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Chrysler Bankruptcy Case to Be Heard by Second Circuit Friday:

Bankruptcy judge Arthur Gonzalez has permitted an appeal by Indiana pension funds to the Second Circuit on his ruling allowing a sale of the company to Fiat. According to the NYT:

The judge, Arthur J. Gonzalez, said that an appeal that sought to block the sale to Fiat could be heard directly by the United States Court of Appeals for the Second Circuit, a move that the American carmaker had wanted. Normally, appeals to bankruptcy court decisions are heard in federal district court, which sits directly above bankruptcy court in the judicial hierarchy. But cases may be moved directly to the appeals court if a judge finds it necessary.

"This case involves a matter of public importance, and an immediate appeal may materially advance the progress of this case," Judge Gonzalez wrote in his order.

The appeal was filed by lawyers for a group of Indiana pension funds, which objected to the sale because they were seeking more compensation for the Chrysler secured debt they hold.

The WSJ reports today that the Second Circuit will apparently hear the appeal on Friday:

Chrysler LLC's exit from bankruptcy could hit a speed bump Friday when a federal appeals court is scheduled to hear from a group of Indiana state pension and investment funds objecting to the auto maker's reorganization.

The funds are trying to block the sales of most of Chrysler's assets to Fiat SpA, contending the deal's terms regarding secured lenders are unconstitutional.

The sale was approved on Sunday by the U.S. Bankruptcy Court in Manhattan, but the funds filed an appeal. The U.S. Court of Appeals for the Second Circuit will hear the case on Friday.

Perhaps Co-Blogger Zywicki can explain what all this means for bankruptcy proceedings and likely outcomes. It seems to me unlikely, but I defer to bankruptcy experts, that lenders will win the appeal. The WSJ article talks with a bankruptcy expert:

A lot is riding on the outcome. The Obama administration is hoping a speedy restructuring of Chrysler through bankruptcy will signal the road ahead will be smooth for General Motors Corp., which the Treasury ushered into bankruptcy protection on Monday. Moreover, Fiat can back out of the deal if bankruptcy proceedings go beyond June 15.

"You can't take away from the fact that this is a huge case. There's a huge amount of public interest," said Earle Erman, a bankruptcy attorney with Erman, Teicher, Miller, Zucker & Freedman, a Southfield, MI based firm. "This is obviously an unusually large case."

A ruling in the lenders favor appears unlikely given the bankruptcy code primarily requires they get a fair repayment on their investment, Mr. Erman said. He declined to speculate on a separate argument they are making challenging the legality of providing a manufacturer like Chrysler money from TARP, which was designed for financial institutions.

People close to the case say that if the pension funds lose their appeal, their chief lawyer, Thomas Lauria of White & Case, may try to take the matter to the Supreme Court, a move that could impose a significant delay on Chrysler's reorganization.

I wanted to note, further to an earlier post, that at issue are rights of the secured/senior creditors. They argue that the effect of the reorganization plan is to benefit the junior creditors, and the union especially, at the expense of the seniors:

The Indiana pension funds — the Indiana State Teachers Retirement Fund, the Indiana State Pension Trust and the Indiana Major Moves Construction Fund — own just $42 million of Chrysler's $6.9 billion in secured debt, and the other secured lenders have already agreed to accept a settlement paying them about 29 cents on the dollar.

The Indiana funds bought Chrysler's debt a year ago for 43 cents on the dollar, and are arguing the restructuring plan is unfair because U.S. law normally puts secured lenders at the front of the line for repayment. They say junior creditors are being put ahead of senior secured lenders in the plan.

There are two questions here. One is whether it is in fact true that the reorganization plan (the same basic issue arises for the GM bankruptcy) benefits junior creditors, starting with the UAW, at the expense of the senior creditors. The second is whether the senior creditors have in fact been dealt with unfairly, given that they could, in principle, go to court — and as the Indiana pension funds have done. Although I would welcome hearing anything that Todd might want to say, the answers seems to me pretty clearly, yes and yes.

In both Chrysler and GM, the junior creditor UAW wound up with far more equity — that is, whatever it is, however, speculative, that the parties thought might be of value in the future — than the senior creditors did. It doesn't really help to say that absent the government bailout, they would have done even worse. Bankruptcy, as I understand it on this matter, is about the relative claims of the parties, relative to each other, seniors and juniors. In fact, although a number of commenters raised it in a post of mine yesterday, I don't see many financial commentators disputing that at all (although, to be sure, I won't rule out confirmation bias!).

This leads directly to the second question — why, consistent among other things with fiduciary duty, didn't the senior creditors, or more of them, contest this reorganization and assert their rights? I said yesterday that they were "strong-armed" by the administration which, after all, has extended financing to many of them and so altered their incentives with regards to asserting legal rights. Mirabile dictu, today's Washington Post editorial on the GM bankruptcy says (emphasis added):

Also worrisome was the strong-arming of the company's bondholders, who got far less equity in return for their money than the UAW, the president's political ally. The administration wants to spin GM back to the private sector as soon as possible. But private investors may have been durably scared by the union's display of clout. Indeed, the UAW boasted to its members that it blocked a plan to build GM cars in China and "negotiated new opportunities for UAW involvement in future business decisions."

