The Chrysler Deal
Looks like Chrysler will wind up in a pre-packaged bankruptcy before becoming a firm jointly owned by Fiat, the United Auto Workers, the United States of America, and Canada. The point of passing through bankruptcy courts is (a) to force a handful of holdout bondholders (mostly hedge funds, it seems) to take a haircut and (b) to be able to put the hammer to Chrysler dealers.
Another element of this is that Chrysler’s financial arm will not be bailed out. Instead, GMAC—GM’s financing arm, now restructured as an independent bank holding company—will take over.
Given the status quo as of two weeks ago, I think this is a good resolution. But I still wish that back in late November when this issue first come up that we’d moved directly to the government putting up money to do debtor-in-possession financing and but the company through the bankruptcy courts. Fiat could have bought Chrysler’s productive assets in a bankruptcy process, and instead of spending billions keeping Chrysler operating for a few additional months more funds could have been made available for direct relief. I suppose that, politically, it may have been necessary to go through the motions of showing that it wasn’t possible to get all the concessions needed short of bankruptcy.
Meanwhile, how much precedent is there for state-owned enterprises to be jointly owned by two different countries?
63 Responses to “The Chrysler Deal”
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April 30th, 2009 at 12:38 pm
Isn’t Airbus owned, directly or indirectly, by the governments of a number of European countries?
April 30th, 2009 at 12:39 pm
Well, I think the real question is how many companies are controlled by their union? It was reported yesterday that the UAW will have a 55% equity stake. Of course maybe this has changed with the Fiat deal being finalized.
April 30th, 2009 at 12:40 pm
But I still wish that back in late November when this issue first come up that we’d moved directly to the government putting up money to do debtor-in-possession financing and but the company through the bankruptcy courts. Fiat could have bought Chrysler’s productive assets in a bankruptcy process, and instead of spending billions keeping Chrysler operating for a few additional months more funds could have been made available for direct relief.
Um . . .
. . . someone appears to not understand exactly what DIP financing is supposed to do.
April 30th, 2009 at 12:45 pm
Hmm…I think this is Canada’s sneaky way of invading our country. First they send hockey players and William Shatner, next they take over the auto industry.
I welcome our new Canadian overlords! So when do I get some of that universal healthcare?
April 30th, 2009 at 12:45 pm
Scandanavian Airlines is jointly owned by three countries (as well as partly by the public).
April 30th, 2009 at 12:49 pm
Amalgamated Bank is filly union-owned. I’m sure there are many such examples around the world.
April 30th, 2009 at 12:49 pm
Yeah, Airbus is owned by EADS, and I believe that France and Germany are the primary shareholders of EADS. I think EADS stands for European Aerospace Defense Systems, or something along those lines.
April 30th, 2009 at 12:54 pm
I believe SPECTRE is now owned by North Korea, Venezuela and Iran. It might be LLP though, not a corporation.
April 30th, 2009 at 1:02 pm
Gee, haircuts for counterparties? What a novel concept. I wonder if this approach might be useful in some other industry other than car manufacturing. Maybe another industry facing a solvency crisis so severe they had to come to the government for a bailout.
April 30th, 2009 at 1:05 pm
What are the odds of Chrysler even maintaining market share over the next five years? I can’t wait until Barney Frank and his Canadian counterpart hold hearings to explore as to how people who buy cars will be made to purchase a Chrysler instead of a Honda or Toyota.
I wonder how Ford line workers should feel about their tax dollars being used to support an entity which has a goal to take market share, and thus job security away, from Ford and it’s employees? How would you feel Matthew, if your tax payments were being used to fund an entity whose success would make you less secure in your current job? Let’s not even get started on the fact that a 25 year old line worker at Chyrsler does not have the same interests as a 60 year old line worker at Chrysler, thus the UAW, in using it’s voting power on Chrysler’s board, must inevitably decide to screw a segment of it’s membership.
April 30th, 2009 at 1:06 pm
To say a bankruptcy is a prepackaged one usually means that there’s been resolution of the key issues prior to the bankruptcy filing. In this case, there isn’t a resolution–the noteholders think they should get more (except for the noteholders controlled, directly or indirectly, by the government).
