Playing Chicken With Obama
For the past nine months I've been pretty clear that Chrysler would enter bankruptcy this year. It is only fitting that a hedge fund created the mess and another one applied the coup de grace. Stephen Feinberg of Cerberus Capital was dumb enough to think he was stealing Chrysler from a desperate Daimler Benz, anxious to unload their American mistake. Of course it turned out he bought at the top of the market, not the bottom. But it was a couple of "vulture funds" that tried to play chicken with President Obama on Wednesday night that forced the Chapter 11 filing.
As Chrysler's fate hung in the balance Wednesday night, this group refused to bend to the Obama administration and accept steep losses on their investments while more junior investors, including theUnited Automobile Workers union, were offered favorable terms.In a rare flash of anger, the president scolded the group Thursday as Chrysler, its options exhausted, filed for bankruptcy protection. "I don't stand with those who held out when everyone else is making sacrifices," Mr. Obama said.
Ironically, the lead hard asses, Perella Weinberg partners, folded at the last minute, but it was too late. This of course is an object lesson that should not be lost on the GM bondholders who yesterday rejected the government proposal aimed at resolving the GM situation out of bankruptcy court.
It's not a smart business strategy to play chicken with Obama.
'"Dumb" billionaire Stephen Weinberg outsmarted by yokel'. That should be the title of your article. Nice to know that giant Mercedes Benz, descendant of the inventor of the automobile, is also a fool.
Your grossly simplified account of what is transpiring further enhances your reputation as a yokel. Nowhere do you mention the problem posed by excess dealers which can only be solved in bankruptcy court, or the problems posed by cram-down vs. senior debt, or the ultimate victory of the funds if they have insurance triggered by bankruptcy, or the risk of Chapter 7 - already huge since suppliers have stopped shipping parts and forced the shutdown of 3 stamping plants in the Detroit area, or that the clients of the "rogue" funds who may very well be endowments and pensioners, or the conflict of interest of the giant banks who received TARP funds and thus have already been well compensated and, for political reasons, do not wish to cross Obama.
Then there's the question of size. Giant government vs. small funds. I thought you "progressives" (ha!) always sided with the little guy.
May 1, 2009 12:13 PM | Reply | Permalink
Geeze... rant much?
May 1, 2009 2:43 PM | Reply | Permalink
Lay off 'ordinary' as he is anything but ordinary.
If you think this is an ordinary ordinary 'rant' you haven't seen a real ordinary rant. For instance, when he has suggested other commenters 'be deported or hung' in his thread on Israeli Intelligence.
May 1, 2009 5:36 PM | Reply | Permalink
Not in your case, buddy.
May 1, 2009 2:59 PM | Reply | Permalink
If you want to comment and be taken seriously, please write more coherently, explain and expand upon your points, use less ad hominem, avoid the cheap shots, and decrease the anger level. Complete sentences would also be appreciated.
As it is, your angry, incoherent, and ad hominem style of writing is unconvincing and does you a disservice. I tried to take your post seriously, but your quick-fire mentions of "problems" don't add anything to the discussion without actually explaining why these things are problems. Furthermore, some of these problems you mention, like the "excess dealers which can only be solved in bankruptcy court" statement, sound unlikely on their face without more explanation.
Other statements just show you are making cheap shots. For example, supporting government intervention is quite often the only way to protect little guys against big corporations. Calling people yokels is hardly useful, either.
May 1, 2009 3:37 PM | Reply | Permalink
Looks like somebody ought to let GM know.
May 1, 2009 10:22 PM | Reply | Permalink
A Chrysler Bankruptcy Won't Be Quick
In addition there are credible estimates in today's news that legal fees (for both GM and Chrysler) bankruptcies will be in excess of 200 million dollars (hourly fees of $900-$1000)! If Obama wants to appeal to patriotism let him request that these - the REAL vultures - reduce those fees to $100-200 per hour. Fat chance.
If these Chapter 11 bankruptcies aren't quick then they will turn into Chapter 7. Not just for GM and Chrysler, but for the whole supply chain.
We will then have the privilege of living through the mother of all L-shaped depression with domestic unemployment exceeding 25%.
May 2, 2009 6:29 PM | Reply | Permalink
Bankruptcy wouldn't be catastrophic: Mark Zandi
Mark Zandi is the best source available.
I agree that Chrysler is finished, either in court or a few months later when the Fix-It-Again-Tony partnership unravels.
I am far less sanguine than he about what follows.
May 2, 2009 7:02 PM | Reply | Permalink
The FIAT Group actually makes pretty decent cars these days. Keep in mind they own Ferrari and other high end brands as well. There's plenty of decent and affordable FIATs that could be made in the USA and rebadged.
FIAT actually has a coherent European style design, emphasizing moderity, efficnency, parking, fuel efficiency, etc. Japanese and European cars also have design coherency. Some American brands like Cadillac or various Ford models have design coherency, most don't.
Chrysler design is neurotic, stuck in a half-assed effort, triangulated somewhere between 1920s American Art Deco, 70's clunkiness, and random attempts at modern styling. They're mostly huge cars with a lousy finish, poor reliability, and half-assed retro-modern styling.
