I have no opinion on whether or not the Supreme Court has the authority to hear the case on the role the U.S. Treasury had in the Chrysler rescue, but the underlying charge — that the bond holders got ripped off because the TARP loans were made in the first place — is complete bunk.
I wrote about it a couple of weeks ago when WATB hedge fund managers were riding around in the WAAmbulance claiming Obama "burned" them, but in a nutshell — the time to complain was when the government gave Chrysler money in exchange for first position secured creditor status. Since Cerberus was spending millions lobbying for that to happen last year, we can pretty safely assume it was something the bond holders favored:
In early 2008, Bill Gross — chairman of the world’s biggest bond fund, Pimco — started shifting the company’s investments into mortgage debt backed by Fannie & Freddie, because he was sure the government would bail them out. "We looked for assets that we felt the government would eventually have to own or support," said PIMCO’s Mohamed El-Erian.
Gross did the same thing with GMAC. "We tried to move ahead of the government," says Gross, "to purchase assets before we believe they will have to." Gross famously called it his "shake hands with Uncle Sam" plan. It’s been hugely lucrative for PIMCO and others, because the government did indeed step in and pay everyone off handsomely. In an era where the finance sector will no longer comprise 41% of GDP by milking a huge economic bubble, everyone is looking to taxpayers cleaning up after their own shady business practices as the biggest potential profit center.
So the co-investors that came together in 2007 to stupidly blow $6.9 billion on the Cerberus buyout of Chrysler thought they had gold on their balance sheets for an otherwise worthless investment. Their loans were in first position and secured, which meant that even if the company got chopped up and sold for parts, they’d be entitled to whatever was left in the event of bankruptcy.
Only that didn’t happen. The UAW’s VEBA trust had a $10.6 billion lien (and junior creditor position) against Chrysler. In bankruptcy, the judge gave the VEBA trust 55% of the stock, or .43 on the dollar for their investment, and the first position creditors got .30 for theirs, or so went the popular math.
"Long story short, a junior creditor was able to leap the senior-most creditor and in the process make a mockery of longstanding US bankruptcy law…capitalists have no choice but to sit up and take notice," said the cowering Eric Landry of Morningstar.
“The creditors’ rights were trashed and the unions got 55 percent of the company,” said "afraid to speak out" Jack Welch.
Gee, what’s missing from this story. Oh yeah:
- The US government has already dumped $7 billion into Chrysler.
- At that point, taxpayers became the "super senior creditors." That’s what it means when it says "debt owed to the government would be senior to other debts."
- As Steven Pearlstein and others have observed, the secured debt had a street value of .30 on the dollar — exactly what the hedge funds got.
- Had the government not loaned the $7 billion already, that secured debt would have been worth about zero cents on the dollar.
- The US government will take 8% of the company, which means they’ve essentially just transferred the bulk of their first position interest to the UAW and all other Chrysler stakeholders — they haven’t robbed the hedge funds crybabies of a dime.
In other words, Jack Welch and the rest of the corporate welfare set just assume that the government investment should go to them. As Pearlstein notes, the hedge funds were free to pump cash into Chrysler too and mitigate the need for government intervention, but they didn’t. They wanted to be cocooned from risk by the taxpayers and screw the workers too.
They’re incapable of seeing that the government acted not to help its "big labor donors" (which is garbage — finance dwarfed labor in direct contributions to the Obama campaign). The goal was not to give a way a bunch of money, but to keep Chrysler’s collapse from triggering a wave of 2 million job losses that could have precipitated a global economic meltdown.
If Chrysler is going to keep making cars, someone has got to work there. That’s part of the plan. And mewling hedge fund managers would have been eating well-deserved dirt on their entire investment had the government never stepped in, bailed them out, and given up their first-position status, which they’re entitled to do.
That’s capitalism.
Look, I’m sorry that pension funds got hit. But the idea that they suffered adversely because of the the government’s loan is ludicrous, and certainly not one that they made at the time. Chrysler would be a smoking hole without those TARP funds, and the bond holders got a fair price for their assets. Beyond that, they’re just trying to shake down the federal money tree to see what falls out.
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Thanks Jane for making this so accessible.
You can be sure that “No Empathy” Roberts will rule as he always has, against anything that resembles justice for the common man.
Excellent post, Jane.
hey mz hamsher .. very nice nutshell summary of a sticky wicket ..
and imo ..SCOTUS shouldn’t even be involved in this .. there are no conflicting opinions from various courts which need to be clarified by a ruling here from SCOTUS .. so how’d it end up on USSC’s docket anyway ??
and i luv the WAAmbulance image .. the WAAmbulance is what responds when you call whine-one-one
like that example of American made iron
a metaphor for the dying US auto industry
Jack Welch needs to retire and go fishing. Preferably someplace very far away, out of sight and hearing of media.
