Barrons reports that unions prevail over wall street in Chrysler deal.
(emphasis mine) [my comment]
MONDAY, MAY 4, 2009
Unions Prevail Over Wall Street in Chrysler Deal
By ANDREW BARY
The car maker's creditors get raw deal in bankruptcy.
PRESIDENT BARACK OBAMA BLAMED CHRYSLER'S BANKRUPTCY on "speculators," but the real problem was that the government's plan gave too much to the auto maker's unions and not enough to creditors.
If the secured creditors holding $6.9 billion in claims had been offered anything close to what the administration wants to give the United Auto Workers, there would have been no bankruptcy filing by Chrysler.
In the bizarre pecking order offered by the administration, the unions, which are at the bottom of Chrysler's capital structure, would get nearly full recovery value for their $10.6 billion retiree health-care claims, while the secured creditors at the top of the hierarchy would receive about 30 cents on the dollar.
Credit that to politics and a likely desire by Obama to reward the powerful UAW. After all, who in America really cares about a group of deep-pocketed banks and investment firms holding the $6.9 billion of Chrysler debt? "I don't stand with them," as Obama said of the dissidents who derailed the deal.
Another surprising aspect of the Obama proposal was the willingness of the Treasury to forgive a $4 billion loan to the company made in December in return for an 8% stake in the restructured auto maker -- an interest that could be worth only 20 cents on the dollar assuming new Chrysler's equity is valued at $10 billion.
This is ironic because Obama has been adamant about protecting taxpayers' interest in the bailout of the financial-services industry. Uncle Sam is prepared to put another $8 billion into Chrysler. Let's hope that money meets a better fate than the first $4 billion.
Obama, meanwhile, asked little sacrifice of Chrysler's unions. The administration proposed giving them a $4.6 billion note yielding 9% due in 2022, and 55% of the equity in a restructured Chrysler. That could mean a nearly full recovery of their $10.6 billion claim.
The UAW was offered a lush deal even though its claim is junior to the claims of Chrysler's other major creditors, including the Treasury. Fiat gets a potential 35% equity stake in return for an alliance that may be of little benefit to the No. 3 domestic auto maker.
The one taxpayer bonus is a $288 million fee for making the new loans. It's hard to recall a similar fee on government loans. Maybe the Wall Streeters in Obama's administration figured the government should get a Street-style commitment fee for extending a new credit.
"We're not holding out for some sweetheart deal. We're asking for the normal treatment of creditors in bankruptcy, and the absolute priority of claims," says George Schultze of Schultze Asset Management, a Purchase, N.Y., investment firm. "Why should the administration force politics into this deal and give a special gift to a favored group of creditors?"
Wall Street will be closely watching how the bankruptcy judge handling the case, Manhattan's Arthur Gonzalez, treats the secured creditors relative to the unions. Contract law favors the bondholders.
Chrysler's debt now trades below 30 cents on the dollar, indicating the markets don't expect much greater recovery value in bankruptcy than what Uncle Sam offered. The Street is betting the bankruptcy lasts six months, not the 30 to 60 days envisioned by the administration, because of the contentious issues facing Judge Gonzalez.
The administration may have offered the unions a good deal to solidify their support for Chrysler. But the UAW, even with pay and other concessions, already is well treated relative to most other blue-collar workers.
ANOTHER AGGRIEVED CREDITOR GROUP is made up of the holders -- many of them retirees and other individuals -- of General Motors' $27 billion of unsecured debt. GM announced a punitive take-it-or-leave-it offer last week under which bondholders would get 10% of GM's equity and no cash. In contrast, GM proposed giving a roughly 39% equity stake to the UAW [another unsecured creditor], plus $10 billion in future payments to satisfy a $20 billion retiree health-care claim that ranks equally with the unsecured debt.
GM said that it likely would file for bankruptcy by month-end if 90% of bondholders don't accept the proposal. A bankruptcy looms because bondholder approval is highly unlikely on GM's terms.
A committee of GM bondholders Thursday made a seemingly reasonable counterproposal in which they offered to be treated equally with the UAW based on the value of their claims. The bondholders would get 58% of GM's equity, the UAW, 41% and GM's current shareholders, 1%. Under the GM plan, the government would get 50% of GM equity in return for forgiving about half its $19.4 billion loan to the company -- including $4 billion yet to be disbursed. Under the GM bondholder plan, the government debt would stay outstanding.
GM unsecured debt trades for about 10 cents on the dollar, as investors expect scant recovery value in a likely bankruptcy. The company's active 6.25% convertible debt (GPM) trades around $2.20, versus a face value of $25.