The retort says, look, the seniors could have exercised their rights and gone to court, but they didn't. If it's because they received government money and so have to dance to the government's tune, that is in the interests of the taxpayers, who are otherwise going to lose as value is transferred first to the creditors in bailing them out, and then to creditors when they take money that would otherwise go to fixing Detroit.

The counter-response is that the problem is not so much one of junior and senior creditors, it is, as David Skeel has noted, a problem of politically favored insiders and politically disfavored outsiders. It is highly unlikely to be efficient, either in the allocation of credit in the economy or in the making of cars, for the government to be naming winners and losers not even on the basis of its (likely dubious) estimations of efficiency, but instead on the basis of the UAW insiders and creditor-fiduciary outsiders.

My experience negotiating lending deals in the developing world suggests that the most important characteristic is not creditor-debtor, but insider-outsider when it comes to efficiency when a government is somehow involved. In the areas I am familiar with, independent media, government involvement comes in the form of broadcast licenses, newsprint monopolies, government agency advertising, all sorts of ways. Crony capitalism in one way or another, rent-seeking, as Megan McArdle explains:

Bankruptcy is often portrayed as a question of creditors v. debtors, and of course that's not a ridiculous frame. But just as important is the tension between insiders and outsiders. This conflict has existed for as long as we've had insolvency, and it doesn't match up to the creditor/debtor divide .... I suspect Obama views his administration's actions as moving along the X axis towards a more debtor-friendly system. But in fact, Chrysler, not the UAW, is the debtor, and it's not likely the company would have ended up in liquidation. The administration's actions weren't debtor-friendly, they were insider friendly. This was classic collusion among creditors, and it's why the parts of the bankruptcy law that deal with Section 363 sales spend so much time talking about the importance of avoiding sham transactions. Cutting back on that sort of abuse was at least as important an achievement as giving debtors a fresh start.

It is far from mad to point out, as McArdle does, that the current Detroit policies are far less about the rights of creditors than they are about the privileges of political insiders. Yet the frame against which the Second Circuit will consider this will be one of creditors versus creditors versus debtors, in the context of something approved by a bankruptcy judge who notes that 90% plus of the senior/secured creditors have approved. The "strong-arming" that caused them not to enforce their legal rights — the frame of favored insiders and disfavored outsiders — will not be on the table. In my estimation, that's to be regretted because, yes and with all due respect to everyone, it does remind me slightly too much of deals in Skopje and Belgrade.

Larrya (mail) (www):
The "strong-arming" that caused them not to enforce their legal rights — the frame of favored insiders and disfavored outsiders — will not be on the table. In my estimation, that's to be regretted because, yes and with all due respect to everyone, it does remind me slightly too much of deals in Skopje and Belgrade.
And Chicago.
6.3.2009 9:50pm
Steve:
What I've learned from the commentary on this issue is that whether the rule of law still exists in America depends entirely upon whether these pension funds win their appeal. The mere fact that an independent court from a co-equal branch of government is pronouncing on the merits is apparently not enough!

I am not really sure whether I buy into the "strong-arming" argument. Not every use of negotiating leverage amounts to duress, and while I'm not looking to criticize this excellent post, it sort of strikes me as the same sort of rhetorical excess I made fun of in my opening paragraph.
6.3.2009 9:53pm
Humble Law Student (mail):
Do the lenders have a colorable collusion claim?
6.3.2009 10:06pm
David Welker (www):
Steve,

Remember that one thing about the rule of law, and you will be fine.
6.3.2009 10:12pm
David Welker (www):

It doesn't really help to say that absent the government bailout, they would have done even worse.


Oh really? Of course it does. In one of your previous posts, you were talking about how the United States is going in the direction of these third world countries. And how creditors need to put more provisions in their contracts to make government intervention more difficult.

But, if government intervention HELPS the creditor, that doesn't make a whole lot of sense, does it?

Yeah, it seems that your argument just comes down to we should be SO concerned about whether the UAW gets relatively more versus other creditors. In other words, this is all about dividing the pie, not growing the pie. Yeah, the secured creditors got a bigger piece of pie than they would have gotten absent a government intervention. But, they want their pie to bigger relative to the UAW. Whatever. Cry me a river.

