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.

If I’m a reluctant shareholder in GM, as Obama said, can I sell my shares now?

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.

That is the law.

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

@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.