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Gov't Preparing For Chrysler Bankruptcy Filing

NYTimes:

The Treasury Department is preparing a Chapter 11 bankruptcy filing for Chrysler that could come as soon as next week, people with direct knowledge of the action said Thursday.

Here's the interesting part:

The Treasury has an agreement in principle with the United Automobile Workers union . . . Moreover, Fiat of Italy would finalize its alliance with Chrysler while the company is under bankruptcy protection. The only major question that remains unresolved is what happens to Chryslerís lenders, who hold $6.9 billion in company debt.

(Emphasis supplied.) More . . .

The governmentís most recent offer, presented Wednesday, would give the companyís lenders about 22 cents on the dollar, or $1.5 billion, and a 5 percent equity stake in a reorganized Chrysler. Earlier this week, a steering committee of the lenders proposed that they receive 65 cents on the dollar, or $4.5 billion, and a 40 percent equity stake.

That is pretty far apart. Apparently, the lenders think they will do better in bankruptcy.

Here's my question, is the government prepared to be tough on the financial industry bondholders? If not, why not?

Speaking for me only

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    another question (5.00 / 1) (#1)
    by Capt Howdy on Thu Apr 23, 2009 at 02:32:17 PM EST
    what happens to pensioners?  my brothers wife is one.

    Is the gov't (none / 0) (#2)
    by maddog on Thu Apr 23, 2009 at 02:34:34 PM EST
    prepared to be tough on the unions?

    Parent
    Right (5.00 / 1) (#4)
    by sj on Thu Apr 23, 2009 at 02:50:54 PM EST
    Because it's the workforce that has caused the problems and not management.  

    But, of course, it is the workforce who pays the price.  Once again.

    Parent

    The NYT article states... (5.00 / 1) (#7)
    by Elporton on Thu Apr 23, 2009 at 03:07:07 PM EST
    "The Treasury has an agreement in principle with the United Automobile Workers union, whose members' pensions and retiree health care benefits would be protected as a condition of the bankruptcy filing, said these people, who asked for anonymity because they were not authorized to discuss the case."

    Parent
    But it also says (5.00 / 1) (#8)
    by jbindc on Thu Apr 23, 2009 at 03:09:59 PM EST
    Chrysler has a $9.3 billion pension shortfall, or 34 percent of its total liability, according to the Pension Benefit Guaranty Corporation. The agency said earlier this month that it would assume $2 billion of the shortfall in the event Chrysler terminates its pension plans.

    If that happened, retirees would receive sharply lower benefits than they normally would expect. But Chrysler is not obligated to terminate its pension plans while in bankruptcy, particularly if it received federal assistance to fund them



    Parent
    How can it be legal (none / 0) (#46)
    by Catesby on Thu Apr 23, 2009 at 08:39:33 PM EST
    to make an agreement for labor in exchange for deferred compensation, get the labor as agreed, but not pay the agreed upon compensation?

    I can see changing agreements for those who have yet to provide the labor, but not in the case of those who have already held up their end of the bargain.

    Parent

    I thought that would be true (none / 0) (#9)
    by Capt Howdy on Thu Apr 23, 2009 at 03:10:33 PM EST
    I hardly see how it could be otherwise.
    but it was worth asking.


    Parent
    You might (none / 0) (#10)
    by jbindc on Thu Apr 23, 2009 at 03:17:28 PM EST
    want to clear up a spare bedroom so they can move in with you.

    I wish I was actually joking... :(

    Parent

    no kidding (none / 0) (#11)
    by Capt Howdy on Thu Apr 23, 2009 at 03:18:27 PM EST
    fortunately I have a large family.

    Parent
    Well there is the question (none / 0) (#13)
    by Catch 22 on Thu Apr 23, 2009 at 03:30:54 PM EST
    isn't it?

    To those who have like to say screw the investors let them take a haircut reality come around. many of us here have been saying all along common hardworking people would get hurt if those 'haircut' people got their way. And did that change the daily drumbeat around here? NO!

    But for those where it hits close to home - friends, family - haircut doesn't sound like a good idea at all. Rightfully so.

    But yet those where it doesn't hit close to home think the investors do have to take a haircut - as long as them and theirs are not involved.

    Ah the compassion of the bank and investor haters!

    Here's my question, is the government prepared to be tough on the financial industry bondholders? If not, why not?

    Pensioners? What pensioners?

