[Todd Zywicki, May 20, 2009 at 4:37pm] Trackbacks
Indiana Files Objection in Chrysler:

Well at least one set of secured creditors is objecting in Chrysler: The state of Indiana on behalf of the Indiana State Teachers Retirement Fund and the Indiana State Police Pension Trust. The objection is available here.

The pleading indicates that the hearing date is May 27. Tom Lauria is one of the lawyers for the objectors.

I'm glad that this is going to at least be forced to be teed-up for a hearing and give Judge Gonzalez a crack at this thing. Obviously this makes it more difficult for the case to be resolved on the government's preferred timetable as well.

The state's press release is here.

drunkdriver:
Maybe they will threaten the bankruptcy judge with not being reappointed?

Anything to further the goal of sinking taxpayer dollars into producing cars Americans don't want, while granting large slices of the pie to politically connected constituencies (unions).
5.20.2009 4:51pm
Abdul Abulbul Amir (mail):

That press release is obviously bogus. It claims that pension funds are involved, but only speculators own Chrysler bonds.
5.20.2009 5:00pm
rosetta's stones:

“As fiduciaries, we can’t allow our retired police officers and teachers to be ripped off by the federal government. The Indiana state funds suffered losses when the Obama administration overturned more than 100 years of established law by redefining ‘secured creditors’ to mean something less,” explained Treasurer Richard Mourdock. “The court filing is aimed not only at recouping those losses but also reasserting the rule of law and preventing the federal government from pursuing policies that strike at the heart of the capital system."


Very interesting.

This cuts many ways. Public employee unions. The UAW. A swing state in the 2012 election. State prerogative. GM's creditor base.

Plus the State Treasurer talks like he's girding for Lexington and Concord. This should be good.
5.20.2009 5:03pm
Harry Eagar (mail):
Bloomberg News has a story about this with the funniest business news headline in all history:

Fund Managers Burned by Obama Now Say They Are Wary
5.20.2009 5:04pm
Thales (mail) (www):
Um, what was the rating on the bonds when the pension funds bought them? It seems like a questionable investment for funds governed by ERISA . . .
5.20.2009 5:11pm
Patrick from OZ (mail):
It feels a bit weird that this has this effect on me but I am so happy that this is happening.

I guess we all forgot that there is one party in the schmozzle over whom the Federal government, especially the executive, has very limited leverage!

Vive la fédéralisme!.
5.20.2009 5:11pm
Hedberg:
Abdul Abulbul Amir says with a truculent sneer:


I guess those greedy pension funds are the ones responsible for Chrysler's collapse. Who knew?
5.20.2009 5:13pm
Zywicki (mail):
Abdul:
Great line!
5.20.2009 5:19pm
Barbara Skolaut (mail):
Good!

Hang 'em high, Mr. Attorney General.
5.20.2009 5:21pm
Cato The Elder (mail):
I wonder how businesses and mutual funds would hedge their positions without a "speculator" on the other side of the trade. Ah, I forgot, the charitable and the empathetic will simply offer to buy dodgy and speculative assets and bear those risks with other people's money.
5.20.2009 5:26pm
DennisN (mail):
This does pose an interesting obstacle. Obama may be able to threaten individual "Evel Speculators" with personal vilification and burning at the stake. A state pension fund is not suvbject for that type of pressure. It looks like they will be just as willing to wave the bloody shirt, as the Feds.

GO Hoosiers!
5.20.2009 5:29pm
Soronel Haetir (mail):
Too bad the state likely doesn't have enough skin in the game to matter in the bankrupcy process. Best of luck to them though, we all need a little more sand in the gears.
5.20.2009 5:31pm
Joseph Slater (mail):
Thales:

Public/government pension plans aren't governed by ERISA (although analogous state laws may apply).
5.20.2009 5:32pm
John (mail):
Perhaps the last line of the press release is the most significant: "he court filing follows a May 18 announcement by Treasurer Mourdock that curtails portfolios under his control from making additional investments in secured corporate debt of businesses that are receiving or will be receiving federal bailout money."
5.20.2009 5:39pm
visiting texas lawyer (mail):
An interesting point is that the payment of funds that gives the Federal Government leverage in the bankruptcy over some secured creditors is really a preferential payment outside of the bankruptcy.