Chrysler's target market is apparently retired people who hardly drive at all, don't expect reliability to have improved much since the 70s, have bad eyesight, and haven't updated fashion sense in decades.
May 2, 2009 10:49 PM | Reply | Permalink
Bribes,
Your criticisms of me are well taken. I know very well that there are better ways to express my views. However, your reaction to me is the same as my reaction to Taplin (and others) so you'll just have to take the good (if you can find any) with the bad. Sorry.
Dealers have large investments in their businesses and are very well protected by state franchise laws. Without federal bankruptcy it can be very, very expensive for car companies to shut them down, something which must be done with the brands that are being discontinued (obviously) and even with the brands that will survive (but in a downsized form).
Bankruptcy law normally says senior creditors must be paid in full before junior creditors receive anything. In Chrysler's case the holdouts were all senior to the unions. BUT. If 2/3rds of the creditors (2/3 as defined by the law) agree to a business plan which requires the seniors to receive less than full value then they can be forced to accept it. At present the government has the votes of the requisite 2/3rds but that can change as the bankruptcy plays out.
Some of the holdout funds have CDS (credit default swaps) which are insurance against default and - usually - pay full value if the debtor enters bankruptcy. So it is obviously in the interest of those funds to force bankruptcy.
Chapter 7 is the biggest risk of all. If no viable plan can be achieved under chapter 11 then the company will be shut down and sold off at auction. Bankruptcy laws says that all parties must be heard if they so desire. This can take a long time - too long because some critical suppliers can then also be forced into bankruptcy or move on to other clients. The government thinks that section 363 will allow it to prevent such a situation. No one is sure whether that will work.
May 1, 2009 11:54 PM | Reply | Permalink
Who the hell would do a swap on Chrysler debt?
May 2, 2009 3:30 AM | Reply | Permalink
I wrote about this earlier -
http://tpmcafe.talkingpointsmemo.com/talk/blogs/eddie-george/2009/05/what-was-obamas-thinking-behin.php
I don't quite follow the reasoning that certain hedge funds lost a game of chicken - they could very easily have made the correct decision by rejecting the deal on offer. And I have doubts that Obama vented at them purely out of righteous populism.
I don't think this caricature of Obama as the big-swinging dick exactly answers my question - and now, what if the courts are more generous to the hedge funds than the government-backed deal would have been? Would that not embolden bondholders?
By the way, that Times article you linked to suggests that Perella Weinberg backed down because they didn't want to jeopardize future business with the government, not because they didn't feel their reluctance to accept the deal wasn't justified on the merits. Conflicts of this sort at investment firms are hardly new, but it adds another hue to this rather more complicated picture.
And I have to take issue with this suggestion:
"It's not a smart business strategy to play chicken with Obama."
I don't give a crap who is president, but this is creepy. The idea that a business should roll over simply because the government wants it to accept a particular deal is wrong on so many levels.
Ken Lewis is potentially is very hot water with the SEC for completing the Merrill purchase because, according to his sworn testimony, Paulson told him to. Businesses properly have certain interests to present; "what the government wants" is however not one of them.
May 1, 2009 12:22 PM | Reply | Permalink
Please don't get all teary eyed on us about the proper role of business and government. Each example, BoA, Chrysler and GM, surrendered their autonomy when they accepted government bailouts.
May 1, 2009 1:05 PM | Reply | Permalink
And did the 20 hedge funds surrender their autonomy as well?
May 1, 2009 1:09 PM | Reply | Permalink
Nope. Just their money when they made their bad investment to begin with.
May 1, 2009 1:38 PM | Reply | Permalink
This is a good point. Ford doesn't even come up in any of these discussions.
Why?
Because Ford is self reliant right now. Obama could tell Ford to get rid of it's CEO and Ford could reply back to him, "we'll take that under advisement and get back to you on that" and then go along their merry way.
I don't agree with the general policy approach we are taking in this situation, along with the financial companies.
I think we are doing Industrial policy in an ad hoc basis and on the fly.
I think we should use the situation to develop an industrial policy. Admittedly that's a big debate - not just whether to have an industrial policy, but how much and where to apply: with only sunset industries, for developing new industries and technbologies, etc... But we've had a department of Agriculture since Lincoln was President. It seems to work well.
The Japanese companies are competitive for a reason. Their auto industry was created using smart industrial policies. The Koreans copied it to the extent they could. Prior to 1987 it was against the law to import any car into Korea. Most foreign manufacturers are still effectively walled off from participating in Japan's auto industry. Instead what Japan did, and Korea to a limited extent, was create hyper-competition domestically and that made those companies sufficiently competitive to be able to compete anywhere on earth.
If we had a Industrial Policy, and a Department of Industry, presumably they would never have allowed the auto industry to become so hamstrung with burdens that limited their competitive ability. They would have helped to ensure that the companies didn't have to worry about providing health care, retirement burdens and would have worked to keep labor contracts flexible enough to allow innovative practices etc... That's the least an industrial policy can do. An industrial policy can make sure that there's always enough capital available for budding new technologies, that education levels are sufficient to meet industry needs, that sunset industries bow out gracefully instead of with sudden tsunami wripples across the entire economy. And for those industries that have strategic value, even if they are in sunset (like the ability to manufacture 'boots' and uniforms for the army in mass) - that a sufficient industrial plant remains in the United States to meet our strategic needs.
