Chrysler to File for Bankruptcy

[alfred russel]

The government is in a tough spot in negotiating with the bondholders of GM and Chrysler. The liquidation value for the bondholders may be minimal, and in ordinary circumstances that would be what the bondholders would be left with as they likely wouldn't be able to get debtor in possession financing.

But in this case, the government is promising to reconstitute the companies as viable and profitable going forward. Since they have an equity claim in bankruptcy, many of the bondholders probably want to hold out for a significant equity stake.

Which would be how likely, really? This was even bolded in the SEC article itself:

Q: What will happen to my stock or bond?

A: ....In most instances, the company's plan of reorganization will cancel the existing equity shares....

Of course--equity (ie stockholders) get virtually wiped out in bankruptcy and creditors (eg bondholders) take over. What signifies ownership in a corporation is stock.

[Savonarola]

Nah - with all that government money it'll emerge from bankruptcy some day.

But 30-60 days?

I think Delphi (which primarily makes auto parts) has been in bankruptcy protection for years.

Six months is the figure that's being thrown around in the press here.  Knowing our newspapers that's probably optimistic.

If they stick to their plan of shuttering their plants througout bankruptcy and if the bankruptcy lasts for six months are they going to be able to emerge?  I'm not an expert in manufacturing, but six months sounds like a long time to produce nothing and then re-enter the market.

[Scipio]

[snip tard trolling]

Hans, shut it. Not only did the UAW take a hit on their collective bargaining agreement, in doing so, they're taking a 55% share in Chrysler, so they're taking on a hefty burden in addition to relinquishing some of their compensation.

If you had actually bothered to listen to Obama's comments earlier, he was oddly specific about who the holdouts were- largely hedge fund managers who were holding out against the prospect of bailout compensation.

Due to the nature of my former job, I know of several of the holdouts who went to the table fully prepared to sabotage talks; I do not consider them worthy of any pity.

Normally, I'm pretty critical on the UAW, but in this case, I'm going to side with them because they tried to take the high ground and got cock-blocked by a few greedy assholes.

Yeah, Union management of big industrial concerns has worked so well.  Like United Airlines.

[DontSayBanana]

Of course--equity (ie stockholders) get virtually wiped out in bankruptcy and creditors (eg bondholders) take over. What signifies ownership in a corporation is stock.

I dunno. I'm smelling a rat. I can't see the UAW accepting 55% equity in the company only to relinquish it in bankruptcy a month later. I have a feeling that both sides of the creditors are going to accuse the other of not voting in good faith and this is going to have to get sent to further arbitration.

[alfred russel]

I dunno. I'm smelling a rat. I can't see the UAW accepting 55% equity in the company only to relinquish it in bankruptcy a month later. I have a feeling that both sides of the creditors are going to accuse the other of not voting in good faith and this is going to have to get sent to further arbitration.

One way of thinking of a bankruptcy reorganization is that the company would be profitable if it didn't have to pay off the creditors, so rather than dissolving the company when the company can't make payments, it is turned over to the creditors.

The employees are creditors (I'm assuming primarily due to underfunded post retirement programs) and the bondholders are creditors. Obviously the two groups are going to be in conflict about who gets what during the reorganization. There are a lot of different parties, and litigating complex bankruptcies can often take years.

[KRonn]

Interesting, and a bit confusing, what this all means and how it's supposed to look afterward.  But that's to be expected given what is going on, all the players in the game, including government. Will be waiting to see how it turns out, and how it progresses and what it becomes, over the short term.

[MadImmortalMan]

How are the unions supposed to represent the interests of the workers when they're also the owners? How does the collective bargaining process work when the same guy is on both sides of the table, anyway?

[Zanza]

If they stick to their plan of shuttering their plants througout bankruptcy and if the bankruptcy lasts for six months are they going to be able to emerge?  I'm not an expert in manufacturing, but six months sounds like a long time to produce nothing and then re-enter the market.

Especially when you consider the supply chain. If Chrysler completely stops making cars I guess a lot of suppliers will go bankrupt in those six months. If the American auto supplier industry is anything like the German one, a lot of suppliers will already be extremely hard-pressed by the current economic situation. If Chrysler now exits the market, you'll see a lot of smaller bankruptcies among suppliers.