I also think you are overlooking something that the UAW has that other creditors don't, and that is a value-creating relationship with GM going forward.
6.3.2009 10:20pm
Kenneth Anderson:
David Welker's comment above raises several important points. Rather than respond myself - maybe I'll come back to this in another post, but I'm eager to post about ... the Star Trek movie - let me ask others to give serious responses, on the several separate issues raised. I don't mean abuse or snark, of course - how, analytically, might you reply on behalf of my argument to these serious objections?
6.3.2009 10:27pm
David Welker (www):
By the way, that Star Trek movie rocked. I look forward to your post.
6.3.2009 10:32pm
dmv (www):
I encourage everyone seriously interested in these cases, beyond the opportunity to get your partisan rocks off, to read Credit Slips, which generally handles these cases entirely from a bankruptcy law perspective, and does it quite well. No offense, VC, but... yeah.
6.3.2009 10:34pm
Jmaie (mail):
I would ask David, is an appearance of impropriety not bothersome at least on some level? I am concerned when the UAW gets more than their legal share for what appears to be payback for political support.
6.3.2009 10:43pm
Just another poor country lawyer (mail):
Changes to allocation of "shares of the pie" in a bankruptcy case impact not merely the particular case, but future credit decisions. This may increase credit cost and even availability of credit in some cases because it increases risk to creditors.

It seems to me that if such decision were made on the basis of political considerations as appears to be the case, that raises serious questions. The threat to turn the White House press corps on any secured creditor not taking the deal is shocking on several levels.

Furthermore, UAW's "value-creating relationship" seems to be what drove both GM and Chrysler to their financial situation. This results from both higher labor costs and work rules under the UAW contracts.

Both companies will undoubtedly need substantial financing in the future. The administration's games may substantially increase the cost of that financing.

Cheers.
6.3.2009 11:17pm
David Welker (www):
I am going to second dmv with respect to the excellent blog he recommends.
6.3.2009 11:38pm
Commentor (mail):
Question: Is the reorganized company's ability to profitably move forward a factor to consider in the reorganization?

It seems to me that a mechanical approach forcing senior creditors to be paid more than the next level creditor, and the next level creditor getting paid more than the next level creditor, etc., would force liquidation rather than reorganization in most cases.

It is easy to say that the UAW is the president's political ally and the senior debt holders are not, but the UAW is a key player in determining whether or not Chrysler can emerge from bankruptcy as a viable company. Clearly, 29 cents on the dollar in equity of a company that might increase in value in the future might be better than 20 cents on the dollar at the senior position in a liquidation.

The vast majority of the bondholders took the deal; that tells me that they perceived it as superior to forcing liquidation.
6.3.2009 11:46pm
Desiderius:
Welker,

"I also think you are overlooking something that the UAW has that other creditors don't, and that is a value-creating relationship with GM going forward."

Shirley, you cant be serious. How many more hundreds of billions of value does that relationship need to destroy for you to come to your senses?
6.4.2009 12:01am
RPT (mail):
Thomas Lauria has been very effective in taking the high profile high publicity road issues in this case. Having worked with lawyers like this, I wonder how much of his position represents his own career enhancement.
6.4.2009 12:02am
Melancton Smith:

I also think you are overlooking something that the UAW has that other creditors don't, and that is a value-creating relationship with GM going forward.


Perhaps that is precisely why the government shouldn't be allowed to do this. Doesn't this harm other, arguably more responsible auto manufacturers, that don't have a special 'value-creating relationship' with the union that they are forced to employ members of?
6.4.2009 12:02am
RPT (mail):
"How many more hundreds of billions of value does that relationship need to destroy for you to come to your senses?"

Who destroyed what?
6.4.2009 12:03am
cathyf:
The interesting question is the relationship between the bond fund managers and their customers. If the quid pro quo is that the banks get TARP funds, and then they turn around and sacrifice their own customer's interests to some degree less than the value of the TARP funds, then they have failed in their fiduciary duty to their customers.

That seems to me to be the place to file the legal challenge...
6.4.2009 12:24am
Brett Marston:
One thing I'm a little surprised at is the dearth of engagement with the opinion of the bankruptcy judge. Has anyone seen any good commentary?
6.4.2009 12:45am
David Schwartz (mail):
The vast majority of the bondholders took the deal; that tells me that they perceived it as superior to forcing liquidation.
Right, but how much of that is due to political, umm, 'pressure'.
6.4.2009 12:48am
Laura Victoria (mail):
Thank you so much Professor Anderson for adding your expertise and wit to this site. My main thought is that I don't like it when judges defer too much to obviously lying cops, sometimes overruling the (non-liberal)trial courts in doing so. Similarly, I think to ignore the obvious threats of Obama, backed up by other warnings in analogous contexts, is behaving in an ostrich-esque fashion as well. Maybe these thugs cannot be prosecuted criminally, but that doesn't mean that we should ignore their obvious and inappropriate use of leverage.
6.4.2009 1:03am
David Welker (www):

is behaving in an ostrich-esque fashion


I like this phrase. Ostrich-esque is a cool word.
6.4.2009 1:48am
Tatil:

It doesn't really help to say that absent the government bailout, they would have done even worse.

Why not? The government is putting money into the new "good Chrysler" or "good GM" which is only buying the assets of the bankrupt old one. In the end, without the government as purchaser of Chrysler's assets, liquidation would most probably bring even less money.

I don't see how the creditors are getting the shaft or all of sudden find themselves in need of additional covenants. They are just jealous that union is getting more.


But in fact, Chrysler, not the UAW, is the debtor, and it's not likely the company would have ended up in liquidation.

