How Chrysler's Bond Holders Can and Will Trump Obama

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.