I think the stockholders of the big banks should sue. These are related party transactions now, and the banks can’t favor a large stockholder’s interests over those of another.
April 30th, 2009 at 1:09 pm
Only about 6% of the list price of cars is factory labor. Dealers are among those who take their cut down the line – let’s see how the media respond to cutting back their take. Why haven’t the media been pushing for this all along, as they were pushing for factory wages to be cut?
April 30th, 2009 at 1:13 pm
Airbus.
April 30th, 2009 at 1:14 pm
They could, but it’d turn into ‘cutting off their nose to spite their face’ pretty quickly. The longer Chrysler stays in Chapter 11, the worse it will be for all the parties involved.
April 30th, 2009 at 1:22 pm
I think the stockholders of the big banks should sue. These are related party transactions now, and the banks can’t favor a large stockholder’s interests over those of another.
Sue who? The company is in bankrupcy court. As bondholders, JP Morgan (the biggest creditor) can sue and force them to liquidate but they would wait years to see anything and in the end, they would never get close to the money can recover in a workout. That’s the whole point of bankrupcy. Force the counterparties to swallow their medicine. Shareholders are essentially wiped out because their claims on the company are unsecured.
April 30th, 2009 at 1:32 pm
Sometimes, Nick, the point of a bankruptcy is to liquidate, because reorganization is pointless. A pretty good case can be mader that right now, as an entity whose purpose it is to make vehicles that consumers will want to buy, instead of buying a Toyota, Honda, Ford, or even a GM, Chyrsler is a pointless organization, and that no reorganization will make it relevant.
I wish people would stop describing the Iococca era bail out as successful. All it did was kick the can down the road a few decades, while encouraging American auto industry management and labor to avoid facing their competition head-on.
April 30th, 2009 at 1:35 pm
I wish somebody could explain to me why Chrysler is supposed to be needed or potentially viable in an industry that even without it will still have a grotesque amount of overcapacity spread among far too many producers.
April 30th, 2009 at 1:43 pm
[...] http://yglesias.thinkprogress.org/archives/2009/04/the-chrysler-deal.php [...]
April 30th, 2009 at 1:57 pm
The UAW must be looking to bleed out the taxpayers of three countries while continuing to be paid net $80,000 per year per worker. Maybe they’ll get their checks in Euros, Dollars, and Hockeybucks.
Or this all has something to do with softwood lumber.
April 30th, 2009 at 2:00 pm
Wow, Will “Pol Pot’s Cheerleader” Allen is dumbing up another thread. Is there no limit to your idiocy Will? Do you have a precedent for your dishonest slur on Barney Frank?
Oh, and while you are at it, please explain your support for Pol Pot. The man is long dead now. Couldn’t you find some more recent murderer to worship?
April 30th, 2009 at 2:20 pm
Will,
Sometimes, Nick, the point of a bankruptcy is to liquidate, because reorganization is pointless.
Really? Fiat is willing to take shot at fixing Chrysler but they didn’t want to inherit the legacy costs. Chapter 11 also gives them a chance to re-negotiate with the UAW. They may or may succeed in turning the company around but whatever the outcome, it’s a much better deal for bondholders, creditors, employees and the US taxpayer than liquidation.
April 30th, 2009 at 2:29 pm
I’m sure that american consumers are just dying to replace their toyota’s and honda’s with Fiats. Nothing says realiability and value like a Fiat.
“•Fiats and Fiat-owned Alfa Romeos sold in European countries are near the bottom in reliability and “need to improve significantly to move away from the foot of the table where they have languished for several years,” according to U.K.-based Which?, an advice publication that accepts no ads, similar to Consumer Reports in the U.S. It says newer models are improved.