Whether GM avoids bankruptcy or not, its common shares, now around $1.80, look rich. In a bankruptcy, GM holders might get little or nothing, while an out-of-court settlement like the one proposed last week by GM would result in massive dilution of existing holders, with GM's share count rising one-hundredfold to 60 billion from the current 600 million. One reason that GM shares are holding up: It is virtually impossible to short the stock.
Wikipedia explains secured loans.
From Wikipedia, the free encyclopedia
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower [except in Chrysler bankruptcy, the Obama administration prevented secured creditors from taking over operating assets and instead forced them to accept a pitiful 30 cents on the dollar.]. From the creditor's perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property [the Obama administration striped Chrysler secured lenders of these rights, overturning over a hundred years of bankruptcy law]. The opposite of secured debt/loan is unsecured debt [UAW for example], which is not connected to any specific piece of property and instead the creditor may satisfy the debt against the borrower rather than just the borrower's collateral.
There are two purposes for a loan secured by debt. In the first purpose, by extending the loan through securing the debt, the creditor is relieved of most of the financial risks involved because it allows the creditor to take the property in the event that the debt is not properly repaid [However, the Obama administration is destroying that right through the Chrysler and GM bankruptcies]. In exchange, this permits the second purpose where the debtors may receive loans on more favorable terms than that available for unsecured debt, or to be extended credit under circumstances when credit under terms of unsecured debt would not be extended at all [terms of future secured loans for all companies will become less favorable as a result of Obama's actions]. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.
Hot Air reports that Chrysler deal violates 5th Amendment.
Senior creditors: Chrysler deal violates 5th Amendment
posted at 1:36 pm on May 4, 2009 by Ed Morrissey
If the Obama administration expected the senior creditors of Chrysler to fold their tents under political pressure, they may have gotten a rude shock today. Thomas Lauria, who accused the White House of threatening the creditors with humiliation at the hands of the White House press corps, has filed a motion to halt the administration's machinations on behalf of the UAW in the Chrysler bankruptcy. Lauria and his allies claim that the Obama administration has violated the Constitution in their bid to devalue the senior creditors' holdings on behalf of junior creditors, and have some precedent to support the allegation.
The heart of the argument starts on page 8 (via HA commenter Outlander):
III. The Taking of Collateral through a Direct or Indirect Use of TARP Authority is Unconstitutional.
15. Relying on purported authority provided by TARP, the Treasury Department is demanding that Chrysler's assets be stripped away from the coverage of the Senior Lenders' liens — thereby impairing the rights of the Senior Lenders to realize upon those assets — so that those assets may be put in New Chrysler and used to the benefit of unsecured creditors in this proceeding, who will then be paid much more than the Senior Lenders. But, even assuming that TARP provides the Treasury Department with authority to provide funding to the Debtors and impose the transfer of collateral away from the Senior Lenders, TARP was enacted long after the Senior Lenders contracted with the Debtors and received senior liens on the Debtors' property. Radford specifically disallowed the use of a law to retroactively alter existing liens on property.
16. Here, the proposed sale of the Debtors' assets will leave the Senior Lenders with a diluted pool of assets and no further interests in the operating assets covered by their specific liens. The Constitution forbids this application of a law retroactively to undercut the Senior Lenders' pre-existing property rights in favor or inferior creditors.
17. Finally, that the Treasury Department would take these unconstitutional actions to help the United States address difficult economic times is not an answer. Indeed, the same justification was expressly rejected in Radford, where Justice Brandeis noted that a statute which violated secured creditors' rights, but which was passed for sound public purposes relating to the Great Depression, could not be saved because "the Fifth Amendment commands that, however great the nation's need, private property shall not be thus taken even for a wholly public use without just compensation." Id. at 602.
18. What is really striking here is that what is being proposed by the Sale Motion would strip the Collateral away and allow it to be put to use as new capital in New Chrysler for the benefit of existing and other creditors — even though the Chrysler Non-TARP Lenders have been given no opportunity to realize upon that Collateral to the point of full repayment ahead of at least $14 billion of selectively identified unsecured creditors.
The Agora reports about the end of capitalism as we know it.
The End of Capitalism as We Know It
Posted by Joshua Claybourn on 21 May 2009
Arguably the most fundamental, crucial element to a civil society is the rule of law. A corollary to this notion is that of contract rights - when two or more people enter into a valid agreement that they intend to be honored, the agreement should indeed be honored. In the U.S., contract law is sacrosanct and it would not be facetious to say that the entire world's economy depends on America's respect for its laws and contracts.