The man is in no small part the reason why we are in this mess today; his capital management methods made normative the practice of borrowing long-term debt to pay down short-term debt in order to keep shareholders (including himself) happy. He has been an opponent of Sarbanes-Oxley — as if less regulation would have prevented our current economic debacle.
It’s interesting to me that certain progressives like to quote “the rule of law” so passionately when seeking to defend their position on other issues like the release of more torture photos . . . but they choose to conveniently ignore the “rule of law” when it comes to this issue.
The law is crystal clear . . . secured creditors get paid back first and most importantly, they get a hearing (which they didn’t) to make their case as to whether what they were going to be paid was fair or not. This has never happened before and economic hysteria aside that is what the law calls for. Period.
Morning All :)
Sorry OT already (Big surprise there..lol), but this situation is getting worse, not only for all the folks who are fighting ‘Big Oil’ but also the cost to us who drive (increasing gas prices)
Oil Companies ‘Should Withdraw’ From Peru
Tuesday, 9 June 2009, 2:21 pm
Press Release: Survival International
Oil Companies ‘Should Withdraw’ As Peru ‘Faces Its Tiananmen’
Survival International today called on all oil companies operating in the Peruvian Amazon to suspend operations as the country comes to terms with the worst political violence since the Shining Path insurgency in the 1980s.
The companies include Anglo-French Perenco (a major gas supplier to the UK), Argentina’s PlusPetrol, Canada’s Petrolifera, Spain’s Repsol, Brazil’s Petrobras and many others.
SEARCH NZ JOBS
Violent clashes on Friday between Amazon Indians blockading roads and rivers, and police and army units intent on breaking up the protests have left dozens of Indians, and at least 23 policemen, dead.
http://www.scoop.co.nz/stories/WO0906/S00067.htm
Rayne and Jane,
been meaning to hunt this down and post it
Maria Bartiromo’s TragiComedy Meeting of the Minds on CNBC last month. caught it by sheer accident and could not look away once it started. Panel made up of the usual Masters of the Universe suspects – incl Mr Welch
not that either of you has 46 minutes to waste on this “very serious” piece of journamalism – but you may find it interesting…or at least handy in the event of insomnia
You’ll Laugh, You’ll Cry
lotsa coverage of this tragedy over at Big Orange
This is in Ginsberg’s hands now and no other, unless she chooses to invite her fellow justices to the party. So we needn’t worry about Roberts yet.
I think that stay is just to give her time to get through the documents. I doubt she’ll find anything that’ll involve the Supremes and she’ll dissolve her stay.
Redfish@6: Check your laws. The goverment had a majority of the creditors signed on to the plan, both in number and in dollar amount. It would quite uncommon for a BK judge to set aside the plan based on the objections of one creditor.
Boxturtle (Bankruptcies are ugly. People get screwed in accordance with the law every day)
There are no regulations governing hedge/vulture funds* whose aim is to operate out of reach of the law as much as possible.
* Vulture Fund – a fund or investment company that seeks to profit by buying distressed investments, seeking a high return in the future on a bargain priced purchase. In the private sector, vulture funds buy assets such as bonds near or in default or equities near or in bankruptcy. Debt cancellation advocates are focused on a particular subgroup of vulture funds – those that target distressed sovereign debt. These companies buy up the debt of poor countries at a big discount from the original owner (either a government or a commercial creditor) with the purpose of suing the indebted country in court once the poor country has some money (often after debt cancellation) to recover the original face value of the debt, or close to it.
One question that I have not seen answered is was the UAW consulted or did they have any power to subordinate their position to the investors or did management come in and make promises to the investors without concern for the long standing position of the union membership.
Are Pension Funds Hedge funds? No. Three state pension funds hold about $42 million of Chrysler’s $6.9 billion in secured loans.
The ontract states secured bondholders are entitled to the underlying collateral which was used to secure the loans in the event of default. While unsecured have no such guarantee.
The sad thing is that Ford’s going to be punished horribly for playing by the rules and making smart decisions.
Sorry, but I’m not buying from Government Motors or Chrysler. I’m voting with my wallet and buying Ford.
State pension funds whose irresponsible fiduciaries invested retirement money in high risk Cerberis investment vehicles.
That does not matter. Laws governing bankruptcy are clear. It is the law. Secured bondholders have the right to a hearing and get paid out of whatever company assets remain.
Please be honest ok? You just want to favor the workers and not the investors. No matter what the law says.
Did the Indiana pension funds invest in Chrysler directly or did they invest in ceriberus?
It does not matter, Ceriberus bought Chrysler from Dailmler.
It’s in the investors’ best interest to favor the workers, even if that’s the case, in this instance.
@17 So far as I can tell, Indiana et al. invested in Cerberis. State pension funds across the country jumped in head-first as soon as bond ratings went crazy-ape bonkers.
Same as back in the day when the US govt bailed out Chrysler, that debt was the first one paid back.
Just a question. How is it that the MSM is not correcting the rethugs who are blaming Obama for what bush did? The GM “Bailout” comes to mind.