•A survey of U.K.-market models by J.D. Power and Associates and magazine What Car? put Fiat 28th of 28 brands in the 2008 Customer Satisfaction Index for 2-year-old vehicles. Quality and reliability count for 30%. ”
http://www.usatoday.com/money/autos/2009-03-31-fiat_N.htm
April 30th, 2009 at 2:29 pm
daveNYC Says:
April 30th, 2009 at 1:14 pm
I think the stockholders of the big banks should sue. These are related party transactions now, and the banks can’t favor a large stockholder’s interests over those of another.
They could, but it’d turn into ‘cutting off their nose to spite their face’ pretty quickly.
April 30th, 2009 at 2:30 pm
We find from the auto company bailouts the obvious, Chris Romer’s multipliers can be much less than one, meaning bailouts can actually cost jobs. If the majority of stimulus results in a multiplier less than one, then Obama is not really stimulating, but paying off past debts. The whole multiplier crap goes out the window, like the Laffer curve, then we ca pull out all the old Laffer quotes and throw them back into the face of the Romer folks.
April 30th, 2009 at 2:30 pm
Obama is a pragmatist. This means a bit of stumbling through. When something doesn’t work something else is tried. Sure God has all the answers from the start but the ideal situation would have been to avoid bankruptcy and the question was whether this would be doable. It wasn’t. Obama is acting intelligently on the information available at the time. That was so then and is now.
April 30th, 2009 at 2:31 pm
The loan made to Chrysler in 1980 was repaid in full, with interest, and kept Chrysler going for over a generation employing American workers and supporting their UAW retirees. So I think your definition of what amounts to a success is so much eyewash.
April 30th, 2009 at 2:32 pm
[...] Matthew Yglesias considers the outcome of Chrysler filing for Chapter 11: Looks like Chrysler will wind up in a pre-packaged bankruptcy before becoming a firm jointly owned by Fiat, the United Auto Workers, the United States of America, and Canada. [...]
April 30th, 2009 at 2:34 pm
(Sorry about the above – hit return when the main page had focus, which is tied to the submit button.)
daveNYC says: They [the big banks] could [sue], but it’d turn into ‘cutting off their nose to spite their face’ pretty quickly.
Don’t forget the public-relations issues. Some of those big banks are the ones already on the public dole. They may not need any more association of their names with “bailout” or “bankruptcy”. Plus Stewart and Colbert would have a field day.
April 30th, 2009 at 2:42 pm
For those wondering why we don’t just let Chrysler fail – a large part of the problem is that, under ordinary circumstances, we could expect someone like Toyota to come in and buy up Chrysler’s assets. But, because (a) Chrysler has massive debts and (b) no one, including Toyota, can get that much credit because of the credit crunch, there aren’t any buyers. But the underlying resources are actually valuable – they just aren’t valuable when coupled with the existing debt, etc.
One interesting thing here is that UAW is getting so much of Chrysler because so much of Chrysler’s outstanding debts is to the UAW (in the form of unfunded pensions, etc.). Presumably that debt is now erased, meaning any returns the UAW gets from its interest in Chrysler will probably go straight into a pension fund. It will be interesting to see how well that works out.
April 30th, 2009 at 2:46 pm
The banks’ stockholders should sue the banks’ managers and directors and controlling stockholders, because those people are causing the banks to do favors for the government that costs the banks a lot of money. Those in control can assert whatever defenses they have.
And, no, it isn’t likely that the bondholders would get less in a liquidation. The reason that some of the bondholders are willing to take than they’d receive in a liquidation is that the government, directly or indirectly, controls them (whether by controlling through discretionary regulation, through control of a significant portion of equity, or control of financing required for operations). Essentially they’re eating a loss because they’re told to, and if they don’t do as they’re told,… So the TARP banks are in, and the non-TARP holders are out.
April 30th, 2009 at 2:55 pm
Yes, Nick, Fiat is willing to participate, given sufficient taxpayer support. Tell me why it is the responsibility of a guy who gets paid to assemble Hondas to help Fiat out?
David W., I think failing to recognize that Chrysler and the other American auto companies failed to make themselves able to compete successfully, long term, with other automakers in the years following the Chrysler bail-out, is so much eyewash.
