Chrysler to File for Bankruptcy

[The Minsky Moment]

The UAW is not an ordinary unsecured creditor.  If Chrysler were to go into Chapter 11, the reorged  company will still have to make some sort of deal with the union, even if the bankruptcy judge tears up the old agreement.  Agreeing to wage and benefit reductions up front creates value for the other stakeholders -- including the creditors who will be taking equity positions in the new company.  It is not unreasonable for the union to expect some compensation in the form of equity for that concession (though the particular terms of the deal at issue may or may not be - i haven't looked at it carefully enought to judge).

[Savonarola]

Chrysler seeks to dump 789 dealers, 14 in metro Detroit
BY GREG GARDNER AND JEWEL GOPWANI • FREE PRESS BUSINESS WRITERS • May 14, 2009

By slashing 25% of its dealer network, including 40 in Michigan and 14 in metro Detroit, the restructured Chrysler-Fiat will eliminate up to 40,000 jobs or more than Chrysler's total U.S. workforce.


In a court filing today, Chrysler asked U.S. Bankruptcy Judge Arthur Gonzalez to reject dealer agreements for 789 dealers throughout the United States in a effort "to conserve cash and pursue transactions that maximize value."

Locally, Chrysler is asking the judge for permission to close 14 dealers including Birmingham Chrysler-Jeep in Troy, Fox Hills Chrysler-Jeep in Plymouth, Meadowbrook Dodge in Rochester Hills, Mt. Clemens Dodge in Clinton Township, Lochmoor Chrysler-Jeep in Detroit and Tamaroff Dodge in Southfield.


Chrysler has signaled its intent to shrink its retail network since filing for Chapter 11 bankruptcy protection on April 30. In 2008, Chrysler's 3,298 dealers sold on average 303 vehicles per showroom, compared with 1,292 for the average Toyota dealer and 1,219 for the average Honda dealer.


"Such larger throughput supports substantially higher average profits, enables dealerships to invest in facilities and other operations and enables competitors to attract the more experienced and highly qualified personnel," said Peter Grady, Chrysler director of dealer operations.


Grady said in a court filing that about 25% of Chrysler's current 3,200 dealers account for about 50% of the company's U.S. sales. Just over 50% of the dealers account for 90% of Chrysler's U.S. sales.


"Chrysler's larger dealer network also substantially increases expenses and inefficiencies in the distribution system," Grady said, "forcing Chrysler to spend additional resources on training ... processes, oversight of the dealer network, auditing and monitoring expenses."


Grady described the rejection of nearly 800 dealer agreements as an acceleration of Chrysler's Project Genesis, which has resulted in consolidation of hundreds of Chrysler-Jeep and Dodge dealerships under one roof. From 2001 to the end of April of this year Chrysler has reduced its dealer network from 4,320 to 3,188.


"We do not have enough production or sales to keep all the dealers alive and prosperous," said Jim Press, Chrysler vice chairman. "This is the way it is. We are a company working its way out of a Chapter 11 situation."


After closing these dealerships and combining some Dodge and Chrysler-Jeep franchises, 84% of all surviving dealership will sell all three brands. About half the dealers that will close sold fewer than 100 vehicles in 2008, Landry said.


In a statement today, the U.S. Treasury said President Barack Obama's automotive task force did not decide which dealers to cut.


The task force "played no role in deciding which dealers, or how many dealers, were part of Chrysler's announcement today," the statement said.


But the Treasury said cuts are necessary.


"The sacrifices by the dealer community ... are necessary for this company and the industry to succeed. And a stronger Chrysler, supported by an efficient and effective dealer network, will provide more stability for current employees and the prospect for future employment growth."

Rejected dealers will have until May 26 to file objections to this motion. Gonzalez will hold a hearing on the matter at 10 a.m. June 3.

There is no appeal process other than through the bankruptcy court hearing. Rejected dealers will receive no compensation for losing their businesses, which will no longer sell new cars and trucks after June 9, said Steven Landry, Chrysler executive vice president for North America sales and marketing.

[garbon]

So why did we ever give Chrysler money?

