How Chrysler's Bond Holders Can and Will Trump Obama

Friday, May 1, 2009

I wasn’t going to post on this, but after hearing all the spin going on about Chrysler I felt as though I had a more down to earth analysis on the subject. While Obama supporters tout the recent events and Obama’s decision regarding Chrysler as a success and those of Rush’s ilk tout Obama’s moves as a page out of the Peron playbook, I feel there are a few moving parts to this story that aren’t being talked about. Make no mistake; this is a clear Obama failure!

To begin with, we need to identify exactly who the parties involved are:

Obama and the Tax Payers – The federal government has loaned $4 billion dollars to Chrysler. In theory, Obama is acting in the tax payer’s “interest” (I say in theory, because he had other options that would have been more prudent in serving our interests). Please note that the loan made was the most recent and unsecured. This is very important in the matter of law.

UAW – This is the autoworkers union for blue collar jobs only. They have contracts with Chrysler giving benefits to auto worker employees and retirees far above and beyond anyone else in the auto industry or the entire US. This includes decades old programs like the job bank, 100% health care coverage, and huge hourly wages.

Bond Holders and the Bond Holder Board – The bond holders have lent Chrysler $6.9 billion dollars. The group that Obama has singled out (the hedge funds) are part of the bond holder board and represent many, many, many (probably millions) of investors in Chrylser bonds. You are probably a bond holder and you don’t even know it. Hedge funds have holdings from teachers unions, state pensions, 401ks, 403bs, and insurance companies. The Bond Holder Board is representing everyone with a stake in owning this debt in Chrysler. They do not manage Chrysler in an way.

Shareholders – These are the owners of Chrysler and are in no way associated with the bond holders. The shareholders picked the management of Chrysler. They partly responsible for the poor UAW contract agreements that have bled the company dry.

Trade creditors – Trade creditors are the suppliers that have lent products such as metal, rubber, glass and so on with trade credit. They have last standing in a bankruptcy and the debt is unsecured.

Here is the background leading up to the Chrysler Bankruptcy

When Obama first seized the auto industry, the progs jumped out and justified the action stating that, “we (the tax payers) lent them (the shareholders…not the bond holders) money, there should be strings attached.” Remember this argument as it is very important! I believe that the take over was to enable Obama to both hide the severity of the situation and work behind closed doors. This has been the case with the banks. However, the strategy that Obama chose was a huge mistake. In taking over these companies, Obama is now responsible for turning them around. Even if he doesn’t want to run them, as he claims, he will be held responsible for their fate. This position is quickly becoming a no win situation for Obama.

Although Obama got on stage and declared victory with a Fiat deal, the real situation is further from the truth. You see, there is another party with interest in Chrysler and that is the bond holders. To a large degree, the media and Obama has been portraying the government’s stake in the company as supreme. In fact, Obama’s hand is much, much weaker than the bond holders. Why is that? While Obama has claimed de facto ownership of the stockholders, the bond holders have the rights to all of Chrysler’s assets according to USA Today. The government’s loan is unsecured. To illustrate, Obama has seized the rights to live in an apartment. However, the bond holders are the landlords and they have the right to evict Obama at anytime.

We know over the last month that Chrysler and the government went into negotiations with Fiat, the UAW, and the bond holders. We don’t know what deal was made with the UAW. According to the UAW in a FoxNews article, the concessions were huge. We do know a few things. The UAW is keeping their 100% healthcare for current blue collar employees and retirees and is receiving a 35% share in Chrysler. I submit that the UAW had to make very small concessions and would have been the second biggest winner had all deals been done. We know Fiat was to pay off all the tax payer money before they took any ownership. Please take note that the tax payer debt is to be fully restored making Obama and the tax payers, the biggest winner. If bankruptcy is avoided, theoretically the trade creditors would be fully restored.

Analysis

Last night, Obama angrily stated:

“Now, while many stakeholders made sacrifices and worked constructively, I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout.

