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May 11, 2009
Auto Bailout Woes
The government's role in the auto bailouts has been a total mess. Consider Chrysler first: First creditors and union reps refused to budge in the negotiations until thegovernment declared, whichh drove the negotiations into Chapter 11. The creditors and union reps were banking on the governments political stake in the outcome, not its economic stake. The administration was on record with a series of pro-worker statements; it could not let the auto makers "fail." Second, when the government got tough it did so by threatening to bring nasty public pressure on the creditors. Creditors that were already on the government dole with TARP money caved immediately; hedge funds held out a bit longer - took incredible public heat - and eventually caved as well. The hedge funds, by the way, are the players the government needs to get into it public/private partnership program and its TALF program for either to succeed. So the government ended up ripping players it needs to play in the future for the success of its programs. Third, the winners were the unions (who are ending up with control of the companies in trust funds) and Fiat. Fiat has quality control problems, Chrysler's bid problem, has failed twice in the United States, is losing money itself, and really only wants Chrysler dealers to sell new Fiat cars. Fourth, the bailout of Chrysler has hurt Ford who must still pay 100 percent of its debts because it is trying to make a go of it without government money and outside of Chapter 11. The bailout has hurt the one company that should be rewarded. What a terrible mess.
May 11, 2009 | Permalink
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» "You don't need banks and bondholders to make cars"? from ProfessorBainbridge.com
The WSJ’s "USA Inc" series continues today with detail on how the US got secured lenders to abandon their fight to get paid more than 30% of their claims, as against giving more than half the company to unsecured workers. Which prompts this zinger from... [Read More]
Tracked on May 11, 2009 11:38:13 AM
Comments
It does not matter how much taxpayer $ the gov't gives to Chrysler over the next months; a non-negligible percentage of the population will associate Chrysler with this thuggery. Absent some remarkable new vehicle by either, I think that percentage will no longer even consider the products of these companies in thier future car-buying decisions. The odds of Chrysler surviving long term were always somewhat worse than even, but IMHO alienating so many potential customers with this ham-fisted payoff for the administration's political patrons makes Chrysler's survival near impossible. GM will soon be staring into the same abyss.
Posted by: Duke | May 11, 2009 12:53:12 PM
By "terrible mess" you, of course, mean "government as usual".
Posted by: Methinks | May 11, 2009 6:28:16 PM
This is like the piece that was in the Journal today, but you've removed a lot of important fact such as:
The gov negotiators had strict orders from the WH to not to ever use the TARP as leverage against the lenders who had received TARP funds.
Or
The investors/lenders that were holding out were doing so because they were trying to roll the government so they could rob tax payers for much more than they would have received in a liquidation, which is 100% certainly where this deal would have gone w/o the new gov money.
Or
The amount the gov was offering to the investors/lenders was the liquidation value that would have been salvageable in a liquidation.
Or
The 29 cents on a dollar figure that was offered to the investors/lenders was actually considerably higher than some investors/lenders were into their respective positions. That is, some of them (the smartest ones) bought their claims for around 15 cents on the dollar.
Or
The gov dealt w/ these investors/lenders exactly the way these investor/lenders go about making their own deals. [Now they're all upset because they could rob the tax payers, and the gov wasn't the patsy they expected.]
Posted by: 1jpb | May 11, 2009 10:05:06 PM
Aside:
The biggest problem w/ Fiat is that Ferrari is having a terrible year in F1. At the same time their only real competition (Mercedes/McLaren) is also terrible this year.
There must be something to learn from the fact that these two teams went from untouchable giants to nearly dead losers in a single season.
Posted by: 1jpb | May 11, 2009 10:18:29 PM
Bloom: You're comment on the right of creditors who purchase distressed assets not to make too much of a profit is totally irrevelant, unless you want government to regulate profits in the securities industry too. You're view that it is relevant is telling. Moreover, you do not repect in your other comments the difference between a party negotiating for a financial return and a party negotiating for a political advantage (more votes). A party negotiating in a financial situation with a non-financial goal generates huge problems.