[Berkut]

The UAW is not an ordinary unsecured creditor.  If Chrysler were to go into Chapter 11, the reorged  company will still have to make some sort of deal with the union, even if the bankruptcy judge tears up the old agreement.  Agreeing to wage and benefit reductions up front creates value for the other stakeholders -- including the creditors who will be taking equity positions in the new company.  It is not unreasonable for the union to expect some compensation in the form of equity for that concession (though the particular terms of the deal at issue may or may not be - i haven't looked at it carefully enought to judge).

These are good points, except that they distract from the main point:

The UAW is a huge supporter of the Dems and Obama, so of course they are going to make sure they can shovel as many billions to them as possible. All the rest is cover.

[alfred russel]

So why did we ever give Chrysler money?

To get them on stable enough footing so that Fiat would agree to take them over.

[garbon]

To get them on stable enough footing so that Fiat would agree to take them over.

Yay?

[garbon]

I guess Obama was lying when he said he want to keep American jobs in America.

[Admiral Yi]

Heard on the radio that the secured bondholders caved under threat of having their identities revealed.

[Berkut]

Heard on the radio that the secured bondholders caved under threat of having their identities revealed.

Wow.

Tough to negotiate when the Unions have the president on their side, and he makes no bones about using his position to fuck you if you don't do as you are told.

Maybe Palin wouldn't have really been so bad...

[alfred russel]

Heard on the radio that the secured bondholders caved under threat of having their identities revealed.

Wow.

Tough to negotiate when the Unions have the president on their side, and he makes no bones about using his position to fuck you if you don't do as you are told.

Maybe Palin wouldn't have really been so bad...

I don't know the details of the plan, but I wouldn't be quick to assume that the bondholders got a raw deal. Without government involvement, the company would have liquidated, and presumably the deal struck is giving the bondholders the pittance they would have gotten in liquidation. The only reason Chrysler has value as a going concern is because of the government's money, and understandably the government shouldn't be keen on that going to bondholders.

I do understand that some bondholders will be upset that they aren't getting anything extra, while the bank and AIG bondholders often were made 100% whole.

[Berkut]

Why is it understandable that government money should all be shoveled into the pockets of the UAW instead of the bondholders?

I don't see that at all - if anything, it is the UAW that had a huge roll to play in driving the American auto industry into bankruptcy to begin with. Now Obama is making it clear that he isn't really bailing Chrysler or GM out, he is bailing the UAW out.

[Admiral Yi]

I don't know the details of the plan, but I wouldn't be quick to assume that the bondholders got a raw deal. Without government involvement, the company would have liquidated, and presumably the deal struck is giving the bondholders the pittance they would have gotten in liquidation. The only reason Chrysler has value as a going concern is because of the government's money, and understandably the government shouldn't be keen on that going to bondholders.

I do understand that some bondholders will be upset that they aren't getting anything extra, while the bank and AIG bondholders often were made 100% whole.

I'm not shedding any tears for the unsecured bondholders.  But it seems the secured bondholders basically got blackmailed into signing off on the deal.

[Neil]

Heard on the radio that the secured bondholders caved under threat of having their identities revealed.

Wow.

Tough to negotiate when the Unions have the president on their side, and he makes no bones about using his position to fuck you if you don't do as you are told.

Maybe Palin wouldn't have really been so bad...

Really, things are just returning to normal.  Persecuting and jailing your political opponents was long a perk of the presidency.

[alfred russel]

Why is it understandable that government money should all be shoveled into the pockets of the UAW instead of the bondholders?

I agree with what you are saying, though it is worth pointing out the UAW is taking a significant hit here, and they do need to go along with whatever plan is in place if Chrysler is to survive. They probably need some sweetener just to keep things orderly, while the bondholders do not.

[alfred russel]

I'm not shedding any tears for the unsecured bondholders.  But it seems the secured bondholders basically got blackmailed into signing off on the deal.

Maybe so, but from where I sit--which is an uninformed chair--they weren't pressured to give up more than they would have been entitled to in a liquidation; they were pressured not to demand a handout with the threat they would create a messy bankruptcy process.