Regarding the problems at Chrysler, Barak Obama went on national television yesterday to (1) hawk Chrysler products (no thanks, Kohouts drive Chevies) and (2) demonize the secured creditors who insist that they receive a better deal than what the president deemed convenient. Because these hedge funds and creditors would not cooperate, the deal fell through and now Chrylser enters bankruptcy (bankruptcy, the president tells us, is really sign of strength–remember, some of the people, all of the time).
The problem is that secured creditors are just that–these creditors provided Chrysler money with the legal guarantee that, if Chrysler ever had to be liquidated, they would receive the receipts from the sale of those assets. Granted, those assets may not be worth the amount of money generated from the sale of the assets, but the secured creditors are assured of getting all of the liquidated money. The rest of Chrysler’s creditors follow–the unions, the pension plans, the executive management’s unsecured pensions, everything (FYI, attorney fees are paid first. It pays to write the rules).
But Chrysler won’t be liquidated. Apparently, even after it lost a ton of money for Mercedes-Benz and for Cerbereus and the U.S. government, somebody still wants it (Fiat, but they aren’t actually putting any money up for it–the U.S. government will keep doing that), people still believe it has some going-concern value. To give the company new owners, all of the current debt holders (and contract holders, such as the auto unions) will have to take a haircut on the amount they are owed (Chrysler is not worth as much as the amount of money that has been loaned to it).
In bankruptcy, though, the secured creditors must receive at least what they would have in a liquidation (because they need to approve the plan, the law assures them that they will be better off for having let the company continue instead of being liquidated). So a group of secured creditors (those not operating with TARP funds and thus taking their orders from the government) refused to take a larger haircut than bankrupty law or finance law will require them to when they were asked to do so for the common good by the President.
Despite what Barack said about the auto union taking a big hit (which is true), the unions are still being unrealistic–there simply isn’t enough value in Chrysler to pay them even the amount they were willing to settle for. That’s unfortunate, but it’s a fact of life. Employees are not secured creditors.
And for this, simply exercising their legal rights, they were demonized by a president who apparently believes he can whip out the word “recession” and get his way. For all this talk of hope and change, when Barak has a little bit of trouble he’s awfully fast to blame or demonize somebody. The new thing, I guess, is to attack creditors as if it is wrong to ask for the money back that they loaned to a corporation:
“I don’t stand with those who held out” for a better deal, said Mr. Obama, who called these players “a small group of speculators” whose decisions “endanger Chrysler’s future.”
Oh, you mean that funds are going to hold out for the deal that they bargained for? I guess so. Is Obama under the impression that if the president asks loudly enough, he can get his way? Did he fail to mention that “he’s the only thing in the way between them and the pitchforks”? Look at the phrasing of that sentence: “I don’t stand with…” The implication is that it’s important for the President to stand with private investors. It used to be that they could hang their hat on basic contract law without worrying about if the President is there to “stand behind them.” Unforunately for Obama, contract law is not an exercise in political will or neighborhood organizing. There are these things called “contracts” and to run an efficient economy, you can’t have the government breaking them at its whim for “public policy reasons.”
If a corporation has a large, politically connected union, that corporation is going to be hard pressed to loan money on secured terms (that’s a pretty obvious, given the result in this case). That’s kind of too bad, because ultimately, what will lift the U.S. out of this recession will be business investment. If investors do not feel that their rights are protected, it is unknown why they wouldn’t choose to buy Treasury Bonds instead. The U.S. has a very efficient economy because this sort of quasi-government interference in the market does not happen.
But even if Obama believed that the public policy of keeping Chrysler afloat should change hundred of years of contract law, the administration had one big problem: the hedge funds managers have something called “fiduciary duty” to the people who entrusted them with investing their money. That means the managers don’t get to run a ponzi scheme and they don’t get to give the money away to the government or to the common good. The managers are trusted with making money for their investors. Surprisingly, these funds (those who aren’t already receiving government money through TARP) decided that they’d better fulfill their legal duty, seeing how they are liable for it and all.
And now, it’s going to be a long time for the U.S. government to get out of the car business. Because Obama overplayed his hand and couldn’t strong-arm the investment community, Chrylser is going to bankruptcy court. The problem there will be, do the other secured creditors (all buoyed by their own government money) votes made in “good faith.” http://online.wsj.com/article/SB124113528027275219.html What a debacle!
And so all of this is terribly worrisome, not least of which to the law school students in bankruptcy courses all across the country who are preparing for exams. But what is funny about it is that while Obama has demonized “creditors” and lionized the little guy debtors, he forgot a truth about corporate bankruptcy law: such gross characterizations are without merit. There are no “good guys” and “bad guys.” Instead, Chrysler, it’s suppliers and union workers are on one side, while Chryslers’ creditors are on the other: yes, banks like Citigroup who probably should be in bankruptcy themselves sans their government money, but also large investment funds. Large investment funds invest money primarily for rich people and pension plans and non-profits. Teacher pension plans are some of the largest institutional investors, as well as university endowments. Check out the statement by the non-TARP lenders:
we represent many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler.
We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests.
The law says the auto unions can’t be paid with teacher union pension money, even if the president stands behind it.