partner, with the government and Fiat, in developing the plan to restructure the company.

In contrast, other companies often use bankruptcy as a way to gain leverage over labor, so that they can lower their costs. Workers at Bethlehem Steel, United Airlines, Delta Air Lines and US Airways lost all or most of their traditional pension benefits when those employers sought bankruptcy protection in this decade, though some of the shortfall was covered by the federal government. Retiree health care coverage was also cut.

None of those cases, filed during the Bush administration, had the kind of federal support offered to the U.A.W.

In the case of Chrysler, the Treasury said Chrysler is giving a VEBA a $4.6 billion note, payable over 13 years at a 9 percent interest rate, helping to fund roughly $10 billion in liabilities. The rest will be paid in Chrysler stock. Chrysler's pension plans will be preserved, with the help of $600 million from Daimler, Chrysler's former owner, the Treasury said.

If Chrysler goes under, pensions will be covered in part by the federal pension agency, but workers will receive much less than they are owed. The VEBA would be in dire straits, since it would owe the Treasury and have nothing to pay it back with.

The U.A.W. was ready for the probability of a Chrysler filing as far back as two months ago, people involved in the negotiations said. Its stand was clear: for it to support a bankruptcy case, workers' health care and pensions had to be protected.

But the administration, advised by Ron Bloom, the veteran restructuring expert, also insisted that the union make sacrifices. On Wednesday, Chrysler workers approved concessions, including work rule changes, that would result in lower pay and less generous benefits than in the 2007 contract.

Significantly, the VEBA can begin adjusting workers' health care benefits in 2010, two years sooner than the previous contract allowed.

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.

None of this sat well with some Chrysler's debtholders, who questioned the fairness of the 55 percent stake granted to the VEBA. They did not raise objections in bankruptcy court on Friday, however.

Professor Gregory said the U.A.W.'s position still carried risk.

"Chrysler may be worth nothing, and 55 percent of nothing may be worth nothing," he said. But a comeback by Chrysler after it emerges from bankruptcy could ensure the security of the retiree health care fund, which will begin selling its Chrysler shares as soon as possible, Mr. Gettelfinger said Friday.

His legacy, and that of the union, could also could benefit, Professor Gregory said — if Chrysler and G.M. are able to successfully restructure.

"It's walking a very tight rope without a safety net, and a very high wire," he said. "But if this can get some traction, they could be the envy of not just organized labor, but a lot of folks."

Obama shafted the investors in order to bailout the union.  I don't see how this could possibly make Crysler viable.

[Faeelin]

That would depend on how seriously you believe the unions are responsible for the fall of Chrysler, as opposed to making shitty cars, no?

[Neil]

Why can't both be responsible.

After all, even when Chrysler comes out of bankruptcy in a few years, they'll still be making terrible cars that nobody has any interest in whatsoever.  At least GM doesn't do absolutely everything wrong.  Chrysler has no chance.

And the fact that they're bringing in Italians to run things, that'll just make things worse.

[Grey Fox]

Fiat's CEO is a Canuck.