April 30th, 2009 at 2:59 pm
And, no, it isn’t likely that the bondholders would get less in a liquidation.
Care to back that up with anything? How much exactly do you think the bondholders would get in a liquidation, and why do you think that?
April 30th, 2009 at 3:08 pm
Yes, Nick, Fiat is willing to participate, given sufficient taxpayer support. Tell me why it is the responsibility of a guy who gets paid to assemble Hondas to help Fiat out?
Because Fiat is the only game in town. The choice is liquidation, a full government nationalization of Chyrsler, or Fiat. The first option puts tens of thousands of people out of work, the second option adds billions to our already mounting debt load, not to mention how difficult such an endeavor would prove to be, and the third option is Fiat. Seems like a no brainer to me. Do you have a better plan? Let’s hear it.
Oh, and aren’t those same Honda workers already helping out GM and Goldman Sachs and Citibank and AIG? What makes Chrysler the exception?
April 30th, 2009 at 3:16 pm
Nah, because the 1980 loan to Chrysler, as I mentioned, was repaid in full with interest by Iacocca. They also did innovate with products like the minivan and the first macho pickup truck, the Dodge Ram. The real problem with the auto industry isn’t so much a failure to compete successfully, but with overcapacity in the entire auto/truck sector. Combine that with the great recession we’ve got on our hands now, and it’s not surprising that Chrysler has declared bankruptcy.
As for government help, yeah, as if the Japanese, South Korean, and European car makers have never, ever received a penny in state support, or not been given generous subsidies by states like Tennessee and Alabama. Which makes your complaint about subsidies ring pretty hollow, to me at least.
April 30th, 2009 at 3:20 pm
The bond holders most likely hold credit default swaps from AIG, which are backed by the Treasury Dept. Therefore, they have no incentive to budge on debt relief. You and I are pitching in to make those sons of bitches whole either way.
April 30th, 2009 at 3:24 pm
And, no, it isn’t likely that the bondholders would get less in a liquidation.
Are you fucking joking? How dumb do you think bondholders are? If they could earn more by liquidating the company that’s exactly what they’d do. You tell me, genius. How much is Chrysler worth? Strip out their liabilities (pension costs, corporate debt, ect), fire all the employees (no payroll) and give me a number for what remains. That is essentially what is left in a liquidation. Real Estate holdings, cash and securities on hand, equipment, patents, and few other minor contributors are all that’s left. Bond holders are owned almost 7 billion alone. The costs of their pension plan is hard to find in hard dollars but it amounts to $3 and change an hour per employee. We’re talking at leasta 20 billion dollars owed to secured creditors. If you turn the place upside down, you end up with less than 3 billion dollars. After paying for lawyers and administration costs creditor will be lucky to get 10 cents on the dollar. Don’t believe me? Do the research and see for yourself.
April 30th, 2009 at 3:48 pm
how much precedent is there for state-owned enterprises to be jointly owned by two different countries?
I’ll do you one better. How many state-owned enterprises are jointly owned by two different countries that were locked in a phenomenally bloody war with each other less than 65 years ago?
April 30th, 2009 at 4:07 pm
This sounds like the setup for a sitcom more than a business plan.
Airbus, as has been said. However, the real question is “how much precedent for joint ownership of an epic failure of a company?”
April 30th, 2009 at 4:09 pm
David, guess what? When a period of large overcapacity strikes, and your competitors are much better situated to withstand that period, that means that you have failed to make yourself adequately competitive. Operating your business as if your industry will never endure a period of large overcapacity, and thus you do not need to prepare better for such a period than your competition, means that you are living in a fantasy. Thanks for proving my point.
April 30th, 2009 at 4:11 pm
When a period of large overcapacity strikes, and your competitors are much better situated to withstand that period, that means that you have failed to make yourself adequately competitive.
You do realize that other governments are subsidizing their automakers, right?
April 30th, 2009 at 4:15 pm
Airbus, as has been said. However, the real question is “how much precedent for joint ownership of an epic failure of a company?”