    Parent

    I hope I would be concerned (none / 0) (#14)
    by Capt Howdy on Thu Apr 23, 2009 at 03:34:04 PM EST
    about the pensioners even if my brothers wife was not one, but I take you point.


    Parent
    I'm sorry that was not aimed (5.00 / 1) (#16)
    by Catch 22 on Thu Apr 23, 2009 at 03:44:33 PM EST
    specially at you. There are those here where the concern for pensioners has been mentioned to them and the response or lack of was disheartening.

    Parent
    Sometimes the silence about (5.00 / 0) (#39)
    by Militarytracy on Thu Apr 23, 2009 at 06:08:16 PM EST
    THE REAL SUFFERING OF THE LIVING BEINGS is deafening

    Parent
    I know, no sweat (none / 0) (#17)
    by Capt Howdy on Thu Apr 23, 2009 at 03:47:54 PM EST
    I was agreeing with you.  

    Parent
    Depends A Lot On ... (5.00 / 2) (#3)
    by santarita on Thu Apr 23, 2009 at 02:44:56 PM EST
    who the bondholders are, I think.  It's one thing to be tough with some of the big banks - after all, the interests of the government and the banks are beginning to merge.  It's another kettle of fish entirely if some foreign interests (China) hold some of those bonds.  And another kettle of fish if those bonds are held by large pension funds.  And then there is the issue of credit default swaps - would those be triggered if the bondholders are forced to take a cut?  And who would be the issuer of the credit default swaps who would have to make good on those cds?  AIG?

    It will be an interesting bankruptcy proceeding.

    My question.... (3.50 / 2) (#6)
    by NealB on Thu Apr 23, 2009 at 02:57:23 PM EST
    Why is Larry Summers in the habit of falling asleep while his boss is speaking? A sleep disorder? Exhaustion? Narcolepsy? Boredom?

    How is it possible for someone in his position as lead economic adviser during the worst economic crisis since WWII to doze off during these events? Whatever the reason, seeing him falling asleep on the job is as hard to excuse as it is to understand. I think Obama should present a staff that projects alertness, engagement, and vitality.

    Taking naps on duty does nothing to increase my confidence in Obama's economic team. Shameful.

    I think that some people (none / 0) (#12)
    by Catch 22 on Thu Apr 23, 2009 at 03:20:50 PM EST
    feel that Summers and Geithner have easy no stress jobs. That they are nine to fivers and get plenty of sleep. That they don't have late night meetings or 'homework' to review or prepare for the next day.

    Could it be possible that he is exhausted?

    Parent

    Well... (none / 0) (#19)
    by Addison on Thu Apr 23, 2009 at 03:52:20 PM EST
    ...you might come close to answering your own question in calling these things "events." What you saw was an press event and there wasn't actual work being done. Obama was talking and explaining and giving a news conference, Summers had nothing to do during that time (unlike, presumably, the rest of the day). The presence of cameras does not indicate something is more important to be awake for, mostly it seems to be the opposite. So, I'd say it was a perfect time for a nap.

    Parent
    Gov. Granholm (none / 0) (#5)
    by jbindc on Thu Apr 23, 2009 at 02:56:42 PM EST
    is not pleased with the banks and said

    "Who knew that bailing out the banks would mean that they could kill the auto industry," she told reporters at an unrelated event. She said the livelihoods of thousands of families are in the balance.

    The institutions are playing "a very risky game" by proposing what amounts to a windfall for them, rather than accepting a market-based settlement proposed by the Obama administration.

    She personally wrote to the heads of the four banks.  Let's see how much good it does.

    And the Michigan Attorney General, Michael Cox wants any bankruptcies to be filed in Michigan and not NY or Delaware

    It appears that Granholm (none / 0) (#15)
    by Catch 22 on Thu Apr 23, 2009 at 03:41:28 PM EST
    is forgetting that the livelihoods of thousands of families who work for the banks are in the balance too!

    How shortsighted of her. Of course she is a politician and only cares for those in her state, screw the banks. But then Gov. Granholm, how about those who work for those banks in your state? Ever think of that?

    Parent

    Well (none / 0) (#18)
    by jbindc on Thu Apr 23, 2009 at 03:51:43 PM EST
    If the auto companies go under, those people in Michigan (and Ohio, Indiana, Kentucky, Texas, etc.) who work at banks will still be affected, as all those autoworkers (and their suppliers) won't be getting loans, or making payments on existing loans, foreclosures will skyrocket, credit cards won't be getting paid, student loans and auto loans won't be getting paid, etc.