Ah, sorry, I got way off thread, with my own rant.
May 1, 2009 11:33 PM | Reply | Permalink
But even the Japanese car companies are not all doing well right now. Massive layoffs have hit Toyota City, which is much like our Elkhart -- a one-horse town with a very sick horse.
May 2, 2009 7:48 PM | Reply | Permalink
Well, Toyota is doing relatively well and is assured to be one of the best car makers into the foreseeable future.
One issue here is the presumption of some developed countries seeing perpetual growth in developing markets.
The reality is that transporting vehicles to other markets is very expensive and local production often has an economic advantage, and may also better serve the needs of local consumers. Such as Chinese and Indians buying their own cars increasingly.
Additionally, an increasing number of countries are competing for the export market. It's not like the post WWII era when America designed most everything big, Japan designed most everything small, etc. Korea for one example is now taking a bite out of the Japanese and American auto market, as well as competing with Japanese electronics, and American durable good exports.
May 2, 2009 11:33 PM | Reply | Permalink
I don't think the idea is that the business should "roll over," because Obama offered something. The idea is that Chrysler is in deep, deep trouble. It's spiraling out of control and the hedge fund creditors, instead of trying take what the government offered (however unreasonable it may have seemed) decided to extort a bit more.
What the creditors should have at least acknowledged was that Chrysler wouldn't have been around if the government hadn't stepped in in the first place.
Obama played ball for awhile, but eventually, it became apparent that the company had to repay certain creditors and it figured it was more appropriate to avoid the set-asides, so it filed for bankruptcy.
Your question about how the court should treat the hedge fund creditors is a good question. I suspect that these creditors were secured and will want Chrysler to liquidate to repay their debts. Chrysler, though, will likely convince the court to allow it to reorganize its business and repay the hedge fund creditors down the road.
May 1, 2009 2:18 PM | Reply | Permalink
"repay the hedge fund creditors down the road"
- yes, and if they get anything more than 10 cents on the dollar "down the road" - they win. Da da!
May 1, 2009 2:32 PM | Reply | Permalink
With 70% bondholder approval, aren't the courts equally likely to implement the deal on the table?
May 1, 2009 2:34 PM | Reply | Permalink
I don't know that this is necessarily the case. That is, the reorganization is something creditors generally approve. So, if the hedge funds feel like they're screwed, they can object and the judge has to make sure there are no sort of preferential treatments for specific creditors.
In this case, the main argument the hedge funds were making was essentially that the bank creditors had to agree with the government's proposal because they were dependent, like Chrysler, on the government.
So, it's too early to tell whether the hedge funds are getting screwed or not. They did loan the money to Chrysler, which is getting out of repaying it as agreed. It's strange, though, that most creditors were so willing to join. My hunch is that the hedge funds were really thinking the government was going to give them a sweeter deal -- and were surprised that it allowed Chrysler to slide into bankruptcy.
Oh, and I hardly think that Obama wants the union to control this defunct company, Shooter. Chrysler isn't able to really do anything until someone with some capital can come in and help Chrysler. Everyone has left the building -- and the union is there while it's burning down. Do you think the union is saying, "wait till this fire stops. We'll have a great new building!" Come on. Think about it.
May 1, 2009 4:14 PM | Reply | Permalink
If the dispute didn't involve the "rogue investors" demanding the government pony up another half a billion in taxpayer money, you *MIGHT* have a point.
May 1, 2009 2:31 PM | Reply | Permalink
Oh boo fucking hoo, cry me a river for the poor, pitiful vulture funds. They play bankruptcy chicken for a living. Unrelated business considerations and arrangements that creditors may have with each other regularly play a role in whether they agree to accept a cramdown outside of bankruptcy. Same thing happened here. They misread the other side this time and now they're getting spanked for it.
May 1, 2009 3:02 PM | Reply | Permalink
Thank you for pointing out the gamble the hedge funds take. I'm scratching my head over some of the posts supporting the hedge funds and thinking - did I miss something? I thought the deal was they made so much money because they took so much risk. So they finally lose a bet and all of a sudden it is supposed to be different game?
May 2, 2009 3:20 PM | Reply | Permalink
There is a tinge of vindictiveness in TPM's post, to be sure...(gosh, I wonder why anyone should feel vindictive towards the people whose trillions of leveraging and 'financial innovation' triggered the near complete collapse of our banking system?)
But there's a deeper level at which I think Josh Marshall et al are right: Wall Street and its political clients love to trumpet the virtues of 'free markets', or the unrestricted play of capitalism, etc. etc. -- while ignoring the elementary insight behind all political economy, which is that 'free markets' (or any other kind) depend on larger interaction frameworks provided by law and by states. There's no alternative.
(This, as a sidebar, is why the same people who love to praise 'totally free markets' today also love to praise the 'rule of law' and a certain kind of Whiggish state in history).