Does the Concorde project count? That was plenty acrimonious, and if Concorde was a success you’re using a pretty narrow definition of success.
April 30th, 2009 at 4:20 pm
CParis Says:
April 30th, 2009 at 12:45 pm
Hmm…I think this is Canada’s sneaky way of invading our country. First they send hockey players and William Shatner, next they take over the auto industry.
I welcome our new Canadian overlords! So when do I get some of that universal healthcare?
We pulled off a major swindle when we offed Celine Dion to you guys but I think you’re cottoning on to us now!
April 30th, 2009 at 4:24 pm
You forgot to include what I earlier said, which is the current great recession. Chrysler, for all their other issues, isn’t responsible for that.
April 30th, 2009 at 4:30 pm
Lets just be very clear here that the elite few in the upper echelon of the ownership class – the hedge funders – are forcing the bankruptcy. Labor came to the table and made big concessions.
But it’s the financial sector that for the most part that has gotten no-strings- (or perhaps very-few-strings-) attached bailouts.
Unacceptable.
April 30th, 2009 at 4:38 pm
[...] Matt Yglesias at Think Progress came out quickly with a thumbs up but would have liked to see earlier action: Given the status quo as of two weeks ago, I think this is a good resolution. But I still wish that back in late November when this issue first come up that we’d moved directly to the government putting up money to do debtor-in-possession financing and but the company through the bankruptcy courts. [...]
April 30th, 2009 at 4:54 pm
David, it doesn’t matter that Chrysler isn’t responsible for the recession. Neither was Honda or Toyota. The point is that Chyrsler failed to prepare itself to survive such conditions as well as Honda or Toyota.
DTM, if you think that that Honda is in better shape than Chrysler because of their superior government subsidies, you are very mistaken.
April 30th, 2009 at 5:23 pm
The latest estimate I am seeing is 65 cents on the dollar for full liquidation scenario, for the secured bondholders. That, admittedly, is the number from the Non-TARP Bondholder Ad Hoc Committee, but even adjusting for number inflation you are still looking at in the ranges of 45-50 cents or so per dollar.
The offer from the government, I note, is far below that.
There is also the peculiar matter of many bondholders having bought credit default swaps on the debt; it means they recover 100% upon triggering default, i.e. bankruptcy. There is no reason whatsoever, if I were a bondholder and had covered myself with CDS, that I would not take this route.
April 30th, 2009 at 5:25 pm
A really peculiar thing is that the bondholders might credibly argue for the seniority of Treasury debt to be subsumed; they have acted the part of the insider, and especially given that the existing creditors were not consulted on taking on the loan, they might make a credible case that taking the Treasury loan has only served to decrease liquidation value.
April 30th, 2009 at 5:26 pm
Every major Japanese corporation has suckled far more at the public teat than Chrysler could dream of; it was SOP through the 80s, and continues in some fashion to this day. Add in further subsidies in the form of trade restrictions, plus $100M gifts to build factories that produce ~100k cars/year, and it’s a little hard to see why I’m supposed to be impressed by the laissez-faire success of Honda and Toyota (not to impugn their engineering; it only took them 2 decades to produce minivans that could compete with Chrysler’s).
I’d also like to note that there have been numerous references to overcapacity, which is awesome disappearing of the stat that Matt cited a couple weeks ago that, due to the current dearth of sales, there’s going to be demand for an extra ~30 million cars once this thing is over.
But no, let’s treat the demand level in the pit of a once-a-century downturn as the baseline for future expectations. That’s the rational thing to do.
April 30th, 2009 at 5:27 pm
DTM, if you think that that Honda is in better shape than Chrysler because of their superior government subsidies, you are very mistaken.
Calculate the total accrued value to Honda of those subsidies (don’t forget health care and pensions), then get back to me.
April 30th, 2009 at 5:32 pm
This isn’t quite right, though. They came extremely close to making the deal work. Except for a minority of bondholders, everyone came on board, and bankruptcy could have been avoided. Presuming that the deal on the table now was available in November (which is far from clear anyway), sure it would have been better to have done the same deal then, not now. But the months of support would have been well worth it had bankruptcy been avoided (esp. since I’d much rather this admin run the bankruptcy than the previous one).