There is the possibility of a clawback into the bankruptcy of all the TARP funds for any investor in Chrysler that allowed secured credit to be suborned.

All of those funds should be available to all of the creditors, not just the ones who are selling out the rest of their class and the rest of the creditors.

Consider the implications ...
5.20.2009 5:54pm
Gabe M. (mail):
The judge already denied this ruling. Click here.
5.20.2009 6:09pm
Melancton Smith:
I wonder what kind of implications it has for the auto workers to have a significant ownership in one of the automakers but not other automakers, like Ford?
5.20.2009 6:10pm
Loops:
Are other fiduciaries in a similar position with secured Chrysler debt opening themselves up to being sued by not making a similar filing?
5.20.2009 6:10pm
rosetta's stones:

There is the possibility of a clawback into the bankruptcy of all the TARP funds...


And this is the golden goose, for existing consumer lawsuits, existing warranty claims, supplier claims, and anybody else who's clawing for some clawed-back goose cash.

If it's not a legit bankruptcy, how are we picking the winners and losers?

I don't envy this poor judge.

But on the other hand, pass the popcorn!
5.20.2009 6:15pm
Hedberg:
I wonder what kind of implications it has for the auto workers to have a significant ownership in one of the automakers but not other automakers, like Ford?

From what I have read, it seems that the unions do not intend to hold an equity interest in either Chrysler or GM for long. It seems that they will turn the stock into cash quickly. I suppose that makes sense in that they need to fund health care and pensions and need to have the money invested in something a little less risky than the stock of companies very likely doomed to failure. Sort of a problem, though, in getting a good price when they're probably going to try to sell over 50% of new GM in short order. Spells trouble for those of us who will be getting a much smaller stake in the company for much more money.
5.20.2009 6:17pm
rosetta's stones:
Dang, he threw it out?! What a wuss.
5.20.2009 6:18pm
Thales (mail) (www):
"Public/government pension plans aren't governed by ERISA (although analogous state laws may apply)."

Thanks for the info; I'm definitely not an ERISA lawyer. I stand by the questionable investment point though.

As for the other issue people have been railing about, while I think it's fine for the hedge funds creditors to have their day in court (and they may well have a fiduciary obligation to push it to the limit), if the court approves a plan where the strong-arm federal gov't is the DIP lender and imposes leapfrogging that is the price of getting the union to cooperate, I just don't lose sleep over buyers of distressed Chrysler debt getting a lower yield or being the victim of the President's bully pulpit. They can pursue it all the way to the Supreme Court if it's worth it, but I'm not convinced by the heavens will fall argument about onerous lending costs for similarly situated companies in the future. Those costs are already pretty onerous, and the old model of huge unfunded legacies and industrial unions will die a deserved death. But there's some merit to keeping the auto industry around long enough to reorganize/sell off to foreigners and white knight buyers/DIP creditors rather than a simple fire sale in today's crazy market and an even bigger devastation of all of the allied industries--and if a minority of creditors (even if they represent other investors) stand in the way of that, really, what's wrong with criticizing them?
5.20.2009 6:19pm
Ben P:

Um, what was the rating on the bonds when the pension funds bought them? It seems like a questionable investment for funds governed by ERISA . . .


and

I wonder how businesses and mutual funds would hedge their positions without a "speculator" on the other side of the trade. Ah, I forgot, the charitable and the empathetic will simply offer to buy dodgy and speculative assets and bear those risks with other people's money.



My suspicion is that **through the magic of high finance** these corporate bonds were tranched and sold in tiny chunks to these investors rated not according to Chrysler's actual finances, but according to the risk computation that the financial modeling programs spit out.

