George Schultze, who runs Schultze Asset Management Co., a relatively small player in the vulture fund community, explains why getting crushed by Steven Rattner in the Chrysler case sets a bad precedent.
“It’s terrible precedent,” said Schultze. “The sad thing is it impacts the manufacturing sector and the companies that have legacy liabilities directly. It will be nearly impossible, or much more expensive, to get secured financing for these type of companies.”
Yes, it’s a terrible precedent, Mr. Schultze, it was the government standing up for taxpayers, and making gamblers like you eat their losses. It’s called cramdown, and it is explained in simple words by another hedge fundie:
“If you’re being paid more than what you would be paid in a liquidation, then the contractual obligation has been met,” said Hindes, whose firm oversees about $526 million, according to a regulatory filing.
That would be Gary Hindes, managing director of distressed investments at Deltec Asset Management LLC in New York, a firm which had better sense than Mr. Schultze and didn’t buy any Chrysler debt. Bloomberg writer Caroline Salas knew enough to ask for a quote on the actual law:
The U.S. bankruptcy code allows for workers to get preference over bondholders, said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm, who isn’t involved in the GM negotiations. Section 1114 of the bankruptcy code requires that a debtor “timely pay” all “retiree benefits” unless the bankruptcy court orders otherwise or the authorized representative of the recipients of those benefits agrees to other treatment, he said.
And indeed it does. Apparently Mr. Schultze bought a bunch of Chrysler debt at distressed rates, in the face of its financial problems, without knowing basic bankruptcy law. Or maybe he thought there was strength in numbers, that he would be protected by bigger lenders. Or, maybe he really likes the Chrysler assets, and would like to have some, maybe a robot riveter to amuse the kids. Or maybe he’s just not competent at asset evaluation.
Most likely he thought Obama and Rattner would cave.
"The plan was to call the government’s bluff. The game was to game the government," said a manager of a distressed-debt fund.
Is that an anonymous Mr. Schultze? Whatever, that plan didn’t work out so well. The Wall Street Journal’s Neil King Jr. and Jeffrey McCracken give us this delightful word picture:
President Barack Obama’s auto task force heard a blunt message early this spring from J.P. Morgan Chase & Co., the largest lender to Chrysler LLC. In any deal to remake the troubled auto maker, Chrysler would have to repay its lenders all $6.9 billion it owed.
"And not a penny less," said James B. Lee Jr., vice chairman at the bank, in a call to auto task-force boss Steven Rattner on March 29.
The next day, Mr. Obama called the banker’s bluff. The president stepped before a podium to announce that Chrysler could face a disorderly bankruptcy or even liquidation. His meaning was clear: If that happened, the lenders would get nowhere near $6.9 billion.
A few hours later, Mr. Lee called Mr. Rattner back. "We need to talk," he said.
King and McCracken were sucked into the Schultze view on a major point, though, the idea that secured creditors get paid before anyone else. Nonsense, as Mr. Hindes points out. You get what your worthless assets are worth. Mr. Lee saw more clearly than Mr. Schultze that they had no bargaining position: they couldn’t liquidate those factories for anything like the money Rattner offered.
Mr. Schultze takes another beatdown from Bloomberg: his claim that the government’s brutal treatment of the poor lenders means the cost of loans to companies like Chrysler will go up is thoroughly debunked by actual reported facts.
Wouldn’t it be great if political writers knew as much about politics as Salas, McKnight and McCracken know about business.