Avoiding Bankruptcy to Hose the Creditors in Favor of Politically Stronger Stakeholders

I have predicted it a number of times vis a vis Chrysler, including back in February:

It is criminal that this [restructuring plan] is going to Congress, not a bankruptcy judge.  This is a conspiracy of management (looking to hold onto their jobs and equity), equity holders, and employees to usurp value from the senior debt holders, who would normally be first in line in a bankruptcy.

or in March:

there is a clear set of winners and losers in a bankruptcy "” and there is enough case law on it that all the players at GM know it and they know into which category they fall.  Those who are lower down the food chain are hoping that putting the restructuring in Obama's hands rather than those of the bankruptcy process will improve their outcomes.

Oh, gee, you say, the Anointed One would not be so crass as to used this way, would he?  From Megan McArdle

The government is trying to play hardball with the Chrysler creditors, asking them to accept 15 cents on the dollar when they're likely to get more in a liquidation.  That's not a haircut; it's more like what they do to you the first day of boot camp.


  1. John O.:

    "Privately, the lenders contend that the government offer was unfair." (from the Washington Post)

    Nothing in government is fair! They sold their soul to the government over an economic crisis and now the government is cashing in the check.

    -- John O.

  2. JohnB:

    This has to have a significant effect on the future market in corporate bonds. The idea of collateral backing has just gone "poof".

    If no one is allowed to fail, can anyone really succeed?

  3. morganovich:

    banks lend and accept collateral based on well established and understood procedures in the event of default and bankruptcy. now the government seeks to circumvent this and force them to take bigger losses because they were given help. this is obviously cut from the same cloth as the "cramdown" legislation.

    in a certain sense, one must admire the sinister beauty of this. the unions and an utterly failed car maker get bailed out without taxpayers realizing they did it. at the same time, the banks take a big hit, it’s harder for them to pay back TARP and they look like the black hats here.

    if I were trying to cause a total cessation in lending to any but the most successful of enterprises, this is certainly how I would do it…
    especially galling is this comment from the Michigan rep whose district includes Chrysler:

    "These are banks that have received substantial investments from the government," said Rep. Gary Peters (D-Mich.), whose district includes Chrysler headquarters. "We hope they will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs. People are angry that again it seems like the banks are standing in the way."

    um, it was an investment, not a gift. in several cases, it was forced upon banks that did not want it (including a couple in the Chrysler lending consortium) it needs to be paid back, with interest. what you are asking for is a gift… I would ask whether he is (a) shameless or (b) stupid, but I fear the answer is (c) both

    that the administration can at the same time berate banks for not lending while consistently pushing policies making it less attractive to do so just beggars belief.

  4. Corky Boyd:

    The problem the Obama administration has with GM is there is no business model to profitability without drastic changes to the UAW contract. And it's not just cost per hour equity with US manufactured imports, it's who controls the shop floor, it's the endess greivenences, it's the ability to strike individual plants even when a national contract has been ratified.

    The Obama advisors planned on solving the UAW/GM problem by making the imports suffer the same fate of organization through Card Check. There isn't time for that now and they know the UAW is the drag.

    It is likely they will stall and "force" GM to declare chapter 11, and let GM do the dirty work to the UAW.

    The bond holders are not caving and can also force a Chapter 11, or worse, despite the adminstrations pressure on them. If the adminstration tries to make them to take 20 cents on the dollar, they will go to court.

    You are right. The administration has everything backwards. They think thier unsecured debt takes precedence.

  5. Tim:

    This is obviously a strong-armed attempt by the administration to save face. They put a drop-dead date on their support. Fiat, which is interested in linking up with Chrysler, is simply choosing to wait until Chrysler gets liquidated in Chapter 7 to pick and choose what they want at fire sale prices.

    The administration overplayed their hand; and Fiat is calling the bluff. I'm beginning to suspect that the Obama administration isn't as smart as they think they are.....

  6. mishu:

    I’m beginning to suspect that the Obama administration isn’t as smart as they think they are…

    But, but he went to Harvard.