    It would be throwing the baby out with the bath water.

    Parent

    That is true except (none / 0) (#23)
    by Catch 22 on Thu Apr 23, 2009 at 04:25:26 PM EST
    that in the case of Chrysler and probably GM they will be in bankruptcy which will most likely allow them to survive and no one gets hurt.

    We can't expect the banks to be pulled up by the bootstraps by the taxpayer and then give it back to another industry that has their own problems. That would accomplish nothing. It would re-weaken the banks at a time where we need them to continue to gain strength. There has got to be a happy medium between what the government wants them to do and what they want that makes sense for the banks and Chrysler.

    Parent

    I think that's naive (none / 0) (#24)
    by jbindc on Thu Apr 23, 2009 at 04:30:58 PM EST
    to assume that with bankrupt auto companies, "no one will get hurt".

    I think millions are going to get hurt either way, but I think saving them is going to hurt a whole lot less.

    Parent

    We will see (none / 0) (#43)
    by Catch 22 on Thu Apr 23, 2009 at 07:25:03 PM EST
    A lot have already been hurt by layoffs and plant closings. It's hard to say if there will be more. BK doesn't always bring that to companies that have already cutback. Car sales may have hit a low already. If that is the case then there would be no further need to cutback production further, in theory.

    There is a thin line between being naive and being hopeful. I was coming from a position of hope in my post. I have reasons for that, some of them expressed in the first paragraph. Also being a businessman I don't tend to complain a lot about business problems because complaining or being a chicken little does nothing to fix anything. I am hopeful for the companies and the people who depend on them. I make no apologies for that.

    Parent

    Uh, (none / 0) (#20)
    by bocajeff on Thu Apr 23, 2009 at 03:53:46 PM EST
    the banks did not kill Chrysler. Chrysler killed Chrysler for a variety of reasons (mismanagement, design and engineering, contracts, etc...) The banks kind of kept them in business. And now the government is. My question, why?

    Parent
    For the same reason that the government (5.00 / 2) (#21)
    by tigercourse on Thu Apr 23, 2009 at 03:59:39 PM EST
    has been trying to keep BOA, Citi, etc. in business. The faiulure of these massive institutions would have too adverse an effect on the economy.

    Parent
    absent the global economy downturn?

    And before you answer that consider, for example, Toyota's seeing it's first ever losses in its 70 year company history, Nissan's cutting 20,000 jobs and lost billions, Honda reports its first loss in 15 years, VW is operating at a loss. Hyundai/Kia seems to be eking out some small profits.

    Clearly Chrysler and GM are in the worst shape, but I'm not sure they'd be "killed" if not for the global issues that are similarly affecting all the manufacturers.

    Parent

    save Ford (none / 0) (#32)
    by diogenes on Thu Apr 23, 2009 at 05:35:56 PM EST
    If the govt poured the money into Ford and GM, they might survive, instead of having domestic overcapacity with a weakened chrysler still in business.

    Parent
    In 2006, the best year in the history of the car (none / 0) (#37)
    by steviez314 on Thu Apr 23, 2009 at 05:53:51 PM EST
    industry, GM still lost money.

    Whether it's the cost structure, or the companies branching out into unprofitable businesses, or just too much worldwide capacity even for maximum demand, something has to change.

    Parent

    No argument there. (none / 0) (#40)
    by sarcastic unnamed one on Thu Apr 23, 2009 at 06:14:14 PM EST
    Cerberus (none / 0) (#42)
    by waldenpond on Thu Apr 23, 2009 at 07:20:55 PM EST
    Cerberus (three headed dog that guards the gates of hell - hell being Ford, GM and Chrysler?)

    Here's my why...

    Doesn't hedge fund Cerberus own Chrysler (80%)?  1. Cerberus took on dying Chrysler in May '07

    1. October '08 announces zero book value - dead
    2. Dec 08 - CPR
    3. May 09 another 6 bill - life support
    4. Wiki states govt is filing bankruptcy (that was quick) - can a new doctor bring them back?

    Cerberus wanted to re-make the auto industry.

    The Chrysler/AIG relationship seems perverted.  The more I know, the more frustrated I become.

    Parent

    Are these bonds insured by credit default swaps? (none / 0) (#22)
    by TexasYellowDog on Thu Apr 23, 2009 at 04:11:57 PM EST
    Maybe from AIG?

    hook for paying 5.3 billion to the UAW's health care trust over the next ten years.