But particularly in hedge fund world, it became far too easy to drink the Kool-Aid, far to easy to believe that they really were brave free marketeers, not people playing arbitrage agaisnt a large state-backed regulatory system, as they were. Now they confront the ugly (for them, not for me!) reality that state power, being the precondition for their kind of game, also retains the power to change the rules and remake the game, and there's not much they can do about it, except seek to influence the state even more than they already do.
From celebrating their cleverness in circumventing the rules two years ago, hedge fundies are now whining that we the people are changing the rules and that's not fair!!
At this level, then, Josh is entirely right -- not that playing chicken with President Obama is not a good business plan, but that playing chicken with the state is not a good business plan.
May 1, 2009 4:43 PM | Reply | Permalink
Faux 'News': Where Freedom Goes to Die.
May 1, 2009 2:09 PM | Reply | Permalink
ACK! how'd that end up in this thread?
May 1, 2009 2:10 PM | Reply | Permalink
What do you expect... Dan Quayle is a member of Cerberus Capital
May 1, 2009 2:34 PM | Reply | Permalink
In the grand scheme, this is but a tiny victory. But it is a sign of hope, to be sure.
May 1, 2009 2:36 PM | Reply | Permalink
This is just banana republic pressure tactics. Obama is trying to stiff legally secured creditors in order to give 55% of the company to the union. Plus $5B or so. The only way this gets more blatant is to send troops to the offices of the hedgies.
May 1, 2009 3:06 PM | Reply | Permalink
So you wanted Obama to pay out more tax dollars to the hedge funds? Or what? What would you like to have happened?
May 1, 2009 4:11 PM | Reply | Permalink
Exactly what has happened, bankruptcy court where the rule of law is applied. Obama's attempt to intimidate secured creditors in favor of unsecured creditors is just rank cronyism. This is the sort of thing one would expect Blagojevich to do.
May 1, 2009 4:19 PM | Reply | Permalink
He intimidated them how? With a threat of bankruptcy? The secured creditors seemed to prefer bankruptcy so they got what they wanted. How do you construe that as a threat?
Not to mention the creditors took risks and they knew they were taking risks. From the NYT article: "Many of them [the creditors] bought Chrysler debt for about 30 cents on the dollar, long after it became clear that the company was in trouble."
May 1, 2009 4:41 PM | Reply | Permalink
"He intimidated them how"
Treasury threatened them that the Court will rubber-stamp their proposal on reoganization. They didn't budge.
Obama clearly lost this round because the company was forced to file for bankruptcy.
If the "speculators" can force liquidation in court, they will get more than 10 cents on the dollar.
May 1, 2009 5:28 PM | Reply | Permalink
And we would all be the poorer for it.
May 1, 2009 6:58 PM | Reply | Permalink
You've got things exactly backwards.
1) They drove themselves into bankruptcy over the last decade, by making crappy vehicles. Oh, btw, they didn't invent the minivan. A small/boxy van type vehicle for families has been popular in Japan and Korea for decades.
2) The inept energy, climate, and financial policies of the Bush Administration, and the Reaganomics of Clinton, created an environment where everybody was allowed to sell so much financial snake oil it threatened to take down the entire global economy. That elevated it beyond a market concern, into a serious issue of national security, public health, and the liberty of ordinary people who'd suffer the fallout.
3) Obama, in trying to fix this mess has offered help to institutions including Chrysler, for which he's also made reasonable demands so as to avoid throwing good money after bad. Rightly, he's also acknowledged that workers are not investors, not in the risk business, and should not be expected to unduly shoulder the losses of gamblers.
4) Every penny of government assistance offered to shareholders, they should be grateful for. If shareholders don't like it, don;t want help, they're free to accept their bankruptcy of their own making, mismanagement, and poor investing.
5) Do understand that a manufacturing base and innovative technology in cars, aerospace, electronics, etc. are at some level important to our sovereignty, quality of life, and national security. If Chrysler can't meet those goals while also maintaining profitability, then another auto manufacturer should be encouraged to do so.
May 1, 2009 8:18 PM | Reply | Permalink
Oh give me a break.
These were vulture capital guys who swooped in on what they knew was a deeply troubled company and bought up some of its secured debt paper at 30 cents on the dollar. Get that? The secured creditors they bought the debt from thought they were doing good to get out of it at 30 cents on the dollar, notwithstanding the fact that the debt was collateralized by the company's assets. We're supposed to feel sorry for the buyers of that debt because it turns out the sellers were right and they were wrong?
These guys knew that the market for the collateral securing the debt they wre buying at a discount was terrible. This wasn't salad oil or gold or some other fungible product that could be dumped on a heavily traded exchange, it was plant and parts inventory which was only immediately useful to someone who was interested in building Chrysler cars (i.e. no one), wanted to retool it and expand their own car manufacturing business (i.e. no one) or wanted it for scrap value (i.e. would buy it only at a huge discount).
In other words, they completely miscalculated how much leverage they'd have if it came down to bankruptcy. They acted like it was completely unheard of for the owners of a huge amount of unsecured and/or subordinate debt to muscle the owners of a smaller amount of senior secured debt. They apparently believed that as holders of a comparatively smaller amount of secured debt they bought at a fire sale, they'd really be able to waltz in to bankruptcy court and force a liquidation of an iconic company over the objections of every other stakeholder who'd signed on to a reorganization plan. And even after it was clear they couldn't, they insisted on acting like they thought they could.