Posted by: oesterle | May 12, 2009 6:51:31 AM
Comments in BOLD:
The government's role in the auto bailouts has been a total mess. Consider Chrysler first: First creditors and union reps refused to budge in the negotiations until thegovernment declared, whichh drove the negotiations into Chapter 11 (NOT SURE I UNDERSTAND THE RELEVANCE). The creditors and union reps were banking on the governments political stake in the outcome, not its economic stake (IF THAT WERE THE CASE, I THINK THE OTHER CREDITORS WOULD HAVE CAVED SOONER). The administration was on record with a series of pro-worker statements; it could not let the auto makers "fail." (OK, GRANTED, BUT NOT SURE THAT BANKRUPTCY = FAILURE. I NEVER ASSUMED THAT TO BE THE CASE) Second, when the government got tough it did so by threatening to bring nasty public pressure on the creditors. Creditors that were already on the government dole with TARP money caved immediately (THE AGREED TO THE GOVERNMENT'S TERMS BEFORE THE GOVERNMENT MADE THESE STATEMENTS); hedge funds held out a bit longer - took incredible public heat - and eventually caved as well (THEY DIDN'T HAVE TO). The hedge funds, by the way, are the players the government needs to get into it public/private partnership program and its TALF program for either to succeed (NOT CORRECT. THE TALF PROGRAM IS SOMETHING ADMINISTERED BY THE FRBNY TO PROVIDE LIQUIDITY TO PARTICIPANTS BY ACCEPTING CERTAIN ASSETS AS COLLATERAL THEY PREVIOUSLY DID NOT. PERHAPS THIS IS MEANT TO REFER TO THE PPIP? EVEN IF IT DOES, IT ALSO IS NOT ACCURATE - HEDGE FUNDS ARE NOT REQUIRED FOR THE PPIP, NEITHER AS MANAGERS NOR INVESTORS, HOWEVER DON'T THINK THIS EVENT WOULD IMPACT THE INVESTMENT DECISION FOR PEOPLE LOOKING AT PPIP INVESTMENTS, SHOULD THEY EVER ACTUALLY MATERIALIZE) . So the government ended up ripping players it needs to play in the future for the success of its programs. Third, the winners were the unions (who are ending up with control of the companies (COMPANIES?) in trust funds) and Fiat. Fiat has quality control problems, Chrysler's bid problem, has failed twice in the United States, is losing money itself, and really only wants Chrysler dealers to sell new Fiat cars (THIS IS A DUBIOUS CLAIM - AND AT ANY RATE, WHO CARES. Fourth, the bailout of Chrysler has hurt Ford who must still pay 100 percent of its debts because it is trying to make a go of it without government money and outside of Chapter 11 (I CALL BS ON THIS, TOO. F IS UP 40% ON THE MONTH, AS COMPARED TO THE SP 500, WHICH IS UP LIKE 5%, EXCLUDING TODAY, WHICH HAD A BIG DROP BECAUSE . The bailout has hurt the one company that should be rewarded. What a terrible mess.
Posted by: Lee Taylor | May 12, 2009 3:50:33 PM
Taylor: You have much wrong. The government controlled the negotiations from the beginning because the government was the wild card. Until the government declared specifically on plans for Chrysler, the parties had to wait to put together sensible negotiation positions. How can this be "irrelevant." The Tarp supported secured banks caved immediately once the government put its proposal on the table (they did not need a tough lashing). Some of the hedge funds held out for more and then took the public heat from Obama ("I do not stand with them... I stand with the workers" or something like that). Your comments on hedge funds as not economically important is ignorant. The hedge funds participation could be significant to both progarms. TAFL is designed to invigorate the securitization lending process and hedge funds are important investors in the process. [By buying the top tranche of the pooling entities, the government hopes that management entities will pool and attract other investors to all the tranches so as to send money back into the hands of the original lenders. Private investors in the pooling entites are critical to the succes of the program.] In the PIP partnership programs the hedge funds could be the primary private side risk takers, partnering with the government. Fiat is a crummy company itself (the German government does not want it to buy Opel from GM -- what does Germany know that we don't?) and to drive Chrysler into the hands of Fiat, for not a dime of cash, is inane. Chrysler's plants will end up with GM eventually. Ford stock is up over market indexes -- what kind of answer is that -- the company is losing money, seeking new funds, and will pay debtors 100% when its two primary United State competitors are paying creditors 20% and recieving another 8 billion in federal cash to boot. How can this not affect Ford's competitive position? Ford stock prices had been hammered by industry wide woes. Your entire argument is irrational.
Posted by: oesterle | May 12, 2009 6:14:28 PM
Oesterle: It appears I've received a tongue lashing or is that a tough lashing?
Posted by: Lee Taylor | May 15, 2009 4:49:24 PM
There’s appears to be no limit to our new President’s talents - the planned change over of the entire Health Care System announced yesterday, the defacto takeover of major banks, and, of course, the direction of GM to issue 60 BILLION new shares of common stock, ostensibly in order to satisfy that auto manufacturers’ creditors, and politically, to shift equity to the UAW Union, GM “rightful” owner, (as all common stockholders get “wiped out.”).