They were hoping that everybody else would make sacrifices and they would have to make none. Some demanded twice the return that other lenders were getting.

I don't stand with them. I stand with Chrysler's employees and their families and communities. I stand with Chrysler's management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.” (Please note that there was no mention of the specifics of the UAW last night. None! We are told they made a great sacrifice, but not told what it was).

Now, I can only speculate that the UAW concessions were small. I think I have good reasoning for this assumption since the UAW and Obama are not giving the specifics on the deal. Obama’s argument is that everyone was making huge sacrifices except the bond holders. Nothing could be further from the truth.

The bond holders have the biggest poker hand in this game. They have a larger loan to Chrysler than the government and have the rights to the assets. The government is almost dead last in the eyes of bankruptcy. The only difference is they have a big microphone.

The truth is that the government’s deal with the bondholders was very poor. Paying bond holders 30 cents on the dollar is a pretty poor deal. The government originally offered 10 cents on the dollar. To give you an idea; the bond holders held $6.9 billion dollars and was offered $2 billion dollars. Meanwhile, the government was to get back all of their $4 billion dollars. No, the bond holders have the strongest hand so logically they should get the best and strongest deal. They were looking for $50 cents on the dollar and a 40% stake in Chrysler. I’ll bet that’s slightly better than the UAW.

Why shouldn’t they get it? The progs argue that there should be strings attached. The bond holders have much bigger strings than the President. They have more invested and invested before the government did, yet they were offered a worse deal than the government. If there shouldn’t be strings attached for the bond holders, then there shouldn’t be for the government either. According to the law the bond holders have a higher right.

Whenever government gets involved the bureaucracy wants to create winners and losers. Obama wanted to secure his political capital by getting reimbursed for the tax payer loan. I speculate that he made the UAW’s interest second on the list. He couldn’t get a deal with Fiat without having to pair down the UAW contracts, but I’d also bet their deal wasn’t as sour as Obama and the UAW have tried to make out. The bond holders were to come out third. However, when you venture into the private world, you can’t make these amateur mistakes. Obama thought and probably still thinks he has a winning hand (by the way, there is no one on his auto advisory board that has run a company), but in reality he’s close to last on the list. The question is, “what will happen in chapter 11?” You better believe that the bond holders will be getting better than $.30 on the dollar or you will see a move to push it all into chapter 7 liquidation of Chrysler. That means that the bond holders will win and the UAW, Obama, and the tax payers are going to lose big. Do you wonder why the CEO’s didn’t want to go into chapter 11? I think there is a serious case to be made that the bond holders were threatening to take the company to chapter 7, which is their right should they choose to exercise it.

If that happens, Obama will try and vilify the bond holders. He will try and equate them to CEOs and corporations, just like the normal progressive template. He’s already tried to do it in his speech. In actuality, this was a huge error on Obama’s administration. This is an error likely to blow up in everyone’s faces. You cannot go into a negotiation, hold a losing hand and then expect to win. Luckily the bond holders (remember that’s you and me), will likely get our money back. Funny how at the same time, we will also lose (thanks Obama).

Check out Obama’s transcript from his speech.

7 comments

The Law said...

Very good analysis. And I think there is much to agree with, except of course the motives.

This story is near and dear to my heart because I own a Chrysler, in fact, their flagship vehicle from a decade ago =) As far as American brands go, I thought they were the best and I didn't want to see them go.

I have argued (as well as most progressives) that the first bailout was necessary for the sake of not losing our manufacturing core. When the attempt to self regulate their reconstruction failed and Chrysler asked for more money, then we argued that they should file for bankruptcy. But realizing the manufacturing sector could be lost, we didn't whine too hard when they got additional funds. But as I agured, if I give you a large sum of money for a specific purpose, the person giving the money tends to have a say in how it's spent. "here's $500... buy a suit, and nice tie, and a briefcase so you look presentable for your interview." I don't see why it should be terribly different. We did the "here's your money - go fix the situation" with the banks, and that didnt work out so well...