This is getting ridiculous. Without government intervention, Chrysler would be bankrupt six months earlier. I don't like the government intervening in the market or favoring the unions, either, but creditors are not the victims here. It is the taxpayers and the other auto manufacturers which all could use fewer competitors in this crowded market.
6.4.2009 2:20am
BGates:
Yeah, the secured creditors got a bigger piece of pie than they would have gotten absent a government intervention. But, they want their pie to bigger relative to the UAW. Whatever. Cry me a river.

Suppose after Katrina Bush had announced that FEMA would be erecting tent cities and supplying potable water for anyone who lost a home, and the government would also buy and furnish beachfront Miami condos for any Republican party member who had lost a home. Clearly everyone would be better off than if the government did not intervene, yet I bet you could have found a reason to object to that arrangement.

Nice redefinition of "growing the pie" to mean "paying off supporters with taxpayer money". Well done.
6.4.2009 4:03am
Avatar (mail):
It's not like Chrysler's physical assets were valueless paper. At the least, offers were (and possibly continue to be?) tendered for the Hummer brand. Nor is it a certainty that other plants would have been simply shuttered and left to rot; the ability to snap up an auto manufacturing complex for, let's face it, pennies on the dollar would have enticed at least a few intrepid investors to get their feet wet.

It's not beyond belief that a Chrysler that was moved into liquidation might have been able to unload sufficient product lines, factories, and tangible property to recover more than 30% of the secured debt amount.

Who's got the biggest complaint here, though? Ford! Their finances aren't exactly rosy either, but they were in an excellent position to gain market share, to enjoy lower labor costs with the influx of experienced workers into the labor market, and possibly to expand their operations by purchasing the assets of their competitors at a discount. Now, though, they have to compete, not just against some really efficient and praiseworthy foreign competition, but also against two domestic companies whose payroll is being met by the federal government. Instead of being rewarded for their relative aptitude in financial dealings and the automobile business, now they're faced with the choice of following the other two into bankruptcy (and thus losing their ownership and investment into the firm, doubtless to be redistributed to other stakeholders on the basis of their political connections) or trying to make a profit while servicing their debt when their competitors are free to ignore their past obligations and cut prices to the bone.
6.4.2009 5:10am
Brett Bellmore:
Quite true. OTOH, they still get to make their own business decisions, for at least a little while longer. That's got to be worth something.

As for me, I suppose there's a Ford in my future, no way am I buying a car from the government. Who knows what kind of after the fact conditions will be applied to me if I ever take it in for warantee work?
6.4.2009 6:46am
Public_Defender (mail):
Is there any evidence that courts won't enforce "the rule of law"? The federal courts are now heavily stacked with Republican nominees. If business can't win with refs they helped pick, they probably shouldn't win.

The courts can take care of the rule of law, but, as a matter of policy, I have little sympathy for a sophisticated investor who bough heavily discounted debt of a teetering company and then found out that the investment wasn't worth what they paid.
6.4.2009 7:18am
Michael Masinter (mail):

It's not like Chrysler's physical assets were valueless paper. At the least, offers were (and possibly continue to be?) tendered for the Hummer brand.


GM owns the Hummer brand.
6.4.2009 7:57am
TheGrandMufti:
The real question is whether anyone will even buy a Chrysler or GM car in the future. Building a green UAW car might satisfy political constituents but it is not a marketing plan.

Don't be surprised if GM and Chrysler are back at the teat after they burn through their next government check.
6.4.2009 8:21am
query (mail):
I am not a bankruptcy judge. So maybe you guys can help me out here. In chapter 11 bankruptcy a collective bargaining agreement cannot be tossed out until proposed modifications are brought to the membership for an up/down vote. What kind of status does that give the UAW contract? Senior? Super junior? Here's a link to it http://www.twu562.org/1113.pdf .... I have heard and read many people that are fuming at the UAW and the Obama administration over the bondholders not getting what they are due. Comments anyone?
6.4.2009 8:56am
Angus:
All of this is an interesting exercise, but ultimately futile until American car makers can build vehicles that don't suck. I've owned 4 American cars in my life and all have been crap. I can't imagine buying another American-made car ever again.
6.4.2009 9:02am
Cash:
Wait -- are folks here arguing that when the federal government protects the interests of the taxpaying public that is supplying the funds that will directly (or indirectly) bail out Chrysler's creditors, it's behaving like a politically connected insider?

Amazing. Thirty years of dominance by the Chicago law &economics movement has destroyed any notion of the public interest and the commonweal.
6.4.2009 9:18am
Bart (mail):
There appears to be a substantial due process issue here.

Chrysler came to the court with a prepackaged government plan where the government and Fiat threatened to back out if the bankruptcy judge did not immediately grant the transfer of Chrysler assets to the UAW, Fiat and the government.

Thus blackmailed, the court only granted the funds about a week of discovery to plow through nearly a million documents, conduct dozens of depositions and obtain expert testimony. Of course, this was impossible. Normally, discovery in a case this size a battalion of lawyers years.