IOW, the last few months haven’t simply been a masquerade for a forgone outcome – they came quite close to pulling it off, and it’s good that they tried.
April 30th, 2009 at 5:37 pm
Add in further subsidies in the form of trade restrictions . . .
Oh yeah, that is another big one.
Not that we should be looking for a long-term trade war over automobiles, but it is just silly for people to be treating this as anything close to a test of inherent merit.
April 30th, 2009 at 5:48 pm
I’m sorry’, DTM, I didn’t realize that Chyrler’s decision to make promises to pensioners was a subsidy to Honda from the Japanese government.
JrRoth, if you want to supply capital to Chrysler, it’s fine with me. Can you leave me out of it, please?
April 30th, 2009 at 5:48 pm
The latest estimate I am seeing is 65 cents on the dollar for full liquidation scenario, for the secured bondholders.
Please provide a source for that number. I think it may not include the pension liabilities. Bondholders don’t get paid before pension costs.
April 30th, 2009 at 6:37 pm
I’m sorry’, DTM, I didn’t realize that Chyrler’s decision to make promises to pensioners was a subsidy to Honda from the Japanese government.
You don’t think a government providing pensions or health care to a firm’s employees is a subsidy?
No wonder you are so confused.
April 30th, 2009 at 6:39 pm
ny nick,
Note that was a statement with respect to secured bondholders. The unsecured bondholders are presumably a different story.
April 30th, 2009 at 7:00 pm
The unsecured bondholders are presumably a different story.
The unsecured bondholders will be wiped out with, or without, bankruptcy. Chrysler’s fiscal situation is too much in a bad way to look after their claims. They are going to zero.
We are talking about secured creditors in regard to the negotiations. The creditors Barack Obama referred to were secured creditors. That’s why it is so ludicrous to ask them for 33 cents on the dollar; the whole thing was supposed to secured to genuine collateral.
April 30th, 2009 at 7:02 pm
Here is the source if you want it.
NY Times DealBook Blog
April 30th, 2009 at 7:10 pm
Golly, DTM, Honda employees all over the planet will be suprised to learn that they are getting a pension from the Japanese government.
April 30th, 2009 at 8:13 pm
In a related note, apparently Toyota is incapable of building cars that people want. Now they are getting bailed out too. Perhaps capitalism has failed at making cars?
April 30th, 2009 at 8:19 pm
Nissan. Merged with Renault. Renault was state owned. Nissan is getting bailed out by some government or another (not ours, maybe Japan or France?). So there, same industry even.
April 30th, 2009 at 11:31 pm
You’ll have to forgive Will Allen, his ability was taken away decades ago. It’s hard to think like a normal person when your hatred brings you to such laughable conclusions as “FDR caused the holocaust and the Great Depression” and “George McGovern is the American politician most at fault for the rise of Pol Pot, and the doozy above “a loan paid back with interest that results in decades of employment for thousands is the very definition of failure.”
But wait till he gets around to explaining how neither Jesse Helms nor Strom Thurmond were racists. Will Allen is a perennial joke.
Hey Will, how happy you must be, another 50 people were murdered by car bomb in Iraq the other day. Fifty more who are “no longer slaves” right? Cheers, you bloodthirsty evil fuck.
May 1st, 2009 at 2:33 am
Laissez Faire, Free Markets, less government intervention; it’s all such crap. We can’t help the US auto industry but we can subsidize the Military Industrial Complex to the tune of 30 trillion over the last 50 years. We subsidize an international criminal conglomerate, Big Finance, but we quibble about possibly saving a few American manufacturing jobs.
The southern states subsidize foreign auto companies and their Free Market touting political representatives brag about it. How is this not treason? Because of its inherent hypocrisy?
I will never understand how selling the United States to foreign interests via the Free Market is promoted as the Patriotic thing to do. How is stripping naked and bending over and allowing the world’s nation-states to rape us to extinction the American way?