"You're in the first tranch, that means that you get the first 10% of returns from these bonds as a whole, your risk very low here**"

** unless more than 90% of these assets default.
5.20.2009 6:22pm
cboldt (mail):
Direct losses were an almost insignificant fraction of the fund.
Indiana State Treasurer Richard Mourdock has outlined the impact of Chrysler LLC's bankruptcy on two funds he controls. He says the Major Moves Construction Fund lost $896,000 and the Indiana State Police Pension Fund lost $147,000.

www.insideindianabusiness.com/newsitem.asp?ID=35687
5.20.2009 6:41pm
common sense (www):
Even though Indiana's motion was rejected, I hope other state AG's pile on.
5.20.2009 7:00pm
Tatil:
Federal government may be favoring the union in this financial deal, but I doubt the bondholders would get any more money if the government did not interfere and Chrysler went into liquidation. If that is the case, the investors are not losing anything. It is the taxpayers, who will be providing funds for the union's health care etc., who is losing out. This whole show looks like crocodile tears to me.
5.20.2009 7:05pm
Calderon:
Re Gabe M, rosetta's stones, common sense's comments, all that the bankruptcy judge denied was the motion to stay the proceedings now. The state's objection to the sale is still pending. Or at least that's what the opinion seems to say on my quick read.
5.20.2009 7:49pm
rosetta's stones:
I think you're right. But, it doesn't look good for them in the future either.


First, the movant argues that the Treasury Department acted outside the statutory scope provided by Congress under the Troubled Asset Relief Program (“TARP”) and Emergency Economic Stabilization Act of 2008. Further, the movant alleges allowing the Sale Hearing to go forward would result in an unconstitutional taking of property under the Fifth Amendment of the Constitution.

However, the movant’s papers do not address the fundamental issue of whether they have standing to challenge any governmental action. There are substantial issues and disputes concerning the movant’s standing both under the Collateral Trust Agreement as well as the Supreme Court’s standing jurisprudence. Without having addressed these issues, the Court cannot say that the movant has clearly demonstrated that they have a substantial likelihood of succeeding on the withdrawal motion.


As I understand, that TARP bill contained buried language that allowed Treasury to sieze or bailout just about anything, from now until the sun goes supernova. It's pretty comprehensive, and not sure Indiana can crack that.

Plus, they may not have standing.
5.20.2009 8:17pm
RPT (mail):
"May 20 (Bloomberg) -- Hedge fund manager George Schultze says he may avoid lending to any more unionized companies after being burned by President Barack Obama in Chrysler LLC’s bankruptcy."

If you have to choose between hedge fund interests and labor, which way do you go?
5.20.2009 8:30pm
RPT (mail):
Re Tom Lauria, some people litigate for their resume.
5.20.2009 8:32pm
Ariel:
California could not cut $74M from its budget, b/c the SEIU was the beneficiary, and the feds would cut off bailout funds to CA. Indiana better hope it's not getting money from the feds.
5.20.2009 8:35pm
Cato The Elder (mail):
So the government is about to bail out GMAC, to the tune of $7 billion dollars, possibly $14 billion when all is said and done. According to the WSJ, the rationale is given is that..."much of the initial money will go to help GMAC shoulder new lending responsibilities for Chrysler dealers and consumers after Chrysler's government-orchestrated Chapter 11 bankruptcy filing last month. As part of the Chrysler reorganization, the government in effect dissolved Chrysler Financial and handed its business to GMAC, creating one big auto-financing arm that would service both companies."

Liberals, this...this travesty is as much of an assault on my rights as being beat down by the cops or being wiretapped by the Feds. Will I will be forced in my upcoming earning years to work to simply try to stay ahead of the inflation that is inevitably coming from these never-ceasing bailouts? I am feeling so despondent about the future right about now I can hardly breathe.
5.20.2009 8:40pm
John (mail):
Cato the Elder--

Of course you are screwed. No politician ever got reelected watching out for people's grandchildren. Your personal shafting will wait for an election cycle or two.
5.20.2009 9:18pm
John Moore (www):
It will be amusing as the union supporters who always vote Dem discover that their pension funds are invested in (gasp) the big bad capitalist companies and that, in fact, those funds constitute the biggest owners of companies.

