Thursday, April 30, 2009

Chrysler Goes Bankrupt

There are a few things in this story that make me want to comment. 

US carmaker Chrysler will file for Chapter 11 bankruptcy protection immediately and has formed an alliance with Fiat, President Obama has said.

Remember when the CEO or company spokesman would make an announcement like this?  It says something about where we’ve come when the President of the United States is announcing that one American company is filing for bankruptcy. 

The move came after talks had broken down with Chrysler’s lenders late on Wednesday, the White House said.

There’s a reason they broke down.  It was a crappy deal for the lenders.  The government was offering to give the lenders $2.25 billion in cash if they would forgive $6.9 billion in loans.  The problem with that offer is that the loans are secured.  These aren’t unsecured loans where the lenders may be happy to take pennies on the dollar because it’s better than nothing.  There are assets being used to secure these loans.  If Chrysler can’t pay the loans, those assets will be liquidated to pay them.  So why would a lender accept roughly 30% payment when they could get it all back?  These lenders have a responsibility to their owners and they did the right thing. 

The White House official accused the hedge funds of a “failure to act in either their own economic interest or the national interest”.

The White House is continuing to demonize businesses.  First of all, it is debatable whether cutting Chrysler any slack on their debt is in the “national interest.”  Many folks think that letting them file bankruptcy through normal channels would have been the best thing for them.  Second, this isn’t fictional money.  The lenders laid out billions in cash to Chrysler.  If they don’t get it back, it will hurt their businesses.  Why should they sacrifice their own businesses in order to save Chrysler? 

But consider the larger picture.  Here you have companies that loaned money to Chrysler in good faith.  Now they are being demonized by the White House for doing exactly what they should be doing - lending money and collecting the repayment of the loan.  Given the administration’s proclivity for arbitrary economic action, statements like this insert much unwelcome uncertainty into the credit market.  Whose to say that the administration won’t step in and force a deal like this on lenders - like they are doing to the shareholders of the banks and GM?  Why would a company loan money when it not only runs the risk of the actual loan, but the additional risk of public condemnation by the government, or worse, a government-imposed modification to the contract? 

Details are yet to be revealed but Fiat was seeking an initial 20% stake in Chrysler, which would then rise to 35% and could even reach 51%.

The Italian firm will not have to pay anything for the share, which will give it access to the North American marketplace.

In return, Chrysler will be able to take advantage of Fiat’s expertise in making smaller, more fuel efficient cars.

This appears to be idiotic to me.  Sure, Chrysler may want to learn a bit more about how to build smaller, more fuel efficient cars, but there is absolutely need to give away a fifth of the company for it - much less give away a majority stake.  I’m not sure why Obama is insisting that Chrysler outsource the ownership of the company to a foreign company, but it strikes me as very stupid.  If Fiat was giving Chrysler something - like cash or assets or dept payments or anything - then it would justify some ownership.  In this case, they are gaining a major stake in an American company for an undefined, unmeasurable transfer of supposedly superior knowledge about how to build small cars at some point… maybe.  Wow.  Where do I sign up for that deal?

Meanwhile…

Daimler said earlier this week that it would now be giving up its remaining 19.9% stake in Chrysler.

Under the deal, Daimler said it will also write off Chrysler’s outstanding loans, and make three annual payments of $200m into the Chrysler’s pension plans.

...we have Daimler paying just to cut loose of this mess. 

Telling. 

Finally, there’s this:

Chrysler will receive a further $8bn (£5.4bn) in government aid, up from the $6bn the Treasury had promised it if it had successfully restructured the business by midnight.

The government set a deadline for Chrysler to fix itself in order to get more taxpayer money.  They missed the deadline, so what is their reward?  They get even MORE taxpayer money.  Great.  Our government at work rewarding failure.

(7) Comments
Posted by Owen at 1703 hrs
Economy + Foreign Affairs + Politics + Politics - General

  1. This is just another joke by the administration.  If they seriously thought this proposal would be approved by the lenders, then they are stupider than we think.

    Posted by .(JavaScript must be enabled to view this email address) on May 01, 2009 at 0006 hrs


  2. Obama is trying to jawbone to save the <strike>company</strike> UAW. The UAW got a heck of a lot of Chrysler by trading in their unsecured debt, and the secured debtors got virtually nothing. To say that Obama was playing favorites is putting it mildly.

    What gets me is that Fiat is getting a complete handout. It’s getting a run around the tariffs and CAFE rules that make it harder for an “import” than for one of the “Big 3.”

    Overall, I’m glad the hedge funds that Obama is characterizing as unAmerican are fighting his vision. Not that they had much choice. If they didn’t fight this battle they’d be fighting their investors for their lack of fiduciary duty.

    Posted by .(JavaScript must be enabled to view this email address) on May 01, 2009 at 0029 hrs


  3. Does anyone believe Obama could even successfully run a high quality produce department in a grocery store?  I believe this man could not.  And he’s dictating the direction of all of this.  This is the beginning of the end of GM and Chrysler, billions and billions of American $$$ and tens of thousands of American jobs….

    Posted by .(JavaScript must be enabled to view this email address) on May 01, 2009 at 0645 hrs


  4. Read between the lines, Owen.

    1)  Cerberus is the owner, and they have $Zillions.  THEY didn’t want to throw more money in to pull Chrysler out of the fire, which means:

    2)  Chrysler is worth zip.  Nada.  Zero.  THAT is why Fiat won’t put money into the damn thing.

    Now we have at least three Zombies:  Citi, Bank of America, and Chrysler….

    Posted by dad29 on May 01, 2009 at 0848 hrs


  5. Chrysler isn’t worth zero, Chrysler is worth at least what it can be liquidated for.    The bond holders have determined, probably entirely correctly, that their return from a liquidation would exceed the return from this deal.

    Posted by .(JavaScript must be enabled to view this email address) on May 01, 2009 at 0859 hrs


  6. What is worse is that Fiat isn’t know for their reliability (which is Chrysler’s biggest issue) and their fuel economy comes from the diesel engines, which can’t be brought into the US because California, NY, MA have such stupidly high and ridiculous emissions standards.

    Posted by Clint on May 01, 2009 at 0955 hrs


  7. Greatest work - I have position the script on my Christmas wish list and contributed it to my blog situation.
    Thank you for alarming me to your position - I don’t read every post completely, I know, and this one slipped past my microwave radar.


    Repair Credit

    Posted by .(JavaScript must be enabled to view this email address) on May 04, 2009 at 1341 hrs


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