The only expert the court heard from during last week's hearing was a Chrysler bean counter, who offered largely unsubstantiated testimony that the funds would obtain more money under the government deal than if Chrysler's divisions were sold off.

In its rushed order entered over the weekend, the bankruptcy court noted that the Chrysler testimony was undisputed and based the order to transfer assets on that testimony.

Incredible and scary.

This is due process in an American court of law?
6.4.2009 9:41am
hga:


It's not like Chrysler's physical assets were valueless paper. At the least, offers were (and possibly continue to be?) tendered for the Hummer brand.


GM owns the Hummer brand.


Indeed, but since Chrysler does own the Jeep brand, which is tremendously more valuable, the basic point of the argument is valid.
6.4.2009 9:51am
MayorOmalleySuxs:

Amazing. Thirty years of dominance by the Chicago law &economics movement has destroyed any notion of the public interest and the commonweal.


Maybe, but fifteen years of living in the UK while British Leyland was still around makes me find the claim that the Government can running an auto company better than the current or past managment can dubious at best.
6.4.2009 11:13am
Steve:
The repeated conflation of the UAW as an entity and the workers it represents strikes me as politically convenient but a bit glib from a legal standpoint.

Bart's point that courts typically take years to evaluate situations where time is of the extreme essence is interesting, but not consistent with the conduct of any courts I know.
6.4.2009 11:23am
ATL Employer (mail):
It will be disappointing if the Federal Courts go along with this backward way of this handling this and the coming bankruptcy cases. What we need is a judge to enforce for the rule of law without worrying about the political implecations.
6.4.2009 11:37am
ohwilleke:
Three points.

First, kudos to the U.S. District Judge and 2nd Circuit for stepping up to the plate, dealing with the issue, and allowing the issue to be resolved on the legal merits, rather than trying to get the issue resolved through coercive settlement negotiations and delay, critical to the national economy with remarkable speed. In the usual case, the delay involved in two or three layers of review (U.S. District Court, sometimes Bankruptcy Appeal panel and U.S. Circuit Court of Appeals) before a decision of a bankruptcy court is final makes the actual law irrelevant. By comparison, even the seating of a U.S. Senator in Minnesota in a disputed close election is still going seven months after the election was held.

This case suggests the virtue of thinning of number of appeals levels in bankruptcy cases generally, and the virtue of giving certain time sensitive appeals priority for consideration.

Second, in a 363 sale like this one there are basically two issues: (1) is the sale price collusive low, and (2) do secured creditors have adequate protection of the interest as it is at the time (i.e. does the sale substitute proceeds comparable in value to their collateral).

The 363 sale is not a final determination of how the pie is split, it is merely a determination of the size of the pie. The court is determining whether the substitution of sale proceeds for the property sold is at an adequate price Secured creditors, by the way, have a right to bid in the sale process using the face value of their debt on a same as cash basis -- although in practice, the one's appealing don't have the money to come to the table and do so; if the secured creditors had wanted to, they could have tendered their debt and outbid Fiat and owned the collateral.

Third, Chrysler case is not going to be an important precedent in big Chapter 11 cases because its balance sheet is so unusual for a company of its size. Chrysler had predominantly secured debt (i.e. debt with company assets pledged as collateral) secured by essentially all the assets of the company. This isn't unusual in a small or medium sized privately held company, but significant secured debt is almost unheard of in a publicly held company, except in purchase money deals for specific high value assets (like a particular airplane belonging to an airline, or a software company's headquarters real estate). Public companies normally have little or no secured debt and instead have unsecured debt in the form of publicly issued bonds as a main source of financing. Sometimes public companies have a significant tranche of subordinated junior debt, but they rarely have so much secured debt with priority over general creditors.
6.4.2009 12:00pm
Can't find a good name:
Could someone clarify certain aspects of this post for me? It seems to be saying that the senior creditors could have gone to court and contested the reorganization, but they didn't, and therefore the Indiana pension funds, which are senior creditors, should lose in court where they are contesting the reorganization.

That makes about as much sense to me as saying that Sonia Sotomayor should not be confirmed by the Senate to the Supreme Court, because if she wanted to be on the Supreme Court, President Obama would have to appoint her and get her confirmed by the Senate.
6.4.2009 12:01pm
rosetta's stones:
KA,

This post sorta dovetails with your post yesterday, and does provide some hope that we are still a nation of merchants, rather than mistresses, favorites, etc.

The nation of merchants have become pension funds, and their holders, particularly public pension funds, which are woefully underfunded and taking a big hit recently as we know. They will fight against Government Motors, if it's to be paid for out of their pockets.

In this case, only this one Indiana group of public employee pensions is fighting the mistresses and UAW/Government Motors insiders, but there are many hundreds of other pension funds who are or will soon be in the same position, when the Tier I and Tier II automotive suppliers start going belly up (supplier numbers have been on their way to a greater than 50% cut, per industry projections, for some years now). Will those creditors get what they got coming? Will Government Motors step in and thumb the judicial scale, and pour out the cash to another select group of insiders?