Schadenfreude is sweet (but naughty)
5.20.2009 9:43pm
wemilii:
To all you Faux Fiduciaries out there: Grow a Pair

The unintended consequences of this will be immense. It is important, for the good of the system, that there be some push back
5.20.2009 9:58pm
Soronel Haetir (mail):
John Moore,

Given how quickly I suspect the union is going to sell their stake I don't think the workers are going to care that much. They'll only care if the union isn't actually able to liquidate the position before Crystler and GM go down the poop shoot again.

How many times will the government be able to bail out the UAW before there is a revolt by everyone else?
5.20.2009 10:07pm
Constantin:
I keep seeing predictions of doom for the automakers if Obama keeps shafting investors. What difference does any of this make? If the American public goes Galt on them, so to speak, and cuts off funds, Obama will just bail them out again with taxpayer money, won't he?

These companies now exist to fund the UAW, nothing more. That's never going away now, just like every other govt entitlement.
5.20.2009 10:49pm
News Guy (mail):
Well, according to this Onion-style article, the Chrysler deal seems to be working out pretty well for some people:

www.optoons.blogspot.com

(Scroll down to "Obama Gives UAW 55% Control Over Chrysler; UAW Negotiations With Itself Go Smoothly")
5.20.2009 10:49pm
Steven Den Beste (www):
How in hell can a creditor not have standing in a bankruptcy?
5.20.2009 10:56pm
Volokh Groupie:
@Steven Den Beste

I have no idea, I haven't been following this well enough. Is it typical for creditors to have to establish their standing in these types of cases? The following was why it was dismissed:


The movant’s papers do not address the fundamental issue of whether they have standing to challenge any governmental action. There are substantial issues and disputes concerning the movant’s standing both under the Collateral Trust Agreement as well as the Supreme Court’s standing jurisprudence. Without having addressed these issues, the Court cannot say that the movant has clearly demonstrated that they have a substantial likelihood of succeeding on the withdrawal motion.


Indiana Filing
5.20.2009 11:08pm
Soronel Haetir (mail):
Without knowing more I suspect that the standing issue comes down to not directly holding the paper. Their funds invested through someone else who is holding the paper and onboard the current deal.
5.20.2009 11:14pm
Think38 (mail):
So just exactly who is going to buy the shares of New Chrysler from the unions? Why would evil speculators want to commit their money to such an endeavor?

When do the investor/shareholder suits start for breach of fiduciary duty? Why should money managers get off free if they do not pursue all legal rights here?
5.20.2009 11:15pm
Christopher Cooke (mail):
All of these objections from creditors to the government's plan (and Zywicki's WSJ article) ignore the lack of available private financing for a Chrysler bankruptcy reorganization. Since the alternative to the government's plan was liquidation, the creditors were likely better off with this plan than they would have been without the bailout.

And, from the point of view of creating a company that can survive bankruptcy, the government's plan is eminently sensible. A car company needs (1) workers and (2) automobile technology, to survive. The plan ensures both. Distressed debt speculators are not as needed (I am not criticizing them, as they provide liquidity to the debt market, just noting that a car company needs other things more). I think this Indiana objection is bunk and likely to be overruled. If I recall correctly, the same attorney tried to spearhead other challenges until his clients changed their minds and dropped their objections. Looks like this latest challenge is more of the same: a publicity stunt.
5.21.2009 12:46am
Kazinski:
RPT:
If you have to choose between hedge fund interests and labor, which way do you go?

