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May 1, 2009
No-one Will Now Lend to Auto Companies
Obama's villification of auto company lenders, the two hedge funds that held out for better terms, pretty much seals the deal -- the government is going to be the only auto company lender. Why lend to auto companies when the President can fix the terms of repayment and call you out if you disagree? Not anyone with money and common sense.
May 1, 2009 | Permalink
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Two posts ago you noted that this company is worth nothing, so w/o the gov money the company would likely be liquidate. If that is true then nobody w/ "money and common sense" would give them money, regardless of what the BHO folks are doing. This newest post dilutes the message of the earlier one because it implies that there are non-gov lenders who would like to lend money but they're afraid of the government, but the earlier post says that nobody should lend to this company because it's worth nothing.
Perhaps your point is that a reorganization (rather than liquidation) would be possible because new lenders would come in if the gov wasn't involved. Well, guess what; these new lenders' level of interest would increase as the benefits to the pre-reorganization creditors were more and more squeezed because that would leave more on the table for them to lend against (not that there is a way to squeeze enough to find something to lend against in this situation).
I agree w/ your earlier post that this company is probably not worth anything and ,w/o gov money, it would likely be liquidated (w/ really low prices because of the generally bad economy, non-existent demand for auto manu equip, and lack of ability/interest for folks to purchase these types of assets). Why you needed to dilute that point by pretending that there would be eager lenders (as if folks, other than the gov, haven't learned from the experiences of Daimler and Cerberus) ready to finance a reorganization is hard to figure--maybe your eagerness to bash the BHO folks overwhelmed your interest in avoiding self-contradicting arguments.
This stuff reminds me of the ready, fire, aim exultation of John Thain that was so prominent on this blog, before the general public knew a bit more about him.
And, I'm reminded of the praise for China's stimulus on this blog, which upon closer inspection (though rarely reported in the US) included some smoke and mirrors characteristics--e.g. requiring matching funds from localities to get to the headline number, and including stuff like funds for universal health care which many of the pro-China-stimulus folks probably wouldn't want us to follow, and of course the fact that the Chinese gov recently declared that executive pay must be lowered doesn't seem like something the pro-China folks would approve of--if they were not obsessed w/ finding ways of attacking the BHO folks.
Posted by: 1jpb | May 3, 2009 2:03:07 PM
1jpb: Take the focus off Chrysler for a moment (although you're wrong on that too) and look at what this restructuring implies going forward. There can be willing lenders to struggling companies--it's called "distressed debt"--with an eye toward either earning a high rate of interest or, in case the company folds, taking over company ownership and/or liquidating assets. However, the current message to those lenders is that their contracts don't matter, bankruptcy law doesn't matter, and if they lend to a union company they may have to take a subordinate position to cover all the fat pensions and benefits that sunk the company in the first place. (And now, there are rumors that the Administration threatened and coerced the settlement.) This article provides a good summary: http://www.realclearmarkets.com/articles/2009/05/obama_to_secured_creditors_dro.html
I don't even see how this is legal.
Unions and "green jobs" are quickly becoming to Obama what oil and weapons contractors were to Bush (but Obama's pet projects are so much nicer that they're not even "special interests").
Posted by: Vince | May 5, 2009 10:01:36 AM
Why buy the debt of any company the Obama folks get their dirty little hands on? You'll get a better return for simply unionizing the shop, and it doesn't require any real capital. PLUS you get an ownership interest. If you want in on this great investment vehicle simply mail your donation... ahem "investment" to the ReElect Obama 2012 campaign.
I seriously don't know what country I'm in anymore.
Posted by: Chris Tamms | May 6, 2009 10:14:51 AM
Hi. this is an informative post
Posted by: Apostille | May 6, 2009 1:11:40 PM
I am not sure I understand the extent or the nature of the complaining, here or on many other boards.
The administration did not change or break the law or truly "force" anything. Under the bankruptcy code, for the plan to get through, the plan needed the consent of a certain amount of the secureds and these secureds went along. Now, I understand that these secureds appear to have been pressured in some fashion. And maybe this is where I am missing some facts, but the administration did not mandate this agreement by fiat, but pressured secureds into consent and by my count, the administration had only two forms of pressure:
1. Apparently the administration threatened terrible PR from the White House if a secured did not go along. Not sure I get this. What would the White House say that is any different from what they are saying now about the holdouts (e.g., "they are terrible, greedy, etc."), and what would the secureds say that is any different from the other holdouts (e.g., "we are entitled to more and are not consenting until we get it and have a duty to fight for our investors"). I don't think the PR threat is really that strong, otherwise, those that consented would not be coming out now and revealing the alleged government PR threat. In this situation, it appears the secureds went along for another reason and are now complaining to cover themselves vis a vis their investors.
