Thursday, April 30, 2009

Chrysler Goes Under

Image credit: gwylow71.

The headlines were the first thing I saw when I got to Google News today:

April 30 (Bloomberg) -- Chrysler LLC, the automaker that survived a near-death experience in 1979, filed today for bankruptcy protection to streamline operations and shed debt in a reorganization that includes Italy’s Fiat SpA as a partner.

The iconic company, third biggest among U.S. automakers, missed a U.S. government deadline to come up with a restructuring plan by today that was rigorous enough to avoid bankruptcy and qualify for more bailout aid. The carmaker tried to negotiate an alliance with Fiat, reduce $6.9 billion in secured loans and cut $10.6 billion owed to a pension fund. Some lenders refused to slash the debt to $2.25 billion.

Chrysler Files for Bankruptcy to Seal Fiat Accord

By the standards of my own finances, this is all a bit complicated. Apparently, the Obama Administration has worked things out so that Fiat can now assume a bigger stake in Chrysler, who in turn will promise to produce a more fuel efficient car:

The U.S. government will appoint four of the nine board members of the new Chrysler, with alliance partner Fiat naming three and the UAW and Canadian government naming one each.

And as one of the conditions of Fiat boosting its stake in Chrysler from 20% to 35%, Team Obama is requiring Fiat-Chrysler to design and build a 40-miles-per-gallon car in the United States.

Team Obama Sends Message

Who were the "some lenders" to whom the Bloomberg article referred? Apparently, they were hedge funds. At least that's what the Obama Administration is implying:

President Barack Obama criticized Chrysler LLC lenders including hedge funds and other financial institutions that turned down administration loan-reduction proposals, forcing the automaker into bankruptcy.

“I don’t stand with those who held out when everyone else is making sacrifices,” Obama said today in Washington where he announced that Chrysler would proceed with a Chapter 11 bankruptcy filing to reorganize into a more viable carmaker in a partnership with Italy’s Fiat SpA.

Obama Criticizes Chrysler Lenders, Hedge Funds That ‘Held Out’

Oh, yawn., more lip service. I think Marcy Wheeler summarized how that's going to go pretty well:

The Administration claims they'll be able to pull off a surgical bankruptcy and still pull off the Fiat deal on the other side, leaving Chrysler with some lease on life. But meanwhile, the banksters get to collect on their bets against Chrysler and get rich rich rich! All while sucking at the Federal teat.

JP MorganThe Banks Forces Chrysler into Bankruptcy

As Marcy points out, it would appear that in the end J.P. Morgan was willing to deal, according to Salon magazine's Andrew Leonard:

The holdouts are no longer the big four banks (and TARP recipients) that together own 70 percent of Chrysler's debt. Both the Journal and the Washington Post have fingered three hedge funds -- Oppenheimer Funds, Perella Weinberg Partners' Xerion Capital Fund and Stairway Cap Management -- as the sticklers. The government is faced with the unenviable prospect of getting unanimous consent from all the bondholders to make a deal, which gives the hedge funds extraordinary leverage. In the parlance of Wall Street, taking a hit on what you are owed is known as a "haircut." The hedge funds seem to be allergic to the barbershop.

Obama Versus The Hedge Funds

I have no idea if it's true in the case of these hedge fund's stake in Chrysler, but many times the idea of a hedge fund is that it pays off when things go badly. If I were they, I'd have been counting on Chrysler doing badly these last few years. That they held out doesn't surprise me terribly.

What does all this mean? If the deal goes through, and I suspect it's theoretically possible that it won't, then Chrysler will remain as a somewhat independent, albeit diminished, automaker. That's a good thing, both for Chrysler employees and consumers. Detroit Free Press's Susan Tompor explains what Michigan hopes to get out of this:

The theory is that some auto plants would be bound to stay open in Michigan with a deal than would otherwise remain with a full-fledged bankruptcy liquidation. Some Chrysler suppliers and dealers are bound to survive, too. It’s a logical conclusion and one that everyone hopes proves to be correct in a state battered by job losses for several years.

“The impact on Michigan is light years better,” said Sean McAlinden, chief economist for the Ann Arbor-based Center for Automotive Research.
McAlinden estimates that about 80,000 jobs in Michigan depend on Chrysler now, including suppliers and spin-offs.

“We’re not going to save all 80,000 jobs, but we’re going to save 40,000 or 50,000,” he said this morning on news of the Chrysler-Fiat deal and the limited bankruptcy plan.

Bankruptcy Better Than No Deal

It's not great news, but it's probably about as good as could be hoped for, given the lack of debt relief. How much of a "haircut" those remaining autoworkers and the company's suppliers and dealers will take is also an open question.

What this will mean for the financial industry is pretty clear, and emptywheel's already summarized that for me. Tom Walsh of the Free Press has a different take:

Obama blamed “a small group of speculators” for forcing the Chrysler rescue into bankruptcy court, knowing full well that 99% of the public regards such speculators as sleazeballs.

Ding. Score one for the prez.

If a bankruptcy judge buys Team Obama’s argument that the hedgies should take the same haircut the banks and other financial outfits took, then score another one. Ding!

Team Obama Sends Message

The problem with that logic is best illustrated by the bright purple line on this graphic. It's a slide from an article at Afferent Input about the growing income disparity in America. [click on it to enlarge]

The problem with Tom Walsh's logic is who that 99% of the population is. None of them are running the financial industry, and damn few of them are Congressmen or decision makers within the Administration. President Obama appears to have a mind that's flexible enough that he might decide at some point to buck the financial industry. He will only do it if he thinks they're more of a liability than an asset, though. As for the rest of Congress, I've seen so little sign of intelligence there that I sometimes think we need to replace the Sergeant At Arms with a zookeeper. They're bright enough to know where their next meal is coming from, though, and it's not coming from you and me.

That other one percent of the population are the folks who have been making money hand over fist for the last few decades at the expense of the rest of us. In this chart they're the ones whose line is going up, while all the others don't. For all practical purposes, they own Congress. They don't give a damn what we think, nor do they need to until we show that we can prevent them from making money.

In short, I'm not holding my breath for this to come back to haunt the financial industry. If I see some concrete action out of either the President or Congress, then I'll reconsider.


Dana Hunter said...

I'm glad you're not holding your breath. Oxygen deprivation can be deadly.

Cujo359 said...

Yes, I suppose I'm not going to hold my breath in any case. Even the simple things seem to take forever in DC.