Fast forward to today, and I don't like how this deal went down either. It seems Obama chose Fiat because it that merger stood the best chance of getting a 100% ROI. Which your assesment of political captial gains and tax payer victory is accurate. But you forgot a loser in your analysis... the REAL loser is the American Consumer! If you thought American cars sucked before (Ford - fixed or repaired daily!) then it will be damn near undrivable when Fiat merges with it. There is NOTHING about the Fiat (fix it again tony!) brand that inspires confidence in America... or Italy for that matter. If it was a Chrysler/BMW merger, well then that would be differnt.

Not a fan of this deal either man. Even if no one called the bluff on this one and Obama comes out the winner, this will all be for nought because in the end, no one will buy a Chryselr/Fiat car. It'll go the way of Daewoo vehicles in America.

Here I was dreaming of a 2011 Chrysler 300 Hybrid that gets 80mpg city/110mpg highway with a 17.5 gallon tank... goes 0-60 in 6 seconds, and can cruise at 100mph... time to throw that one in the wishful thinking pile.

May 1, 2009 at 3:33 PM

Hey tL,

You're right! I didn't say who the loser was, but you pointed out the obvious.

You're right about Fiat, but they have been successful in turning their image around in Europe.

As I pointed out, the stories not over though. I think Obama needs to tread lightly in Chapter 13 or we'll wind up in chapter 7. I didn't mention in my post, but this is going to mean that Obama and the UAW are going to need to take a much bigger loss than they want. I don't know if Obama can take cover from that.

Great comments!

May 1, 2009 at 3:41 PM
Devrim said...

You cannot go into a negotiation, hold a losing hand and then expect to win unless you are Obama.

Let's send couple ACORN buses to the houses of these bondholders.

I am wondering if Fiat is going to sell US the Lada Riva or the SEAT Marbella model ? I wouldn't mind seeing tL pushing his brand new Chrysler Zastava either :) Which part of it you didn't understand the "hybrid power" part or "300 mpg" part.

May 4, 2009 at 12:28 AM

I never realized that saving American institutions would end up being so politicized.

I thought that all parties would want the same outcome. An American automobile industry.

I understand to some extent the economic breakdown that you are putting forth. It seems to me that you feel the union is the biggest culprit so far.

I don't know how this is going to end up. I want to let you know that I feel that the auto industry should have never reached this nadir in the first place.

If American auto engineers, up to and including designers and ceo's would have worried more about manufacturing quality products instead of junk we would be in a different place right now.

In the face of higher oil prices and huge increases in the cost of productivity via rising health care, the industry kept making junk.

Gas eating monsters and pieces of crap that flew in the face of what Americans wanted and needed.

Keep in mind I hear no mention of the upper managements pay in this recipe that you have laid out.

In spite of quarterly losses the bosses that ran this industry into the pile of worthless shit that it really is took every dollar anyway they could, bonus after bonus after loss after loss, vacation homes, pay raises, best health care coverage with no deductibles, multi-million dollar offices and every other perk that could be had.

In 2005 the ratio of ceo to worker pay was 300 times higher.

So they were getting paid 300 times more than the workers that they directed to make crapola cars.

On the political front I blame all the past administrations after Eisenhower left office to the present day. The auto industry lobbyist in collusion with the oil lobbyist, kept the government from demanding safe and efficient cars for Americans. If you look into it you will see that lobbyist fought against everything from brake lights and turn signals seat belts, mileage mandates, pollution control you name they fought against it.

This industry has itself to blame for not stepping to the forefront, in tech, safety, design, and quality. They were so used to screwing the dumb consumers instead of trying to be forward looking and it all backfired.

Now the Germans and Japanese and the Koreans have passed us up.

You just can't blame the factory worker for that.

Is Obama doing the right thing? I have no clue, all I now is that he is trying something.

Regards,

Joseph

May 4, 2009 at 2:52 AM
The Law said...