Unfortunately, it appears the GM saga may be played out in bankruptcy court in a more protracted affair than Chrysler’s current “run” on “Broadway.”
What we didn’t know was Mr. Obama’s apparent passion for advertising, and commitment to achieve more with less in the matter of the Government’s defacto takeover of Chrysler!
His secret? Why bring back the 1958 DeSOTO of course!
Before you scoff, think of all the cost savings: tooling, brochures, ad budget - why the works!!
Posted by: Andrew Gross | May 16, 2009 7:05:18 PM
See Comments in BOLD:
Taylor: You have much wrong (I DISAGREE, PLEASE SEE BELOW). The government controlled the negotiations from the beginning because the government was the wild card (NICE NON SEQUITUR ARGUMENT). Until the government declared specifically on plans for Chrysler, the parties had to wait to put together sensible negotiation positions (NONSENSE). How can this be "irrelevant."(YOUR POSITION IS THAT ONCE THE GOVERNMENT SHOWED ITS HAD, BANKRUPTCY WAS INEVITABLE? THAT IS HARDLY THE CASE. THE GOVERNMENT AND THE SENIOR SECURED DEBT HOLDERS ATTEMPTED TO REACH A DEAL OVER SEVERAL DAYS OF NEGOTIATIONS. THE SENIOR SECURED HOLDERS SEEMED TO BE UNDER THE IMPRESSION THAT A 40% HAIRCUT WAS REASONABLE. INDEED, SENIOR SECURED NOTEHOLDERS HAVE HISTORICALLY BEEN ABLE TO RECOVER AROUND 60%, HOWEVER THESE ARE NOT NOT NORMAL TIMES, AND THERE HAS BEEN VERY HIGH VOLATILITY ASSOCIATED WITH THOSE RECOVERIES OVER THE YEARS. THE CAPSTONE GROUP ESTIMATED THE RECOVERY FOR SENIOR SECURED DEBTHOLDERS OF CHRYSLER TO BE BETWEEN 9-39%, WITH EXPECTED RECOVERY TO BE AT THE LOWER END OF THE RANGE THE LONGER IT TOOK TO REACH AN AGREEMENT) The Tarp supported secured banks caved immediately once the government put its proposal on the table (they did not need a tough lashing). Some of the hedge funds held out for more and then took the public heat from Obama ("I do not stand with them... I stand with the workers" or something like that ). Your comments on hedge funds as not economically important is ignorant (BIG DEAL. SO THE HEDGE FUNDS TOOK PUBLIC HEAT? I THOUGHT THEY WERE MADE OF STERNER STUFF. WHAT HAPPENED TO ALL THEIR HIGH-MINDED CLAIMS TO HAVE A FIDUCIARY DUTY TO THEIR INVESTORS?) . The hedge funds participation could be significant to both progarms (PROBABLY SO, BUT HAVING WORKED WITH HEDGE FUNDS AND HEDGIES FOR MY ENTIRE PROFESSIONAL CAREER, I DON'T BELIEVE THAT A SIGNIFICANT NUMBER OF THEM WOULD TURN DOWN AN INVESTMENT THAT WOULD MAKE THEM MONEY ON. HEDGE FUNDS ARE IN THE BUSINESS OF ASSESSING AND TAKING RISKS. THEY SHOULD BE ABLE TO ASSESS THE RISKS ASSOCIATED WITH INVESTMENTS ASSOCIATED WITH TALF AND PPIP. TO THE EXTENT ATTRACTIVE OPPORTUNITIES EXIST, THE MARKET WILL FUNCTION). TAFL is designed to invigorate the securitization lending process and hedge funds are important investors in the process (THE TALF IS ADMINISTERED BY THE FRBNY, NOT THE EXECUTIVE BRANCH. THESE ARE INDEPENDENT ENTITIES AND MARKET PARTICIPANTS ARE WELL-AWARE OF THE DIFFERENCE. AT ANY RATE, TRYING TO TIE THE FAILURE OF THE TALF PROGRAM TO PRESIDENT OBAMA'S ADMINISTRATION BROKERING A DEAL ON CHRYSLER'S BANKRUPTCY IS PRETTY WEAK) [By buying the top tranche of the pooling entities, the government hopes that management entities will pool and attract other investors to all the tranches so as to send money back into the hands of the original lenders. Private investors in the