When did the “popular press” the MSM stop saying that all these “bailouts” are actually loans that have to be payed back first? Or did they ever tell the sheeple? Does the MSM itself understand that these are loans not gifts? Do the rethugs actually believe the term “bailout” means that their will be no payback? Perhaps the word “bailout” itself is not the correct term
I probably don’t understand the deals very well, but wasn’t Ford so cash strapped some time ago that they mortgaged the company and are now “lucky” enough to be sitting on that cash? Like was just pointed out — these are not gifts. I don’t see how Ford’s being “punished” at all.
What about the clearly stated bankruptcy law don’t you understand? Secured bond holders are entitled to be paid first and to a hearing on what value the remnants of the bankrupt company have. Period.
The law doesn’t start or end with periods.
It does in this case. Let’s say you invested in a local business and in exchange for terms your investment was secured by the value of the company’s assets. And other investors according to their terms received no security to protect their investment. If the company went bankrupt, the law clearly states that secured investors, meaning you, are paid first out of any assets the bankrupt company has left. And, you are also entitled by law to a hearing as to whether the disposition/sale of the company’s assets was fair as judged by market standards.
That is the law.
thanks for that, I’ll squirrel it away for when I need a soporific.
Welch should be persona non grata, just as Rush and Gingrich should be — but he likely still throws a lot of financial and political weight at NBC/CNBC as the person responsible for their acquisition by GE.
The federal takeover of GM and Chrysler is probably going to leave Ford in a major bind. With the feds controlling their competition, isn’t that a little unfair?
If I’m a reluctant shareholder in GM, as Obama said, can I sell my shares now?
Just so I’m clear, given all the willful ignorance and noise on this bankruptcy stuff, I’m going to block out a lay business person’s understanding of what happened, without sloganeering about laws and “periods” and the golden thread of bankruptcy law.
Basically, the moral of the story is that new financing comes with new terms. Once enough creditors accept the terms, the company’s asset pie gets resliced and the collateral reapportioned to reflect the new reality. The new reality is that the guy with the money is the one that sets the terms.
First, secured creditors do NOT have the right to recoup their whole investment. That’s why it is a bankruptcy. They only have the right to whatever their particular collateral will bring on the open market, less whatever commissions and fees are involved. So, while the collateral may be worth enough to cover the debt at the time the loan is originated, it may not come anywhere that during a bankruptcy.
In Chrysler’s case, I wonder what a specialized custom-built, somewhat elderly, less-than-state-of-the-art assembly line for full-size, American pickups and SUVs goes for on the American market these days? Or a foundry for big iron V-8 engine blocks? Talk about an impossible-to-value toxic asset! In a recession, even the demand for scrap gets depressed, so selling it to the junk man would not bring a lot.
I therefore assume the bondholders could only get $.30 on the dollar because that is what their collateral would sell for now on the open market. This was the best-case upper bound on what the secured creditors’ could get in liquidation. To get more someday, someone would have to offer Chrysler new financing, so that it could remain a going concern and have a chance to earn enough to pay back more of its debt.
As I understand it, when the government offered the TARP money, it presented itself as a new investor, just as a hedge fund or a bone-picker capital company might. Like any new investor in a distressed firm, it set terms. Naturally, these included a concession from the existing creditors: a secured position senior to the existing senior secured creditors, so that the new, riskier loan would be secured by adequate collateral. I presume that this deal is attractive to the existing secured creditors to the extent that it offers them the chance to make more than $.30 on their dollar from the refinancing.
In this case, the creditors refused the deal initially, presumably because they thought they could hold up the US for more by leveraging the potential collapse of the company and the unions. Presumably, it didn’t work. The secured creditors only succeeded in forcing the company into bankruptcy.
I don’t see what they honestly had to gain by this. Their collateral was still only worth the $.30 on the dollar if the company were liquidated. The point of a bankruptcy proceeding is, presumably, to maintain the company as a going concern so that it can pay more. But liquidation is still pennies on the dollar. I don’t see why a 13th-hour, Government white-knight financing deal in bankruptcy court would be more advantageous than an 11th-hour version of the same deal–you’d think the delay and court proceedings would just add costs. So I assume this was a tactic that backfired.
Once Chrysler entered bankruptcy, certain commentators on this blog and many in the MSM seem to assume that the TARP money would somehow become collateral that they could divvy up among themselves. But it was still just financing offered subject to terms. The bankruptcy court presumably brokered a deal, but nothing really changed. Now that their bluff was called and Chrysler was under bankruptcy protection, the bulk of the secured creditors took the best deal they were ever going to get–which was the value of their collateral, $.30 on the dollar, exactly what they would get in a liquidation as senior secured creditors. No private hedge fund was going to them a better deal–they WERE the hedge funds. The Government got a more senior secured position–and the corresponding collateral–in keeping with the financing it was providing.
So who got robbed? Not the secured creditors. Unsecured creditors probably maybe. But that is bankruptcy.