What really pisses me off here is that the people weeping bitter tears over how shabbily these poor noble capitalists are being treated are the same ones squealing in outrage at the notion of helping people hammered by subprime mortgages.
A respected white shoe Masters of the Universe Wall Street investors buy what know is risky debt--because that's what "seventy percent discount on secured debt" means, for Christ's sake--and then gets hammered because it turns out their assessment of the risk was wrong and there is lamentation and recrimination over how mean the government is being to them. However, some guy with an associate's degree in engine repair signs a subprime mortgage with terms that are so deliberately inpenetrable that even lawyers say they can't understand them, and these same guys insist that they should be thrown to the sharks because its their own fault for failing to properly assess the risk.
May 1, 2009 4:58 PM | Reply | Permalink
"...the debt was collateralized by the company's assets"
- that's the critical point that you keep missing.
May 1, 2009 5:32 PM | Reply | Permalink
My understanding was the debt was bought by the hedge funds at 30 cents on the dollar, and the hedge funds wanted to break up and sell off Chrysler, its tools, factories, buildings etc. in order to get a 300% windfall profit on their original purchase of the distressed debt paper.
Instead they were offered more or less what they paid for the debt, perhaps at loss.
May 1, 2009 5:43 PM | Reply | Permalink
No they weren't. Read this to get a better idea of who owed who what, and why the union gift push is just Chicago cronyism.
May 1, 2009 6:29 PM | Reply | Permalink
shooter242 there is absolutely nothing in your link that has any relevance to my comment (standard for you) - that the hedge funds bought debt at a big discount. The standard mode of operation of these 'vultures' is to buy distressed debt, and then destroy the company and its jobs in order to collect their pound of flesh and profits. The New York Times gave the relevant info:
link
May 1, 2009 8:30 PM | Reply | Permalink
Exactly. Shooter's link does nothing to support his view. In fact, it does just the opposite, pointing out that the Vulture funds basically wanted to be bailed out with taxpayer money, leaving the UAW to take the hit. Which is just bizzaro.
Again demonstrating that these hedge fund crooks and their supporters seem to be completely amoral. They'd literally be selling snake oil and mugging old ladies, with a government subsidy to do so, if they could.
May 1, 2009 8:44 PM | Reply | Permalink
Noble,
isn't this a replay of the 'leveraged buyout' boom of the 80s where vultures would use a company's own pension fund as leverage to buy the company then sell it off piece by piece destroying the company and all the jobs that existed?
They turned these companies into automobile chop shops where the parts are worth more than the whole and the only people that benefitted were the sharks.
May 2, 2009 8:22 AM | Reply | Permalink
That's exactly what they hoped for, to take Chrysler apart piece by piece, against the opposition of other stakeholders. They counted on other stakeholders being incapable of stopping them. Their miscalculation.
To play devil's advocate, Corporate Raiders often do attack weakened companies that perhaps should liquidate. Personally, I think Chrysler is a fairly awful brand.
However, in the process Corporate Raiders force the failure of weakened companies and basically rape them, doing enormous damage and leaving a wake of carnage. On balance the damage is far greater then the good of redistributing resources to marginally more efficient companies via such accelerated and harsh means.
Furthermore, great wealth winds up distributed to people who only know predation and destruction, who then create self perpetuating "industries" of predation and destruction, seeking out new victims. That distorts markets and creates further incentives for shorting and manipulation.
There's nothing economically efficient about making destruction the most profitable business around.
If Chrysler should ultimately fail after the best efforts of management and labor, at least the transition will occur over enough time that stakeholders may adjust with the least carnage to communities and the economy
If Chrysler can turn it around and become the US equivilent of Subaru for example, good for them!
If for example Chrysler makes the equivilent of an Subaru Impreza, a stylish AWD hatchback equally suited to urban driving or outdoors, and they make it a hybrid, I'll be their 1st customer.
May 2, 2009 10:36 PM | Reply | Permalink
And I think the point you keep missing is they aren't the only stakeholder in those assets. It was their miscalculation to imagine they were.
Corporate Raiders imagine nobody's ever seen a Trojan Horse before, that they'll walk in with a small amount of capital and raze the place to the ground. Well, as it turns out, people have seen Trojan Horses before and know what corporate Raiders do, and they don't actually want to be looted.
Sorry. Life's a bitch, and turnabout is fair play.
May 1, 2009 8:27 PM | Reply | Permalink
No, didn't miss it. I believe I even said it twice. And now they get to find out if the bankruptcy judge is as impressed with that as they thought everyone else should be.
May 1, 2009 8:49 PM | Reply | Permalink
Exactly. I think the vulture's business plan went wrong when they threatened to jump off a cliff if Obama didn't give them a golden parachute.
May 1, 2009 8:52 PM | Reply | Permalink
The overarching point to all this is that if these funds thought the capital structure wasn't legal THEY WOULDN'T HAVE BOUGHT THE BONDS AT ANY PRICE. What you and the rest of the schadenfraude sandbox are supporting is fraud. Pure and simple fraud.
May 2, 2009 9:46 AM | Reply | Permalink
No rules were changed.