I'm thinking no, that they can't afford to do that, or rather my grandchildren can't afford to do that. But that just tells us that this move here with the Big 3 is illegitimate, because all situations are analogous. And we're only talking about a few hundred thousand UAW Big 3 employees here, as opposed to the millions employed in the auto industry elsewhere.

No industry has destroyed more capital than the automotive industry over the decades. It's been worse than the steel industry of years ago, if that's humanly possible. Bailing out a capital destruction machine, in the midst of a historically overcapacitized NA automotive production base, can only lead to continued underproductivity, and is a mistake. Chrysler's carcass shoulda been picked over by GM and Ford 30 years ago, making them both stronger, rather than making them both weaker, through subsidizing a weak competitor and thereby contributing to the historical NA overcapacity problem.

Instead, we're doing it all over again, and worse, this time around. Welcome to Government Motors.
6.4.2009 12:04pm
Eric Rasmusen (mail) (www):
Friday is awfully close!

Can amicus briefs be filed on this sort of motion or whatever it is? What is it, actually? Is anyone at work on this very important question? Where can we find out primary-source info-- i.e., the motions, briefs, etc. ?
6.4.2009 12:52pm
ShelbyC:

I don't see how the creditors are getting the shaft or all of sudden find themselves in need of additional covenants. They are just jealous that union is getting more.


I'm not sure I understand. They're not "jealous". As fund managers and investors, their job is to collect as much money as they're legally entitled to. And their entitlements in a bankruptcy are relative to the other investors.

And I'm not sure what the point of saying, "well, if X didn't happen they'd be worse off" is. That's what the point of investing is. Unforseen things happen and if you win you win and if you lose you lose. You don't give up your position because things could have been worse.
6.4.2009 12:53pm
[insert here] delenda est:
This chart makes a good point that America might be better of giving up more of its manufacturing! (wish I could embed)
6.4.2009 1:14pm
none_ (mail):
ohwilleke's 2nd point is exactly right... the reason this procedure doesn't benefit junior creditors at the expense of senior ones is because this particular chapter 11 isn't a direct debt-for-equity swap. if it was, then you would be right that the secured bondholders are getting screwed.

instead, the 363 sale process lets the DIP basically swap out its illiquid assets for cash, which can then be distributed according to the plan, which will probably call for pro rata distribution to the secureds, with everyone else receiving nothing.

the juniors (ie., the union) have more equity in the NewCo than the senior lenders, but the equity structure of the NewCo isn't a matter for the bankruptcy court. its simply not relevant. anyone can come in and bid. in this particular case, the US govt brokered a deal for the union to have an enormous share (say what you want about that), but that doesn't stop competeing bids... its just that noone but fiat is really willing to even take a chance.

also, the Credit Slips blog has dealt with all of these issues extensively and is highly recommended.
6.4.2009 1:43pm
Subotai Bahadur:
I am not a lawyer, nor do I play one on TV. I do have some [incomplete and imperfect, I'm sure] knowledge of the law based on my pre-retirement career.

There are limits to what constitutes agreement. If I walk up to you at an ATM, put a gun to your head and tell you, "Give me all the money in your account and I will not kill you."; that does not constitute a legally enforceable agreement and quid pro quo. The government can negotiate with private entities, but in a civilized country operating under the rule of law, it is restricted to actions and threats [yes threats can be part of a negotiation under certain circumstances] of actions that are authorized to it under the powers granted by the rule of law. Going outside that to personal threats not based on legitimate government powers goes outside the rule of law.

The administration has no statutory power over the White House Press Corps, but the threat by the Administration to have the WHPC "ruin" bondholders who did not waive their rights was indeed credible based on the extra-legal personal loyalty of the media to the administration. This was a shot across the bow to the bondholders.

Now despite the promises that the whole bailout/stimulus process would be the most transparent ever; this is all being done in secret. The Treasury has testified that they have no idea who is getting money for what.

The negotiations between the White House and the bondholders were in secret. The bondholders' identities were not originally made public. And after the initial threat, the bondholders were not eager to have either the WHPC or the "mobs with pitchforks" that Obama had personally threatened AIG executives with turn up at their houses.

Who knew the identities of the bondholding companies being negotiated with? They themselves did, their lawyers, and the White House.

It was reported in the press, and never denied or refuted, that bondholders began receiving death threats from parties unknown after they filed for their rights in bankruptcy court. Given that the only source for their identities would be the White House, the only thing a reasonable person could conclude was that the White House had released their identities to whoever was making the threats, or that the White House itself had orchestrated the threats. The bondholders submitted to the White House as soon as it was made clear that the court had no interest in protecting them.

If the totality of circumstances approximated this scenario, or if the bondholders were led to believe that they were under personal threat from the Executive branch, we have moved outside the rule of law, and into something akin to the ATM transaction above.

Leaving aside the concept of extortion; I will leave to others to consider due process rights.

There has been discussion of the effect of the abandonment of bankruptcy law in this case on the economy in the future. Might I offer that there are other implications?