All contracts are important in some way, but credit contracts are particularly important to a functioning capitalist system. That's why Article V of the U.S. Constitution prohibits states from interfering with the obligation to pay debts. And Article 1, Section 8 reinforces this point by delegating to the federal government the sole authority to enact "uniform laws on the subject of bankruptcies."
Under these long standing bankruptcy laws - enacted and enforced by the federal government under the Constitution - a secured creditor is entitled to first priority under the "absolute priority rule." Other nonsecured creditors have "junior" priority. The purpose of this rule should seem clear. When you offer credit to some one or some thing, and do so on the condition that it is secured by an asset, you should be first in line to collect before those providing credit without such security [mortgage is a loan secured by an asset (land/house) and a credit card is an example of an unsecured loan. Imagine the government taking an individual's foreclosed home from the bank and selling it to pay back that individual's credit cards. Insane right? That is what Obama has done with Chrysler]. Unfortunately President Obama's actions throughout the Chrysler bankruptcy have trampled over these well worn bankruptcy laws, contract rights, and even the rule of law.
One of Chrysler's secured creditors was the State of Indiana, or more particularly, pension funds administered by the state. But now that Chrysler has filed for bankruptcy, Indiana and other secured creditors are being forced to the back of the line so that unions can proceed to the front. For every dollar of secured creditors' claims, they're receiving only 30 cents. Compare that the the United Auto Workers union, an unsecured junior creditor, who will get 50 cents on the dollar [plus a big equity stake].
Why? It's not because any contract, agreement or bankruptcy law calls for it, but because the federal government decided it was politically convenient. Of course, we've become far too familiar with the government robbing Peter to pay Paul, but in this instance the government is violating the rule of law to do it. The arbitrary whims of Obama's administration threaten the very foundation of capitalism. [Not an exageration]
Henceforth lenders will hesitate to provide credit, and eager entrepreneurs and businessmen will struggle to find it, because any credit can now apparently be confiscated by government greed regardless of the law or the existence of a binding contract. Simply put, the price of borrowing will now go up because lenders must account for a new risk - government intervention.
Obama has assisted the UAW in this instance, an entity which just so happened to be crucial to his election. But how many union workers in the future will be laid off - or never hired in the first place - because their employer couldn't find credit or loans for expansion?
Thousands upon thousands of people are getting steamrolled by this outrageous affront to the credit system, but only Indiana has objected, and its efforts appear to be fruitless thus far. I fear that President Obama's actions in the Chrysler bankruptcy signal the dawn of a new era in which powerful political interests trump capitalism and the sanctity of contracts. May God have mercy on us all.
The Wall Street Journal reports that Chrysler plan faces new foes.
MAY 21, 2009
Chrysler Plan Faces New Foes
By SERENA NG and DAVID MCLAUGHLIN
New opposition to Chrysler LLC's restructuring plan emerged as Indiana pension funds holding Chrysler senior debt filed objections to the plan, saying the U.S. government's involvement had "infected" the company's bankruptcy.
The opposition was led by the Indiana State Teachers Retirement Fund, the Indiana State Police Pension Trust and the Indiana Major Moves Construction Fund, which together own about $42.5 million of Chrysler's $6.9 billion in secured debt, according to the funds' lawyer.
The funds are unhappy the government put together a restructuring that will give secured creditors only 29 cents on the dollar. Chrysler unsecured creditors ranking below them -- namely the United Auto Workers union -- will recover more.
Judge Arthur Gonzalez of the U.S. Bankruptcy Court in Manhattan on Wednesday denied lenders' request to delay the coming sale of Chrysler assets to a new company backed by the U.S. But the funds did secure a separate hearing in U.S. District Court in Manhattan next week, where they plan to challenge the constitutionality and legality of government involvement in Chrysler.
"As fiduciaries, we can't allow our retired police officers and teachers to be ripped off by the federal government," Indiana State Treasurer Richard Mourdock said Wednesday.
Mr. Mourdock, a Republican who oversees one of the funds and is trustee for another, said Indiana's state funds "suffered losses when the Obama administration overturned more than 100 years of established law by redefining 'secured creditors' to mean something less."
The Big Picture reports that Chrysler battle has important implications.
If Congress wants to pass (and Mr. Obama wishes to sign) a law making all creditors equal, regardless of the seniority of their claims, then at least we will have had due process and an issue to discuss in 2010. But our President had better be ready for the economic consequences of this action. Lending may not cease, but if senior secured lenders stand as equals in line with unsecured junk bond holders, parts suppliers and employees, then all loans to a corporation will reprice as if they were junk. High yield spreads have come in since December, but they still tower over Treasury yields by more than 1200 basis points. The green shoots supposedly popping up this spring will flattened if the cost of capital reaches these sky-high levels. And what will our foreign creditors think when they see Uncle Sam changing the rules for creditors of domestic origin? Will they want to extend us loans for 10 years at 3% if they fear we'll game them, too?