Again, the vulture funds were forecasting Chrysler going into bankruptcy, and being able to liquidate it.
There was no "rule" which stated that had to happen. You're truly delusional if that's what you imagine.
There was no rule forbidding other entities, including government, from helping keep Chrysler afloat and preventing that liquidation.
There is no rule which makes the vulture funds the managers or only stakeholders in Chrysler.
If there was such a rule, and no risk, then vulture funds could never have bought @ 30 cents on the dollar.
They vulture funds thought they had a sure thing, free money. They screwed the pooch. Boo hoo.
May 2, 2009 11:45 PM | Reply | Permalink
You seem angry, Steve. More of this, please.
May 2, 2009 11:17 PM | Reply | Permalink
Since these small creditors agreed at the last minute (when it was too late) it's clear they recognized that the government was offering better terms than what they will get out of bankruptcy court. They called Obama's bluff that he wouldn't take Chrysler into bankruptcy, they were wrong and they lose.
May 1, 2009 3:50 PM | Reply | Permalink
You have that exactly wrong. Obama didn't want bankruptcy. The creditors will get a better deal from the judge. Read the link I provide just above our post.
May 1, 2009 6:35 PM | Reply | Permalink
You're still wrong and just willfully ignoring the facts. Nobody wanted bankruptcy as a 1st choice.
The funds would have preferred some degree of bailout, and tried to hold out for more. Basically they gambled Government would pay any price to avoid bankruptcy, and they could extort the taxpayer, while screwing the UAW and everyone else.
As proof of that, the funds accepted the offer at the last moment, but it was too late. The "playing chicken" analogy is very accurate for the game they played and lost.
The funds aren't going to get what they wanted in court, becasue they're not the only stakeholders, and have badly over estimated their leverage. Bankruptcy will inevitably drive down their investment as well simply due to disruption and loss of brand. The funds have really screwed the pooch on this one.
May 1, 2009 9:02 PM | Reply | Permalink
They are still in bankruptcy, are they not?
May 2, 2009 11:20 PM | Reply | Permalink
I enjoy watching the right wing capitalists on here and on Wall Street whining.
May 1, 2009 4:01 PM | Reply | Permalink
Same here. Especially when they talk about following the rule of law.
May 1, 2009 5:00 PM | Reply | Permalink
Me, too. Except I feel for the suppliers who are going to take a big hit for the next 2-3 months - not all of them will survive.
May 1, 2009 5:23 PM | Reply | Permalink
Just more evidence that hedge funds need to be heavily regulated and heavily taxed. Shine a light on these vultures.
May 1, 2009 4:26 PM | Reply | Permalink
True that!
May 2, 2009 3:37 AM | Reply | Permalink
As unpopular as it may be, I'm inclined to argue for the side of contract law on this one. Maybe the secured creditors will get less than they were initially offered, maybe they won't. Regardless, it's important to let the system work. This isn't Venezuela, not yet at least.
As for the folks on here arguing in great detail about why turning secured creditors into villains is a terrible idea - save your breath. Arguing with some of the socialists on this site will get you no where. They will respond to your arguments with the same thoughtless, one line comments until you come down to their level. And once you start arguing on their level, they'll just beat you on experience.
May 1, 2009 5:17 PM | Reply | Permalink
If you take the last three sentences, and replace "socialist" with "Republican" you've got some truth there.
May 2, 2009 7:56 PM | Reply | Permalink
"As unpopular as it may be, I'm inclined to argue for the side of contract law on this one."
The last three words are interesting. Is there a situation where you wouldn't be in favor of contact law?
May 1, 2009 5:42 PM | Reply | Permalink
Well, Obama & Co certainly don't favor contract law when they sense political headwinds.
Oh, and it's contract law. We're not debating disposable lenses or anything.
May 1, 2009 5:55 PM | Reply | Permalink
Oh Jesus, Buddha and Zoroaster!
When the "contracts" in question are debt instruments of an insolvent company, the sacred sanctity of contract you're so piously moaning about goes down the crapper. No socialism involved, that's Capitalism 101. These guys knew that full well and were, in fact, counting on it. They weren't bone fide purchasers of debt who were snookered into paying full value thinkng there was no risk of loss. They were buying discount shanks for the inevitable eye gouging, kidney punching prison riot among creditors and stakeholders that invariably breaks out whenever a public company is on the brink of bankruptcy.
There's never been a pre-bankruptcy scrum in history where the junior creditors and other stake holders didn't break out every weapon, fair or foul, that they could muster to try to beat down the senior debt holders. A junior creditor happens to hold a demand note from a senior creditor? "Hmmm, it would be a shame if you forced us to call that note in by making us take too big a loss in this thing now, wouldn't it?" That's the way it goes, and that's the way this went.
May 1, 2009 9:45 PM | Reply | Permalink
Exactly. Good comments.
Also, as you know and pointed out, that's why they were able to buy at 30 cents on the dollar to begin with: because they were assuming the burden of going through this process.
If they don't like it, if they don't have the stomach for it, if the outsize profits they've been making aren't satisfactory any longer, then perhaps they're not the corporate raiders they thought they were.
They could always try another business. Perhaps they could try designing and manufacturing a product to meet consumer demand, you know, working for a living.