pooling entites are critical to the succes of the program.] In the PIP partnership programs the hedge funds could be (COULD BE, BUT DON'T HAVE TO BE - THE ASSET MANAGEMENT BUSINESS IS HUGE, AND HEDGE FUNDS ARE BY NO MEANS THE ONLY PLAYERS IN THAT SPACE. THEY COULD OPT OUT ENTIRELY - A HUGELY STUPID AND IMPROBABLY EVENT - AND IT WOULD NOT MATTER, AS THERE ARE PLENTY OF OTHER INSTITUTIONAL INVESTORS AND POTENTIALLY INDIVIDUAL INVESTORS WHO WILL BUY THESE ASSETS, SHOULD THEY EVER SEE THE LIGHT OF DAY) the primary private side risk takers, partnering with the government. Fiat is a crummy company itself (the German government does not want it to buy Opel from GM -- what does Germany know that we don't?(OOOH - SCARY! RUN FOR THE HILLS, AMERICA! THE GERMANS DON'T WANT FIAT TO BUY OPEL, SO IT MUST FOLLOW THAT FIAT INVESTING IN CHRYSLER IS A BAD DEAL!)) and to drive Chrysler into the hands of Fiat, for not a dime of cash, is inane (THIS WAS NOT THE BASIS OF ORIGINAL POST, RATHER YOU WERE CONCERNED ABOUT FIAT GETTING ACCESS TO CHRYSLERS DEALERSHIPS. WHO CARES IF THEY GET THAT ACCESS? FIAT IS GETTING 20% OF THE COMPANY, AND IN EXCHANGE THEY GET ACCESS TO EACH OTHERS MARKETS AND CHRYSLER GETS ACCESS TO FIAT'S PLATFORMS AND MORE FUEL EFFCIENT DESIGNTS. IF FIAT WANTS MORE OF THE COMPANY, IT NEEDS TO PAY OFF THE GOVERNMENT LOANS. THIS IS AN INDUSTRY WHERE SCALE IS VERY IMPORTANT AND NEITHER FIAT OR CHRYSLER HAVE IT BY THEMSELVES, BUT MAY WHEN COMBINED). Chrysler's plants will end up with GM eventually (HUH? WHERE DOES THIS COME FROM?). Ford stock is up over market indexes -- what kind of answer is that (IT PROVIDES EVIDENCE THAT YOUR CLAIM THAT FORD IS SOMEHOW GETTING THE SHORT END OF THE STICK HERE IS NOT BORNE OUT BY EVIDENCE IN THE MARKET, AND BY COMPARING IT TO A BROAD MARKET INDEX, I TRY TO ACCOUNT FOR THE FACT THAT THE RALLY IN FORD IS NOT ENTIRELY A MARKET EVENT, THAT IS, THE INCREASE IN FORD STOCK IS DUE TO EVENTS PARTICULAR TO FORD AND ITS INDUSTRY. INDEED, THE AUTO PARTS COMPANIES STOCKS HAVE ALSO RALLIED IN RESPONSE TO THESE EVENTS, SEE VISTEON, LEAR, OR TRW) -- the company is losing money, seeking new funds, and will pay debtors 100% when its two primary United State competitors are paying creditors 20% (WHOS PAYING CREDITORS 20%? CHRYSLER'S SNR SEC LENDERS ARE GETTING 28 CENTS ON THE DOLLAR) and recieving another 8 billion in federal cash to boot. How can this not affect Ford's competitive position? Ford stock prices had been hammered by industry wide woes. Your entire argument is irrational (MY ARGUMENT IS IRRATIONAL? - YOU CLAIM THAT, "THE BAILOUT HAS HURT THE ONE COMPANY THAT SHOULD BE REWARDED." THE MARKET DOES NOT APPEAR TO THINK THAT FORD IS BEING TERRIBLY HURT. INDEED, WITHOUT FORCEFUL GOVERNMENTAL INTERVENTION, IT IS LIKELY THAT GM AND CHRYSLER WOULD HAVE FAILED IN THE CONVENTIONAL SENSE, LEADING TO A SEVERE CRISIS OF CONFIDENCE OF US AUTOMAKERS GENERALLY, NOT TO MENTION THE IMPACT OF GM AND CHRYSLER FALLING APART ON KEY SUPPLIERS TO FORD. SINCE ALL OF THE BIG 3 RELY ON A NUMBER OF SAME SUPPLIERS, FAILURE OF GM WOULD IMPERIL THOSE SUPPLIERS ABILITY TO SUPPLY FORD. FORD FURTHER BENEFITS FROM THE LIKELY CONCESSIONS THAT IT WILL BE ABLE TO SQUEEZE FROM THE UAW EMPLOYEES UNDER ITS EMPLOY.).
Posted by: Lee Taylor | May 18, 2009 11:44:59 AM
thank you for this post I ll bookmark your page :)
Posted by: Inchirieri Masini | Jul 23, 2009 6:47:11 AM