[Zanza]

How are the unions supposed to represent the interests of the workers when they're also the owners? How does the collective bargaining process work when the same guy is on both sides of the table, anyway?

They take a guy like Raz. :p

[saskganesh]

How are the unions supposed to represent the interests of the workers when they're also the owners? How does the collective bargaining process work when the same guy is on both sides of the table, anyway?

they don't. it's a quasi Co-Operative situation

it would be bold if it evolved that way: the Chrysler Car Co-Op Company (CCCC)

[The Minsky Moment]

[quote author=Hansmeister link=topic=671.msg29903#msg29903 date=1241144347
You seem to be the one with ADD since i originally pointed out that Obama was blaming the evil capitalists for failing to fall on their swords.  Funny that those small investors didn't want the government to illegally confiscate their property.  People can be silly like that.
[/quote]

The dissenters are not exactly "small" investors.  My understanding is that the concern is that hedge funds bought up the bonds and CDS protection at the same time and hence had an incentive to wreck any deal.   If that is true, it a huge problem and those responsible deserve verbal condemnation (even though they acted lawfully).

[alfred russel]

The dissenters are not exactly "small" investors.  My understanding is that the concern is that hedge funds bought up the bonds and CDS protection at the same time and hence had an incentive to wreck any deal.   If that is true, it a huge problem and those responsible deserve verbal condemnation (even though they acted lawfully).

If that is the case, there may not be a problem. If the CDS protection payout occurs in the event of bankruptcy (I don't know that, but it would seem a logical trigger), the parties that dragged Chrysler into bankruptcy may now be indifferent to whatever to their bankruptcy compensation and it may be the quick proceeding the administration promises.

[The Minsky Moment]

If that is the case, there may not be a problem. If the CDS protection payout occurs in the event of bankruptcy (I don't know that, but it would seem a logical trigger), the parties that dragged Chrysler into bankruptcy may now be indifferent to whatever to their bankruptcy compensation and it may be the quick proceeding the administration promises.

My concern is the ex ante incentives before filing.  Normally the assumption would be that the creditors of the company have an incentive to avoid bankruptcy if an acceptable deal can be reached.  But if some of the creditors have (confidential) CDS holdings, they have an incentive to be obstructive and blow the deal up.

[alfred russel]

If that is the case, there may not be a problem. If the CDS protection payout occurs in the event of bankruptcy (I don't know that, but it would seem a logical trigger), the parties that dragged Chrysler into bankruptcy may now be indifferent to whatever to their bankruptcy compensation and it may be the quick proceeding the administration promises.

My concern is the ex ante incentives before filing.  Normally the assumption would be that the creditors of the company have an incentive to avoid bankruptcy if an acceptable deal can be reached.  But if some of the creditors have (confidential) CDS holdings, they have an incentive to be obstructive and blow the deal up.

Bond insurance (or credit default swaps functioning in that role) increase the risk of bankruptcy. It is just the nature of the beast.

[alfred russel]

If that is the case, there may not be a problem. If the CDS protection payout occurs in the event of bankruptcy (I don't know that, but it would seem a logical trigger), the parties that dragged Chrysler into bankruptcy may now be indifferent to whatever to their bankruptcy compensation and it may be the quick proceeding the administration promises.

My concern is the ex ante incentives before filing.  Normally the assumption would be that the creditors of the company have an incentive to avoid bankruptcy if an acceptable deal can be reached.  But if some of the creditors have (confidential) CDS holdings, they have an incentive to be obstructive and blow the deal up.

Actually, this came into play when Congress was upset that AIG was paying out 100% on its obligations and not trying to negotiate lower payments with its counterparties: some of them had CDS to back up any nonperformance by AIG and were unwilling to negotiate any discount (Goldman Sachs said so explicitly).

Though I doubt anyone would pen the letter, it would highlight the absurdity of the situation if a hedge fund wrote a letter to the NY Times titled, "Why I put Chrysler in bankruptcy" stating that the administration wouldn't make him whole outside of bankruptcy, so he simply waited until the bankruptcy took place and when he was made whole with a check from AIG, with money supplied by the federal government.