2. The only DIP and exit financing available to Chrysler appears to be from the government. As such, the government is in a position to make the demands it wants. Lots of commenters on other blogs think the settlement is ridiculous and that the "law" says that the secureds are to be paid in full before anyone else. Fine, but without DIP and exit financing, there's not much to go around. The secureds would have to be paid in full before anyone else got paid in liquidation, but the secureds have to know that liquidation would produce far less for them to share. Hence, in my humble opinion, the secureds went along with the only deal in town. Makes me wonder why anyone held out other than for grandstanding.
Even if I am missing something here, which could certainly be the case, the better question, and I am certainly not the first to ask, is why more secureds didn't stand up to the administration if this was so terrible, patently unfair, illegal, etc.? Maybe I am naive about the true pressures involved, but it is a mischaracterization to say the gov't just stepped in a mandated this settlement by fiat.
We can all disagree as to whether the government should be (a) investing taxpayer money to save a car company or (b) playing favorites by trying to help employees. I acknowledge arguments that the government should not be playing the roles in Chrysler that it is. But, it does not take anything like a cynic to recognize that those roles should not come as a surprise. Given that, I don't think one can truly complain about how those goals are pursued, meaning using the leverage available to reach them. Again, I understand and don't necessarily disagree with the argument that taxpayer money should not used to leverage the position of employee pensions in the rescue of a company, but nobody broke or changed bankruptcy law here.
As for disincentives, pardon my sarcasm, but are lenders really going to back off lending thinking "we'd better not lend to this company that needs it because some day down the road, the only additional source of money might be the federal government and if that happens the government might force us to take a bigger haircut in favor of underfunded pension obligations by using its leverage as the only source of continued financing?"
Somebody said, "I don't even see how this is legal." I am not sure I understand what is illegal, again, acknowledging that many of us don't want the government playing in these markets in the first place. But, again, once you acknowledge that some can make arguments, strong or not, for trying to save Chrysler (e.g., lots of jobs, lots of dependent suppliers, lots of dealers, etc.), I am not sure you can really question how they are playing.
Posted by: Steve | May 8, 2009 11:05:15 AM
I don’t know if anything done was per se illegal (although I wouldn’t be surprised it was), but I find your question amusing. Basically you’re asking what can a president do to threaten institutional investors with only the full force and power of the federal government behind him along with popular sentiment. Gee I don’t know, but if I was a fund manager holding these bonds, I’m not sure I’d want to find out.
Posted by: Chris | May 8, 2009 3:36:47 PM
"However, the current message to those lenders is that their contracts don't matter"
I doubt that the possibility of contracts being unfulfilled was a revelation. That is, if you invest or lend to a terrible company that is going nowhere but down. And, that company ends up in bankruptcy, you should expect your contracts to meet a buzz saw in bankruptcy. It's hard to believe that this was a surprise to these holdout investors/lenders. The only real surprise must have been when these minority holdouts discovered that milking, by threatening to scuttle the whole deal, the "deep pockets taxpayers" (don't forget you and I are paying for this) for an extra twenty cents on the dollar was harder than expected--the gov didn't fold.
If my gov is unalterably determined to bailout loser companies I'm thrilled to see that they're driving a hard deal w/ creditors. That's my money! And, if companies don't want this treatment the managements of those companies should probably avoid running their companies into the ground--which is always a good idea, even if w/o the worry of the gov coming in to mess w/ the carcass of your failed company.
And, if lenders/investors don't have the stomach for contracts being trashed, they should probably avoid high risk companies that have a decent chance of landing in bankruptcy--where contract expectations can go to die/change. BTW, this happens even w/o the participation of the gov as the lender of last resort. And, I have zero sympathy for anyone who invested in companies that were so screwed up they had no (non-liquidation) option but to get gov help. These investor/lenders should have a) priced their junk investments appropriately to account for the extreme uncertainty and realization that some of these types of deals would be big losers, or b)they should have taken their money and gone to Vegas to let it all ride on good ole twenty seven. Gambling is as gambling does.
Posted by: 1jpb | May 8, 2009 6:45:38 PM
"If my gov is unalterably determined to bailout loser companies I'm thrilled to see that they're driving a hard deal w/ creditors. That's my money!"
Are you really that concerned about "your money"? (By the way, it's actually China's money or your grandkids' money at this point.) Nobody can blame the government for trying to save a few taxpayer bucks. However, the "hard deal" drivin with the creditors saved taxpayers nothing--the "savings" were simply handed out to the UAW. Fiscal conservatism is a poor basis upon which to defend this restructuring.
This was pure political payback--more blatant than any no-bid contract to Halliburton--and Obama does not deserve a pass.
Like yourself, I have no problem with creditors losing money. You take a risk, sometimes you lose. It's the cornerstone of the free market (you know, that "thing" to which Obama pays homage in speeches while simultaneously undermining in practice). Funds can factor all types of economic risk into their investments. The problem here is that the new risk is purely political. Factoring for political risk is traditionally reserved for investments in corrupt third world countries, not unionized America. Unfortunately, that may be where we are headed. Hence, the prediction that nobody will want to lend to auto companies.
Posted by: Vince | May 12, 2009 12:17:37 PM