Politics and legal systems vary from society to society; but each is a way of resolving disputes and allocating power and resources in a way acceptable to most, most of the time; at a level of violence acceptable to that society. The means, and what is acceptable both as a result and as a level of violence, varies widely from society to society. Think everything from Zimbabwe to Switzerland.

What they all have in common though, is that the default position if most of the people lose faith in the legitimacy of whatever system is local; is the return to brute force and violence to resolve disputes and make those allocations. The collapse of the rule of law is not a good thing, unless you believe that you have a monopoly on the use of force.

Of late, we have seen a number of very public cases where those appealing to the law; have been told that they have no standing to do so. If a significant portion of the population comes to believe that the law is a game to protect those that they consider to be lawless; we are on the road to a society that Thomas Hobbes would recognize. And history shows that the descent, once begun, is both steep and hard to arrest.

Subotai Bahadur
6.4.2009 2:01pm
Eric Rasmusen (mail) (www):
I see that the briefs deadline was 2 hours ago. Here's CREDIT SLIPS blog, which has links to primary materials:

6.4.2009 2:08pm
rosetta's stones:

"...its just that noone but fiat is really willing to even take a chance."


none_,

What "chance" is Fiat taking? They're not putting any cash into this deal, unless something's changed recently. Government Motors is financing this.
6.4.2009 3:01pm
rosetta's stones:

"...but that doesn't stop competeing bids..."


I don't recognize any bids, unless they had dollars attached to them. If Fiat "bid" anything, I'd like to see how much cash they bid. I suspect Government Motors was bidding against itself... and "won". However, the Treasury and national debt lost, in that process.
6.4.2009 3:04pm
devil's advocate (mail):


I also think you are overlooking something that the UAW has that other creditors don't, and that is a value-creating relationship with GM going forward.


Shirley you can't be serious


Ditto. And is the reference to GM cynical or freudian. I do believe this is the chrysler bankruptcy we're talking about.



Brett


One thing I'm a little surprised at is the dearth of engagement with the opinion of the bankruptcy judge. Has anyone seen any good commentary?


Try this.

unfortunately his later in depth comment on the ruling and the appeal appears to have a faulty url. Also agree that Credit Slips has a bankruptcy law perspective that has snippets of relatively unloaded commentary on these events, although I do not see that any of their commentors has posted an extensive dissection of the Gonzalez's decision.

Now that the process stuff is out of the way, let's try the substance:





But in fact, Chrysler, not the UAW, is the debtor, and it's not likely the company would have ended up in liquidation.




This is getting ridiculous. Without government intervention, Chrysler would be bankrupt six months earlier. I don't like the government intervening in the market or favoring the unions, either, but creditors are not the victims here. It is the taxpayers and the other auto manufacturers which all could use fewer competitors in this crowded market.


I assume in your haste and otherwise careful and qualified discourse, you didn't really mean to confuse "bankruptcy" and "liquidation".

It seems to me that there is plenty of blame to go around for the travails of domestic automakers, and it seems like an unproductive game of rhetorical ping-pong to argue about whether clearly unsustainable labor relations - that remain largely and uncharacteristically undisturbed by this politically choerographed bankruptcy - are the result of union demands or management agreeing to them.

Insofar as secured creditors go, who would lend money to a concern with these kind of structural problems, so they are kind like parents who keep handing kids hundred dollar bills to feed their drug habit.

The beef is not really over the secured share. What is being semantically overlooked -- and I'll do Rush one better, semantics matter -- is that the secured creditors hold unsecured debt as the wart of their interest, i.e. face value at 71 cents on the dollar since they are offered a 29 cent payoff from the sale.

So why is their unsecured interest treated less preferentially than the unsecured interest of labor. QED on this absurd "value creating" allegation in the sense that the proof of such a relationship would be in the share value of Chrysler- now at 0, boy that is one value creating relationship.

And labor cannot hold an ordinary bankruptcy proceeding hostage to such a "value creating" relationship because the contracts can be and often are amended or abrogated by the court as part of the reorganization.

What exactly labor is surrendering for the equity share it is receiving is not well discussed here or at several posts at credit slips. Perhaps it will be more clear if I spend some time with primary documents but appreciate any pointer to a good summary.

Welker and others have the point that normally carries the day in bankruptcy, that the vast majority of secured creditors agreed. But some suspension of disbelief seems due to this minority claim given the extraordinary circumstances, together with allegations of collusion and influence that no one really doubts, it is just a question of the propriety of those actions. Were they reasonable efforts serving the goverment's interest in moneys invested it, guarding the taxpayer and advancing public policy through legitimate means, or was this bankruptcy an accelerated questionably transparent legal gimic?

Now, I agree that as a practical matter the secured creditors may be better off than if the government had not dumped money in, but that is not a question before the bankruptcy court. By analogy, if the government builds a highway exit that increases the value of your land but several years later decides to take your land to widen the road, they are not entitled to deduct the derivative enrichment that the operation of society effected. (of course if they take it because it is a wetland then they can pay you nothing, but I digress)

Some think the above example ought to come out differently and favor a theory of "givings", that more narrowly construes taxpayer funded improvements to the standing and worth of property owners as condominium style economic development that ought to be compensated in some measure by those who benefit most directly.

