Chrysler to File for Bankruptcy

[MadImmortalMan]

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

You can make shitty cars and still be profitable: http://www.kmcir.com/Download/KiaMotors_2008_eng.pdf

[Admiral Yi]

*sigh* Sadly true. I realize there's a certain amount of expedience to be desired from a bankruptcy, but the lack of disclosure required of the creditors really is pathetic. The votes must be in good faith, but with so little room for disclosure, how do you prove that the votes aren't being made in good faith?

What do you mean by a vote cast in bad faith?

[Caliga]

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

You can make shitty cars and still be profitable: http://www.kmcir.com/Download/KiaMotors_2008_eng.pdf

The thing is that those shitty cars are cheap.

[Savonarola]

Chrysler workers and dealers to feel pinch
Automaker details cuts to survive through June
BY GREG GARDNER and BRENT SNAVELY • FREE PRESS BUSINESS WRITERS • May 5, 2009
The squeeze won't let up on Chrysler workers and dealers during the next two months, as the company tries to fund essential operations on a bare-bones budget.


Salaried workers will take a two-week unpaid furlough. Hourly workers will get 75% of their regular pay, with Chrysler paying about one-third what it has in the past when workers are temporarily laid off. The company will stop reimbursing one-quarter of its 3,200 dealers for rebates and slash incentive spending by 50% beginning June 1.

Those details were spelled out in a court filing that describes how Chrysler will get by until the end of June. Other filings disclosed that Chrysler lost $16.8 billion last year and is burning through $1.7 billion of cash each month.

At a news conference in Sterling Heights, UAW President Ron Gettelfinger said workers will receive about 75% of regular pay, but added, "It's certainly not a paycheck."

Chrysler went into bankruptcy with about $660 million of cash, of which it can spend $400 million to pay suppliers for parts delivered over the last 45 days, reimburse dealers for warranty costs and other essential expenses approved by U.S. Bankruptcy Judge Arthur Gonzalez. The company must maintain a minimum cash balance of $260 million.

Robert Manzo of Capstone Advisory Group, Chrysler's restructuring consultant, said the U.S. Treasury had a "low likelihood" of being repaid the line of up to $4.5 billion Chrysler will use while under bankruptcy protection. He also said the loan was made on far better terms than what Chrysler could have received from private lenders.

If the reorganization is completed with Fiat taking a 20% stake in Chrysler, Manzo estimates that the new company could be profitable by 2012 and earn up to $3 billion by 2016.

Gonzalez issued orders Monday that free up cash for Chrysler to pay suppliers for parts delivered over the last 45 days and to reimburse dealers for warranty costs.

The additional worker and dealer sacrifices come after the UAW agreed last week to accept stock in a reorganized Chrysler in lieu of cash payments to fund a retiree health care (VEBA) fund and freeze wages through September 2011.

Hourly retirees have expressed worry that their health care benefits may be cut.

"This VEBA is going to be on life support initially," Gettelfinger said, but if Fiat Chief Executive Sergio "Marchionne comes in here and turns this company around, then we will be in good shape."

That sounds like a paycheck to me, Ron.

Is it normal for the government to simply give away money in loans they know are bad during a bankruptcy restructuring; or is this something unique to Chrysler?

[alfred russel]

That sounds like a paycheck to me, Ron.

Is it normal for the government to simply give away money in loans they know are bad during a bankruptcy restructuring; or is this something unique to Chrysler?

I think it is SOP since September.

[DontSayBanana]

What do you mean by a vote cast in bad faith?

Well, for starters, I actually hate using that phraseology precisely because it's so vague and contributes to the problem. In this instance, I'm referring to a divisive vote cast without regard to the outcome because of a vested interest in sabotaging the overall administrative process.

[Hansmeister]

Hedge Funds Outraged At Obama Bullying But Also Cowering In Fear
Clifford S. Asness|May. 5, 2009, 12:29 PM|245
PrintTags: White House, Barack Obama, Hedge Funds
Cliff Asness, managing partner at  AQR Capital Management, distributed the following letter after listening to Obama blast the Chrysler hedge-fund holdouts.  We picked the letter up at ZeroHedge.



Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC

The President has just harshly castigated hedge fund managers for being unwilling to take his administration's bid for their Chrysler bonds. He called them "speculators" who were "refusing to sacrifice like everyone else" and who wanted "to hold out for the prospect of an unjustified taxpayer-funded bailout."

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a "group letter", was the superb note from "The Committee of Chrysler Non-TARP Lenders" some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President's wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It's really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I'm entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally "sacrifice" their money without their permission.

Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It's not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

The above is how it works in America, or how it's supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler's creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.

Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients' money to share in the "sacrifice", they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients' money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That's how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could "share in the sacrifice", you would not be happy.

Let's quickly review a few side issues.

The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.

Let's also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.

Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President's comments here are backwards and libelous. Yet, somehow I don't think the hedge funds will be following ACORN's lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.

This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.

I am ready for my "personalized" tax rate now.

[The Minsky Moment]

It's a dog eat dog world. The debt agreements Chrysler extended to the creditors were likely inch thick documents filled with terms and conditions for Chrysler to follow and a list of nasty things if they didn't. When Chrysler asked for the money, it knew that most of the creditors weren't interested in anything other than making a buck, and they would break the company if they could get a few more pennies for it.

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.

[alfred russel]

It's a dog eat dog world. The debt agreements Chrysler extended to the creditors were likely inch thick documents filled with terms and conditions for Chrysler to follow and a list of nasty things if they didn't. When Chrysler asked for the money, it knew that most of the creditors weren't interested in anything other than making a buck, and they would break the company if they could get a few more pennies for it.

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.

I'm in complete agreement.

[dps]

What do you mean by a vote cast in bad faith?

Well, for starters, I actually hate using that phraseology precisely because it's so vague and contributes to the problem. In this instance, I'm referring to a divisive vote cast without regard to the outcome because of a vested interest in sabotaging the overall administrative process.

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

[MadImmortalMan]

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

Or in this case, the interest of the people whose assets they are entrusted with. I think those guys are backed into a corner and had no other valid option.

[DGuller]

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.

I like the arsonist analogy.  An even better analogy would be selling fire insurance to arsonists who don't even own their target homes.  This is also why I'm dismayed every time CDS is referred to as insurance.  It's not, insurance cannot be speculative, and the owner of insurance must have insurable interest.

[Admiral Yi]

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.

How does the amount of coverage affect anything?  Their vote is still based on the value of the bonds.  If they're 100% covered they're going to vote no to any settlement, if they're 500% covered they're going to vote no to any settlement.

[DGuller]

How does the amount of coverage affect anything?  Their vote is still based on the value of the bonds.  If they're 100% covered they're going to vote no to any settlement, if they're 500% covered they're going to vote no to any settlement.

Maybe in this case it doesn't matter, since given Chrysler's current situation both amounts are gross "over-insurance".  In general, though, having 500% coverage will always be over-insurance, and any over-insurance gives incentives for sabotage (we call this fraud in the real insurance industry).

[alfred russel]

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.

Also, even if you heavily regulate (to say require an insurable interest) or ban CDS, you can accomplish much the same by buying puts at very low strike prices.