May 1, 2009 10:09 PM | Reply | Permalink
Contract law does not provide for enforcement of contracts that against the public interest.
May 2, 2009 7:58 PM | Reply | Permalink
Are you guys sure that those hedge fund debts weren't insured by AIG credit-default-swap Treasuries? With Uncle Sam quietly covering their back ends, why would they care whether Chrysler comes, stays, lays or prays?
May 1, 2009 6:21 PM | Reply | Permalink
Ordinary guy is just another hate filled racist who will never give Obama his due because he's a racist. I am convinced that the people who hate Obama so much, do so because they are hate-filled racists. What else could be the reason?
This has got to be the most honest, decent guy ever to be in public life, let alone President.
May 1, 2009 8:02 PM | Reply | Permalink
A lot of the same people hated Clinton too ...
May 2, 2009 3:39 AM | Reply | Permalink
2012 is years away. Sure you want to tip off the trolls to the re-election strategy this early?
May 3, 2009 1:55 PM | Reply | Permalink
Cerberus is the 3-headed dog god that guards the gates of hell for Hades, and was Hercules' twelfth labor .
Playing chicken? Professor, you missed a golden fleece of an opportunity here...
May 1, 2009 9:11 PM | Reply | Permalink
What?
May 1, 2009 9:33 PM | Reply | Permalink
Oh, god, lol, how did I not see it coming?
May 1, 2009 9:52 PM | Reply | Permalink
Ack!
Stealth attack!
May 1, 2009 10:00 PM | Reply | Permalink
Chickens see everything....
May 1, 2009 10:05 PM | Reply | Permalink
To good to pass up.
They played chicken with Obama and he fried them.
May 4, 2009 11:08 AM | Reply | Permalink
Jon Taplin gets the Bootlicker of the Day award; only for the day, because there are so many on the infantile and pathetic Left who - ignorant of the American principles such as 1) The rule of law, 2) separation of powers, and, 3) individual rights - are ready, able and willing to worship at the alter of undiluted government power, in the person of Barack Obama.
By virtue of the US Constitution, and by virtue of federal statutory provisions enacted pursuant to the Constitution, secured creditors have a pre-existing right to be made whole in a bankruptcy proceeding, before junior creditors get a dime. This is that law, and the dissident Chrysler bondholders have a right to stand on their rights according to the law, despite the desire of Jon Taplin and others of his ilk to bow & scrape before their all-powerful Dear Leader.
May 1, 2009 11:23 PM | Reply | Permalink
Where did Professor Taplin suggest that this was not lawful behavior on the part of Cerberus Capital?
Another damn fool shrieking Obomination irrationally.
May 1, 2009 11:29 PM | Reply | Permalink
From Bloomberg ... who also apparently started the whole "playing chicken" metaphor.
May 2, 2009 2:38 AM | Reply | Permalink
While "Bootlicker of the Day" nails it, I think you are wrong about the absolute ascendancy of the senior debtor.
More generally, the times are truly extraordinary. Would you have our whole financial and economic system collapse if nothing can be done within the law? That, increasingly, is the situation we face.
May 2, 2009 8:22 PM | Reply | Permalink
In this hour I was responsible for the fate of the German people, and thereby I became the supreme judge of the German people.
May 2, 2009 9:43 PM | Reply | Permalink
Not surprising you had that particular quote at the ready.
May 2, 2009 11:24 PM | Reply | Permalink
Hmmm. I'm going to speak a little more slowly for the ill-informed here.
1. These funds bought distressed bonds, issued by Chrysler and sold to others, based on the bonds legal position of being paid first in event of bankruptcy.
2. This is a legally established, tested, well precedented strategy, without which the bonds WOULD NOT BE BOUGHT.
3. The price paid doesn't matter. Whoever holds these bonds gets 100 cents/dlr. It's a guarantee by law.
4. The Obama administration decides to artificially prop up Chrysler, and in doing so assumes it can bypass precedent to suit it's own purposes. It makes an offer to rearrange who owes what, paying off the creditors.
5. Rather than follow the rule of law regarding who gets what in a possible bankruptcy, it makes an offer to all parties that is noxious.
6. The funds are owed $7B. They are offered $2.25B to go away. Simultaneously the union health fund (who is behind the hedgies) is owed $11B, yet offered $4.5B plus 55% of the new shares of "post bankruptcy" Chrysler! Wow, what a deal. From back of the line to majority owner!
7. This offer from the White House is so corrupt that the hedgies say forget it, they'd rather take their chance in court, and force bankruptcy rather than bend over for the union.
8. It is the mob tgactics of Obama that precipitated this bankruptcy, pay for play at it's most blatant. And to top it off, here is the hedgies lawyer describing the threat from the White House that brought about the last minute change of heart of one fund.
9. After all this, the moral of the story is that smart people with money to lend are going to avoid getting into business with the Government any near, for the same reason it's unwise to borrow from the mob. And don't think the Chinese aren't watching the pressure tactics in play.
10. Dirty capitalists are how any large enterprise is funded. No dirty capitalists, no money, no enterprise. Or in actuality, you'll have to pay credit card rates for money to compensate for the risk demonstrated in this current morality play. Obama is now no better than Blago.