If the government better observed it's obligations in the "takings" realm, I am certainly open to this discussion. To the extent that economic efficiency is gained by having the beneficiaries of infrastructure and services pay for them on a more transparent, fee-like basis this could be a useful import to our contemporary political economy -- but of course applying it across the board means that parents would have to pay for their children's education [how about at least a significant copayment -- but I digress again].

So it is a useful rhetorical tool in terms of examining who is receiving a political payoff to compare the disparity of outcomes without government intervention altogether. However, this is a "but for" analysis. It is informed speculation, but only that, as to how secured creditors may have fared if the Bush Administration had respected proper restraint and government process and forced the automakers to negotiate bankruptcy six months ago without any bailout.

So, I think the gravamen of Indiana's complaint boils down to collusion. To the extent that the debtor conspires with some favored creditors at the expense of others I would think that even a small minority of creditors within a certain class has the ability to assert its interests despite minority status.

Yes, they may well be arguing over the split of a larger pie. But the executive's weapon here, if it intends to play the part of economic actor and not tyrant, should be a threat to withdraw from supporting the restructured entity, not a bunch of political maneuvering to divide and conquer the creditors who don't go along with the preordained outcome. Reminds me of my recent post on eminent domain and the Flight 93 memorial opposed to the notion that it shouldn't be viewed as excessive because only a small % of property owners actually suffered condemnation. The threat of it was enough to get the others to sell up.

Brian
6.4.2009 5:18pm
Hans Bader (mail) (www):
The Indiana State Teachers' Retirement Fund is rightly challenging the diversion of tens of billions of dollars of federal TARP bank bailout money to pay for auto bailouts in the Chrysler bankruptcy case. That diversion violates the law. It is part of the government's unfair reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.

(The bailouts are doing no good. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy, endangering their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s).

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of "financial institution," which the Administration claims includes virtually any institution, financial or not. The bailout statute defines "financial institutions" eligible for the bailout as "any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company." Never mind that Congress listed as examples of "financial institutions" only entities that were banks, insurance companies, or financial institutions, not automakers.

Legal scholars at the Heritage Foundation and many other commentators have argued that this violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term's definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.

But if that's not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government's incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.

Indiana Treasurer Richard Mourdock is to be commended for raising these important legal questions in court. Mourdock rightly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler. By cheating Chrysler's lenders, the government's plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

The federal government's poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.

On June 2, a panel of the U.S. Court of Appeals for the Second Circuit, including Chief Judge Dennis Jacobs, and Judges Amalya Kearse and Robert Sack, entered a temporary stay of the bankruptcy judge's ruling rubberstamping the government's plans for Chrysler, in an appeal brought by the Indiana State Teachers' Retirement Fund. The case is In re Chrysler, LLC, Second Circuit Docket # 09-2311-mb.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana's position has merit, and that the Second Circuit should rule in favor of its appeal.
6.4.2009 6:21pm
David Schwartz (mail):
The courts can take care of the rule of law, but, as a matter of policy, I have little sympathy for a sophisticated investor who bought heavily discounted debt of a teetering company and then found out that the investment wasn't worth what they paid.
That completely misses the point. The point is that the less the bonds are ultimately worth, the bigger the drop in bond value will be next time around. The reason the debt was heavily discounted was not because the company was teetering but because the bankruptcy was politicized and therefore unpredictable.
6.4.2009 7:13pm
Desiderius:
RPT,

"Who destroyed what?"

The relationship, you fool! Read what I said.

Does it short-circuit your brain to be unable to hate me for blaming dear, sweet, labor or love me for blaming those grubby capitalist-roaders in their boardrooms?

The truth, of course, is that the two colluded with one another to destroy far more market value than Madoff, yet suckers like us allow ourselves to be divided, conquered, and fleeced for hundreds of billions, with no doubt more to come.
6.4.2009 8:41pm
LibertyCowboy (www):
I think many creditors agreed to the deal because fair or not, contesting it wasn't worth the cost of litigation. The "new" GM/Chrystler probably aren't going to be worth much.

I have some thoughts on the auto industry on my site.
6.4.2009 10:49pm
Can't find a good name:
I'm going to reiterate my question from 12:01 pm. I don't understand the post's implication that the Indiana pension funds should lose the case, where they are in court, for failing to take the case to court.
6.4.2009 11:58pm
Can't find a good name:
Please ignore my previous comment. I was misreading the post.
6.4.2009 11:59pm
ohwilleke:
In the Chrysler bankruptcy, the UAW is a junior creditor relative to the bulk of the creditors who have secured debt.

In the GM bankruptcy, this is not true. The UAW retiree creditors and the bondholders are both general unsecured creditors of the same priority.

In both the GM and Chrysler bankruptcies, the government, as the DIP lender, is superior to everbody but secured debtors.
6.5.2009 4:32am

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