You don't get it do you? If hedge funds and other "speculators" don't invest in unionized companies, its going to do two things starve investment in unionized companies, and give a competitive advantage to non-unionized companies. Obama's policies of stealing from the speculators and giving to the unions, will doom the unions in the long run.
5.21.2009 12:56am
Tony Tutins (mail):

Hedge fund manager George Schultze says he may avoid lending to any more unionized companies after being burned by President Barack Obama in Chrysler LLC’s bankruptcy."

Is that what hedge fund manager George Schultze did, lend money to the unionized Chrysler LLC? Because according to his website, he buys garbage hoping it will turn to gold:

Mr. Schultze has been an actively investing in distressed securities for over 14 years. During and after graduate school he managed a family fund investing in distressed securities and special situations.
5.21.2009 1:38am
Constantin:
So just exactly who is going to buy the shares of New Chrysler from the unions?

Barack Obama, on behalf of the American taxpayer.
5.21.2009 1:39am
John Moore (www):

Given how quickly I suspect the union is going to sell their stake I don't think the workers are going to care that much. They'll only care if the union isn't actually able to liquidate the position before Crystler and GM go down the poop shoot again.

I was referring not to the UAW, but to the various union pension funds (mostly state workers and teachers) invested in the bonds. They are getting screwed.

If more people, especially government and union workers, knew where their money was invested, they'd be a lot more pro-business.
5.21.2009 1:40am
Andy Freeman (mail):
> If more people, especially government and union workers, knew where their money was invested, they'd be a lot more pro-business.

Nope. They'd have to believe that their pensions depend on said investments. If they believe that some govt is responsible for paying their pensions even if the investments tank, they're not going to be very concerned with said investments.

State, local, and federal employees think that some govt with taxation powers guarantees their pensions. If their pension funds tank, we'll find out if they're correct.
5.21.2009 2:25am
rosetta's stones:

All of these objections from creditors to the government's plan (and Zywicki's WSJ article) ignore the lack of available private financing for a Chrysler bankruptcy reorganization. Since the alternative to the government's plan was liquidation, the creditors were likely better off with this plan than they would have been without the bailout.


The creditors forced this bankruptcy proceeding, so they evidently disagree with your opinion.

And there would be plenty of private DIP financing available, if Chrysler was headed for a true bankruptcy, and its assets made available at their true market value. Trust me, Jeep and the trucks would be scooped up by any number of investors... pronto. And the car herd would be thinned appropriately, and bought at value.

The Chrysler-UAW contract would not survive such a proceeding, however, and that's the whole point of this fed involvement... the survival of that contract.





And, from the point of view of creating a company that can survive bankruptcy, the government's plan is eminently sensible. A car company needs (1) workers and (2) automobile technology, to survive. The plan ensures both.


The workers and the automotive technology will be there with or without the government. Chrysler is not "surviving" bankruptcy here, it is moving down the road to the next bailout.
5.21.2009 10:03am
Harry Eagar (mail):
'Of course you are screwed. No politician ever got reelected watching out for people's grandchildren. Your personal shafting will wait for an election cycle or two.'

Yet when corporations behave exactly the same way, people admire their attention to market principles.

Why is that?
5.21.2009 1:40pm
David Schwartz (mail):
And, from the point of view of creating a company that can survive bankruptcy, the government's plan is eminently sensible. A car company needs (1) workers and (2) automobile technology, to survive. The plan ensures both.
Why is that good exactly? It's not like the workers wouldn't do something else if they didn't have New Chrysler to work for and it's not like the technology would disappear into thin air. All this does is make the number of car companies one greater, for a short time at least, during a period where it's obvious that there are too many car companies.

What the plan saves is the worker's pensions and the name 'Chrysler'. The former would be better saved by direct action, and that wouldn't constitute a legalized theft from the senior creditors -- if the government wants to bail out the auto workers, it can do so with its own money. The latter is probably not worth saving, as the creditors clearly believe that Chrysler is worth less than the sum of its parts, which could be sold at auction. (However, if a legal and fair plan could be constructed to save it, that's obviously fine with me.)
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