Chrysler to File for Bankruptcy

[The Minsky Moment]

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

But the legal structure of the bankruptcy process doesn't take that into account.  Although it is accepted that creditors in a CC don't all have identical interest, the system does not take into such massive conflicts of interest. If CDS were required to be disclosed, then the problem could be fixed by having separate committee - but they aren't.

[alfred russel]

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

But the legal structure of the bankruptcy process doesn't take that into account.  Although it is accepted that creditors in a CC don't all have identical interest, the system does not take into such massive conflicts of interest. If CDS were required to be disclosed, then the problem could be fixed by having separate committee - but they aren't.

I don't understand because:
a) I don't know what CC means, and
b) if we are talking about this specific case (and assume the CDSs exist and were the cause of the bankruptcy), won't they be without any incentives for a good outcome in the bankruptcy and be inclined to sign off on whatever is politically expedient? Which in this case seems to be the previous plan they have torpedoed and the other parties signed off on. From which I would assume that this could be a relatively painless bankruptcy, as now everyone will be willing to jump onto the president's plan.

[There is a lot of assuming in point b that I don't know to be correct, starting with the assumption that the creditors objecting to the plan had CDS arrangements that were behind them forcing bankruptcy, and not them wanting to litigate for a bigger piece of the pie in bankruptcy, which could create a very long and messy process]

[KRonn]

I have to wonder if Chrysler will really be saved, or if this just staves off the inevitable. I read a report on their bankruptcy, which went on to list auto quality among the companies. No Chrysler products were anywhere in the lists, and basically they're still playing catch up to get to decent quality. And we're trying to save this company? Pres Obama lamented the poor quality and lack of autos that consumers wanted; hardly a ringing endorsement. What is he trying to save, with thinking like that? Well, at least they are bound to pay back the taxpayer, if they do make a come back.

[Hansmeister]

I have to wonder if Chrysler will really be saved, or if this just staves off the inevitable. I read a report on their bankruptcy, which went on to list auto quality among the companies. No Chrysler products were anywhere in the lists, and basically they're still playing catch up to get to decent quality. And we're trying to save this company? Pres Obama lamented the poor quality and lack of autos that consumers wanted; hardly a ringing endorsement. What is he trying to save, with thinking like that? Well, at least they are bound to pay back the taxpayer, if they do make a come back.

You're so fucked when you rely on Fiat to be your saviour. 

[dps]

I have to wonder if Chrysler will really be saved, or if this just staves off the inevitable. I read a report on their bankruptcy, which went on to list auto quality among the companies. No Chrysler products were anywhere in the lists, and basically they're still playing catch up to get to decent quality. And we're trying to save this company? Pres Obama lamented the poor quality and lack of autos that consumers wanted; hardly a ringing endorsement. What is he trying to save, with thinking like that? Well, at least they are bound to pay back the taxpayer, if they do make a come back.

You're so fucked when you rely on Fiat to be your saviour. 

Kind of like when American Motors was just hanging on, and tried to save themselves by hooking up with Renault.

[The Minsky Moment]

I don't understand because:
a) I don't know what CC means, and
b) if we are talking about this specific case (and assume the CDSs exist and were the cause of the bankruptcy), won't they be without any incentives for a good outcome in the bankruptcy and be inclined to sign off on whatever is politically expedient? Which in this case seems to be the previous plan they have torpedoed and the other parties signed off on. From which I would assume that this could be a relatively painless bankruptcy, as now everyone will be willing to jump onto the president's plan.

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.

[Admiral Yi]

Why is it relevant if the CDS's are disclosed or undisclosed?  I can see how it would play in the court of public opinion but that doesn't impact the 90% voting rule does it?

[Sheilbh]

I got a lot of joy reading that 'Chrysler was taken over by Fiat'

[dps]

I got a lot of joy reading that 'Chrysler was taken over by Fiat'

It makes sense;  they're a good fit because neither has a very good record of building cars that Americans want to buy.

[The Minsky Moment]

Why is it relevant if the CDS's are disclosed or undisclosed? 

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

[PDH]

I got a lot of joy reading that 'Chrysler was taken over by Fiat'

I was to be taken over by fiat at one point, but the authorities soon recognized that this was worthless and countermanded the decree.

[Admiral Yi]

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.

[The Minsky Moment]

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.

[Admiral Yi]

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.

Why?  Would they act differently if they knew this?

[The Minsky Moment]

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.