It is a sad cases an industry that cut their feet from under itself. Everything that Joeseph mentioned, from the lobbyists, to the reluctance or refusal to innvoate because of a money mankign strategy, the failure to adapt to to european and asian competition... it is all a self inflcited fatal injury. I had mentioned somewhere before reading motor trend magazines back in 1998 when Ford released the new gas guzzling, heavy polluting, new version of the Mustang, and the reviewer was puzzled because there was not a big market for muscle cars, and were falling fast against the smaller, cheaper, more fuel efficient competition (and the japanese cars like the maxima arguable looked better too).

I really don't want to see the auto companies go either. I was in support of the first auto bailout. I'm not sure how much money we can keep poruing into these industries, which is why I think we have to let them go. USA will still have an auto industry. Ford and Chevy are still around to produce more traditional cars, but the failure of the big 3 (though it seems GM might be able to make it through, so only one of the big 3 would fall) will create room for new competition.

How about Tesla Motors, based in Silicon Valley? This company might be the one to make the cutting edge fully electric, zero emission autos of the future.

All the government can do for an important institution is stop the bleeding. Captialism has to be the long term solution for solvency. Failure to let the captialist system work can result in a never ending cycle of bailouts, and let bad decision makers continue to make bad decisions.

May 4, 2009 at 4:09 AM

Joseph and to some extent tL,

First things first! This post is about resolving Obama's Chrysler take over. The simple fact is that Obama villified the bond holders. They are not the CEOs, they are not the management, and they are not drawing large Chrysler bonuses. They should not be the party that is getting the short end of the stick. That is my main point. What you are arguing really does not have relevence to getting these companies vialbe again. It really does not have anything to do with their pay out. CEOs and management have nothing to do with Obama blasting the bond holders.

I invest. I own stock. So when I look at banks and car companies, I look at the situation as an owner. That's because I am an owner. I am quite certain I have a stake in their bonds and I'm sure I have a stake in their stock. I have posted on the trouble with corporate management in the past. I think I may do it again soon. Make no mistake, this country does not have a corporation problem, but a CEO problem. However, I have yet to post on unions. Unions are just as guilty. They have just as many lobbiests as the CEOs. Both CEOs and unions bled these car companies dry.

If you think that the unions are blameless then you would need to explain why GM sells more cars than any other car company and cannot make a profit.

Sure, management has not made good decisions. Yes, they should be fired, but not by Obama. They should be fired by me, the owner. Like you both, I wish we never came to this point.

The Obama sell that these companies are failing because of SUVs is completely bunk. SUVs have for a long time kept these guys afloat. Legacy costs have been a large discussion on the viability of American auto companies for nearly 10 years. So Yes, the main problem is the legacy costs. Don't get me wrong, I'd love to get my hands on their benefits. However, and I will use a fun progressive word, they are not sustainable.

FYI on hybrids. Hybrids have been a losing model for years and only come into popularity for the last two years. They are also a losing model for the future because they are not the technology of the future.

May 4, 2009 at 8:05 AM
Devrim said...

tL your beloved Chrysler/Fiat is also the producer of Ferrari, gets a whopping 8 mpg, can you say gas guzzling, heavy polluting , but they are selling like hot cakes, actually there is a 5 year backlog.

Auto companies won't go. Say if me and CG were the bondholders, under law, these companies would be given to our receivership. Say CG gets Chrysler brand, and I get Saturn. We look at the books of these companies, see where they are in black, where they are in red. See if we have a product that there is a demand for.

Say CG decides he can turn Chrysler profitable by firing half of top management, and replacing with people who would work for less money, he just does that. I look at Saturn, think I can never turn a profit, and shut down and sell the assets. The assets sold are the factories, manufacturing equipment, now CG or Ford or Kia can buy those assets and expand their production.

Now instead of a government owned company who screwed their primary creditors, you have one which fulfilled its contractual obligations. Now if you were to invest your money in the future how much of it would you invest in Chrysler ?

May 4, 2009 at 8:05 AM

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