The Wall Street Journal reports that plan for Chrysler undercuts creditor rights, US law.
MAY 6, 2009
< /span>Plan for Chrysler Undercuts Creditor Rights, U.S. Law
The Obama administration proposal outlined in your editorial "Chrysler Goes to Court" (May 1) is distressing for anyone vaguely familiar with how U.S. credit markets and contract law work. No matter what spin President Obama and his enablers put on this, the proposal is nothing short of an unprecedented legal violation of senior secured creditor rights, forcing a 70% loan write-off by the banks with no commensurate equity interest in Chrysler.
Allowing the junior creditor, the United Auto Workers' retiree health fund trust, a 55% equity stake over the senior creditors is simply unheard of and is obviously nothing but a transparent payback for Mr. Obama's past union votes and continuing union support.
Thomas M. Neale
There was a good deal of talk some years back about the growing convergence of the U.S. and the Soviet Union. Developments in the Chrysler affair show that a convergence has been arrived at -- between Barack Obama's America and Vladimir Putin's Russia.
Never did I expect to see such an open assault on the rule of law, property rights and contractual obligations in this country. What is the difference between Mr. Obama's treatment of Chrysler's secured creditors and Mr. Putin's treatment of Yukos oil?
I wish I could take the populist view that the bondholders should be embarrassed by not agreeing to the government deals. I am more embarrassed and frightened by our government's actions in not upholding normal bankruptcy laws. In the future, how will we be able to encourage bond investment in this country if bondholders are no longer first in line among creditors? Moreover, how can we as a country look down on emerging-market countries that default on bond investments? Traveling down the current government path is certainly going to cost us in the long run.
Peter A. North
Many of the Chrysler bondholders are investing on behalf of others (e.g., individuals and pension funds) and have a fiduciary obligation to those investors to maximize the value of their holdings. If they accept a settlement that is far less than fair value, they are breaching their fiduciary duty and ought to be subject to lawsuits. They have no moral or ethical obligation to the UAW or the federal government, but they do have one to their shareholders and investors. In that context, an involuntary shared sacrifice is no sacrifice. It's confiscation.
As I understand it, the government is trying to force lenders to accept less than they are legally entitled to in the reorganization of both Chrysler and GM, with Obama-supporting unions getting more than they are legally entitled to.
If the government is forcing this rather than asking nicely, this would seem to be just the sort of thing the Founders worried about. The takings clause of the Fifth Amendment to the Constitution says, "nor [shall any person] be deprived of life, liberty, or property, without due process of law."
Rebel Traders reports that Obama administration is breaking contract law.
So will the Obama administration break contract law once again and then blame the bankruptcy of General Motors on those individuals and corporations who are legally in their right to claim full due process?
I think it was very clear why the deadlines for Chrysler and General Motors were spread apart the way they were. Chrysler was a 'test' for the big one which is GM. So if the administration follows in the same steps as their Chrysler proceedings then it is probably safe to say that GM bond holders will end up with little or nothing, even though they have legal contracts that entitles them to be first in line for reimbursement.
IF GM does fall the same way as Chrysler, and bond holders end up getting shafted yet again one has to ponder what this will mean for any company in the future who needs to sell bonds. Who will want to buy them if the Government can overstep the law and make their certificates worthless? The president may be playing on 'public' anger against anything Wall Street just to place blame for the bankruptcies solely on them. What a shame that most Americans don't understand what the law is in this matter, and that the President makes those who "play by the rules" look bad... and give money to those who have constantly "played with fire" and got burned.
My reaction: What the Obama administration did to Chrysler bond holders was theft, pure and simple. Under US law, Chrysler's secured creditors, including Indiana pension funds (California's and Michigan's pension funds were hurt too), should be recuperating close to 100 percent through bankruptcy, and the UAW' retiree health fund trust should have gotten next to nothing.
If the Obama administration wanted to give a handout to the UAW, they should have just printed more money (the fed has already bought $422 billion mortgage backed securities. What is another $20 billion compared to that?). However, stealing from secured creditors to reward political supporters is plain theft.
More importantly, the Obama administration is doing great damage to America's capital markets. Who will now lend to troubled corporate entities, given the current administration's penchant for intervention? That leaves ONLY the government as the last remaining source of credit for these Corporations, making them de facto GSEs or quasi-government entities.
UPDATE: May 26, 2009 10:28 PM
Indiana state treasurer Richard Mourdock discuss his battle for the rule of law.