May 2, 2009 10:29 AM | Reply | Permalink
Shooter, you're the slow one. Let me try and make this clear for you:
Your assumption, and that of the vulture funds, is they're entitled to force Chrysler into bankruptcy, at their will, and reap the profits. No. In fact, other stakeholders are perfectly entitled to ask for help or do all they can to stop the rape of their companies and return it to profitability.
The other stakeholders are going to fight to keep their company afloat and stop the vulture funds from liquidating them. They're perfectly entitled to do so by any legal means, including making their case to the American public and asking for assistance.
In fact, the mentality of Vulture Funds, that they actually oppose a company returning to profitability and would rather see it fail, is just sick. Predation isn't the rule of the land.
Sorry for you if you thought it was a God given right to rape companies without opposition. The vulture funds knew that going in. All the whining is just pathetic.
Also, you don't have to threaten to go away, please just do. You're not wanted, needed, nor liked. Our economy is not dependent on vulture funds. They're a net drag, leeches on the economy, doing far more harm than good.
May 2, 2009 11:04 PM | Reply | Permalink
May 2, 2009 11:18 PM | Reply | Permalink
No, that's not the law at all. You're delusional.
They have no authority to manage the company or force it into bankruptcy.
May 2, 2009 11:37 PM | Reply | Permalink
In case you missed it, quoted from the Bloomberg article above:
“The U.S. bankruptcy code foresees the possibility that it may be necessary to vary from absolute priority, in particular when a two-thirds majority is convinced it makes legal or business sense,” Hahn said. “If the government has consents from 70 percent, that’s more than enough” to give equity to junior creditors."
That right there ^^^ actually is the law.
Your repeated assertions about the law are simply mistaken.
May 2, 2009 11:54 PM | Reply | Permalink
"3. The price paid doesn't matter. Whoever holds these bonds gets 100 cents/dlr. It's a guarantee by law."
LOL!! If that's actually what you think, then you have a pretty lousy understanding of the relevant issues.
In lay terms:
IF (and that's a big IF) assets are liquidated into cash, or the company is sold, or of the company returns to profitability, (basically whenever the company has cash) THEN they're paid out first, before other stakeholders.
HOWEVER, the vulture funds do NOT have the right to demand a liquidation, nor to manage the company, nor otherwise determine where or how the company does or does not have cash to repay them.
If that's what they wanted, to run the company, then they should have bought a controlling share of common stock at market value. But they didn't.
They are in no way "guaranteed 100 cents on the dollar by law" as you so absurdly suggest. In fact there's an enormous danger of miscalculation and risk involved, which is why they can buy @ 30 cents on the dollar to begin with.
Essentially, it's a calculated gamble. They stand to triple investment if they win, or lose thier invesment if they miscalculate.
This time they miscalculated. Boo hoo for vulture funds.
May 2, 2009 11:24 PM | Reply | Permalink
To those arguing contract sanctity of senior debt holders (legitimately, though I suspect the courtrooms will be far messier), Prof. Kingsfield is harrumphing in agreement. What's overlooked in much of this is how the political game has become so rigged by Wall Street Masters over the past 30 years. Unions "leveraged" their labor for pensions and other illiquid retirement benefits, contractual promises ever-more-easily scrapped in courts by Wall Street-massaged bankruptcy legislation (not to mention years of wink-winking at PBGC contribution shortfalls). I suspect Obama offered something outside of the box that might allow for some "fair" loss allocation of what's left of an insolvent carmaker worth a couple of medium-sized strip malls. The Masters may do better in bankruptcy. We'll see. But more important, the Masters continue to whine-and-buy influence, refusing to acknowledge that the rules must change. It cannot be said often enough that, over three decades of outsized beltway influence, skimming billions for themselves while gambling with everyone else's hideously over-leveraged investments--a self-dealing business model that nearly crashed the entire financial system--the Wall Street Masters are failures. Abject failures. They've cashed out; few will ever answer for the misery and uncertainty they've delivered to millions of people. Perhaps relentless public humiliation is all that's left. Where's Thorstein Veblen when we need him?
May 2, 2009 12:57 PM | Reply | Permalink
I'm not proficient in the legalese of this case, but the issue at hand seems to be one of class. So often in this recession it seems to be that extremely wealthy people losing that wealth and drifting into the middle class (having to work for money instead of making money work for you) is an impossibility. Many of our laws and safeguards seem to be set up so that a mass of middle class people will slide into poverty rather than a few fat-cats have to actually do something than leech off the interest of the retirement funds of people who actually work.
Anything remotely legal that results in the workers getting their retirement funds while shafting the finance weasels is alright with me, and I don't see the merits of any other outcome.
May 2, 2009 2:49 PM | Reply | Permalink
To all of you arguing "the law," don't you know that if the President does it, it's LEGAL!
Where have YOU been for the past eight years?
May 2, 2009 8:03 PM | Reply | Permalink
Then can I presume you'll heap scorn upon Obama, like I also presume you did to Bush?
Or have you jumped on the Bush bandwagon regarding Presidential powers? Heh.
May 2, 2009 11:22 PM | Reply | Permalink
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