    People close to the talks said Wednesday that the U.A.W. had tentatively agreed to accept Chrysler stock to finance half of the company's $10.6 billion obligation to the health care trust. The balance would be paid in cash over the next decade. That money presumably could come from either the Treasury, or from Chrysler's profits, once it emerges from bankruptcy protection.
    (Emphasis added)

    we spend a couple billion dollars a (5.00 / 2) (#27)
    by tigercourse on Thu Apr 23, 2009 at 05:23:17 PM EST
    week in Iraq.

    Parent
    one.

    Parent
    perhaps (none / 0) (#29)
    by Capt Howdy on Thu Apr 23, 2009 at 05:32:09 PM EST
    they are expecting universal access to health care to mitigate that problem.

    Parent
    Is that a joke? (none / 0) (#30)
    by sarcastic unnamed one on Thu Apr 23, 2009 at 05:32:47 PM EST
    it was sort of a cynical hopefull (5.00 / 2) (#33)
    by Capt Howdy on Thu Apr 23, 2009 at 05:39:56 PM EST
    joke.


    Parent
    CH, (none / 0) (#35)
    by sarcastic unnamed one on Thu Apr 23, 2009 at 05:43:53 PM EST
    where do you think the UHC money would come from to fund this if not you and me?

    Parent
    I hope that the government negotiators (none / 0) (#31)
    by easilydistracted on Thu Apr 23, 2009 at 05:35:42 PM EST
    (whoever they are) actually addressed that matter in their "agreement in principle."

    Parent
    A question for the legal folks: (none / 0) (#34)
    by easilydistracted on Thu Apr 23, 2009 at 05:41:34 PM EST
    Would a federal bankruptcy judge even be bound by all terms of any agreement prior to the actual filing? Could the major stakeholders here (the investors)cause enough stink in bankruptcy court to force a judge to ignore this "agreement in principal."

    Equitable Principles Can Be Applied... (none / 0) (#36)
    by santarita on Thu Apr 23, 2009 at 05:52:52 PM EST
    in bankruptcy decisions and the court can cancel executory contracts (performance on both side has not occurred) and there are other modifications that can be made but all within fairly well-defined statutes and case laws.  The "acid test" is what would a class of creditors have received in a liquidation.  The standing of a class of creditors and the merits of their arguments are usually based on that acid test.  Equitable principles (like "unclean hands") can be a good argument although often it is just gives additional  weight to the more traditional legal arguments.  

    Parent
    An Agreement in Principle With... (none / 0) (#38)
    by santarita on Thu Apr 23, 2009 at 05:57:39 PM EST
    regard to a prepackaged Chapter 11 (i.e. a Chapter 11 where major parties have agreed to a plan of reorganization once the Chapter 11 has been filed) doesn't necessarily mean that that will be the plan that the judge approves.  The plan still has to meet various statutory tests.  And the judge can throw monkey wrenches into plans sometimes, although usually the parties don't go in to bankruptcy unless they know the plan will be confirmed.

    Parent
    The agreement with the UAW for taxpayers to fund the health care trust for the next ten years is tantamount to government subsidized health care for that company, thereby putting competitors at a price disadvantage -- action which is outside the jurisdiction of a bankruptcy court. As long as the government is on the hook for payments to the fund, neither the union or the reorganized company have any economic incentive to address this matter at the bargaining table for the next ten years. How would the bankruptcy court view this sort of argument?  

    Parent
    Hard to Say... (none / 0) (#45)
    by santarita on Thu Apr 23, 2009 at 08:02:36 PM EST
    In general, bankruptcy courts are looking at the reorg plan to see if it complies with the statutes and case law and will listen to creditors of the company.  Since one of the tests is whether or not the plan has a chance of working, competitive advantage to the reorganized company is not going to be a basis for a challenge, especially by a competitor.  Unless, of course, there is some allegation of unfair business practice, anti-trust ,etc. GM has a good argument as to why it should receive similar treatment - however, that argument is more of a political one than a legal one, I think.  

     

    Parent

    Although the first quoted portion (none / 0) (#44)
    by oculus on Thu Apr 23, 2009 at 07:35:16 PM EST
    of NYT article says government is preparing bankruptcy filing, the beginning of the actual article says the government is pushing Chrysler to get a filing prepared for next week.  Which makes more sense.