Chrysler Update

Apparently, Chrysler is toast.  Which is what a lot of us were saying before taxpayers put billions of dollars into it.  (ht:  Maggies Farm)

Rumors, credible rumors, are beginning to circulate in the car industry and the automotive press, that Chrysler may not make it another year primarily due to its falling sales and growing financial losses at partner Fiat....

The Congressional Oversight Panel has already said taxpayers will not see most of the $81 billion that they put into the American car industry. The $14.3 billion put into Chrysler is more and more likely to be lost completely. The biggest single loser if Chrysler cannot survive is the UAW which owns 55% of the company.

I struggle to cry much for the UAW with that last part.  They only own 55% because the President intervened to give what should have belonged to the secured credit holders over to the UAW in exchange for being so helpful in getting him elected.

In January 2009, Chrysler stood on the brink of insolvency.  Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP).  Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler's secured debt.  The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler's secured debt, hinging billions of dollars in additional TARP funding on Chrysler's acquiescence.

When Chrysler's first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler.  Chrysler was thus able to avoid the "absolute priority rule," which provides that a court should not approve a bankruptcy plan unless it is "fair and equitable" to all classes of creditors.

I had more here.

Update: A firsthand account from a hosed secured creditor (pdf)

Details of the bankruptcy were unprecedented. For the first time in American history and totally counter to all established laws of bankruptcy, secured creditors would receive less than nonsecured creditors....

Indiana's legal filings in the Chrysler, LLC bankruptcy sale made three essential points: First, the bankruptcy laws which have been in place protecting the rights of secured creditors cannot be arbitrarily overthrown by an act of the Executive. This is a violation of Article I, Section 8 of the U.S. Constitution in that Congress is solely assigned the role to determine uniform bankruptcy law. Neither the Courts nor the Executive can do this arbitrarily. Our funds suffered a "taking" in violation of the Fifth Amendment in that there was no "due process of law". There was, and is in all financial arrangements between debtor and creditor, a contractual relationship, which is here being rendered null and void. If allowed to stand, this violation of two party contracts undermines a basic and essential tenet of debt financing in the capital markets.

Second, money provided by the federal government to Chrysler is being provided illegally and clearly counter to the intent of Congress. When TARP was being debated then Secretary of the Treasury Henry Paulson testified the money was NOT for the auto companies. It was targeted to aid the ailing financial industry, i.e, those with "Troubled Assets" that needed a "Recovery Program." Evidence that the money was NOT intended to be an automotive bailout bill could not be more clearly illustrated than to review the failure of the separate automobile bailout bill presented in Congress in December 2008. If Congress had intended the TARP bill to cover the auto companies when it passed in October 2008, why were they even attempting to pass a separate automobile bailout bill just two months later? We believe both the Bush and Obama administration have acted illegally in this use of TARP funds.

Third, we argue that a sub rosa or "under-the-table-arrangement" between the Treasury and Chrysler prevented a fair valuation of the assets. In a legitimate auction sale, no potential bidder would be allowed to set the value of the assets being auctioned. But that is precisely what happened in this case as the Treasury was assigning values to creditors, determining which assets would be liquidated, what new parties, (i.e., Fiat SpA), would be brought into the deal, and how a new dealership network would be defined, etc. It was known from the outset that when the Chapter 11, Section 363 sale of the assets would occur, there would be only one bidder: the U.S. Treasury. Secured creditors could not have their rights protected or fairly valued in such an arrangement. Such an "insider-deal" reeks of impropriety.


  1. feeblemind:

    One wonders what will happen if Chrysler runs out of money in a year? An election year. One also wonders if there is a significant percentage of car buyers that sees through the injustice of the bankruptcy charade and as a result won't buy GM/Chrysler at any price?

  2. gmsc:

    If unions keep getting preference over shareholders in companies (especially bankruptcies), the obvious rule will quickly become to avoid investing in unionized companies.

  3. L Nettles:

    You know I had just about forgotten Chrysler even existed.

  4. Allen:

    Not surprising to see this turning out to be the case. As much as Fiat tried to say they were into this deal, they didn't seem willing to sink much into it.

    Question -- Is there anything going on legally right now in regards to some of the issues raised by this deal?

  5. Tim:

    And, what's worse was the shotgun marriage between Fiat and Chrysler at the insistence of the president.

    First, it's an extremely poor fit between the two companies. While there is not a lot of product overlap; Fiat does not have the design and engineering discipline that will lead to long term success. (The only reason that Fiat had cash at all was because they started a merger with GM; and GM paid US$2b to walk away from the deai.)

    Second, Fiat didn't do due diligence. Chrysler's product pipeline is *empty* -- and this came as a surprise to Sergio Marchionne. Outside of the new pickup, and a minor freshening on a couple of their sedans; their closest new product is at least two years out, and Fiat is 12-18 months away from having any of their European market cars federalized for sale.

    Last, Fiat's product plans for Chrysler are absolutely asinine. In the last plans I saw, they planned on repositioning Chrysler as a high and luxury nameplate slotting *above* Lincoln and Cadillac; and Dodge as a 'driver car' (e.g. BMW). That's going to take decades -- if they can pull it off at all.

  6. K:

    re Fiat: The guy running Fiat believes that Fiat had to get big or die. They couldn't remain a second-tier or third-tier company. So Fiat has made several alliances or purchases in the last few years that didn't seem highly attractive to other car companies. Chrysler is one.

    But they aren't going to put a lot of cash. I think they wanted access to Chrysler's dealer network and US distribution. In return Chrysler got access to a lot of Fiat technology. But that costs Fiat almost nothing whether Chrysler revives or fails.

    I don't fault Fiat's plans about how to survive in the auto industry. Those are their choices and they have a right to make them.

    OTOH Tim is right, Fiat overvalued what remained at poor Chrysler and seems stuck on stupid about what to do.

    What will happen when another 200,000 auto related jobs vanish in Michigan is everyone's problem. O will wish to inject more money into Chrysler. Politically I don't think he will be able to. His repeated pattern is to still do what he wants but rename it and call it a new idea. It will be interesting.

    I am dubious about a GM recovery too. But we won't face that until after the 2010 elections.

  7. perlhaqr:

    feeblemind: I don;t know how broad this sentiment is, but I'm generally a "mopar guy" and now, I'd never buy a Chrysler product again. Which sucks, because I think they do make the best light duty diesel trucks out there. Ah well, that's what the used market is for.

  8. Doug:

    The current administration wants to investigate the legality of the previous one's interrogation techniques, maybe the next will want to look into this.