The Catalyst for Chrysler's Bankruptcy Was the Cramdown of Chrysler's Secured Creditors

May 1, 2009.

And on the 101st day of President Obama’s Administration, Chrysler Corporation filed for bankruptcy.

Chrysler was undoubtedly heading for bankruptcy and perhaps dissolution sooner or later. It lacks products, quality, capital, and a captive finance company. Daimler ran it for cash flow, and then Cerberus stripped out its headquarters building and Chrysler Finance to reduce its investment, and followed up by cancelling future product lines to prep it for flipping.

Chrysler had been saved in the past by such cars as the Chrysler Cordova (with Corinthian leather), the K cars, minivans, and Chrysler 300 (with the Hemi). No such future products exist!
Essentially debt free when Cerberus acquired control of Chrysler two years ago, Cerberus immediately mortgaged almost every asset of Chrysler, borrowing $10 billion.

President Bush punted the Detroit can down the road to the Obama Administration to avoid Detroit collapsing on his watch.

The Obama Administration has two major objectives, sometimes consistent and sometimes contradictory, with Chrysler and GM:

1) Nurse them through the 2012 election (Michigan and Ohio are critical states in the Presidential election with Missouri and Illinois close behind)
2) Give as much as possible to the UAW.

President Obama owes Labor; he must do what he can to save it.

Loss in the equation are the interests of the shareholders, creditors, taxpayers, and consumers.

We know that shareholders will essentially get wiped out in a bankruptcy and often in a reorganization. Indeed, Daimler has already written off its remaining 19.9% stake in Chrysler, and even kicked in $600 million to the Pension Plan. Cerberus has been unwilling to provide financing to Chrysler, and has decided to walk away, perhaps retaining Chrysler Financial.

The Administration announced last weekend plans for GM to be majority owned by the federal government and Chrysler by the union. Both were dependent upon approval of the creditors, who in turn were being forced to agree to substantial cramdowns.

GM’s creditors would exchange $27 billion in unsecured debt for stock worth 10% of the outstanding shares, and existing shareholders would be reduced to 1%. However, the UAW would surrender half of the $20.4 billion of unsecured debt for the healthcare plan of GM for stock, giving it 39% of the company.

The Chrysler proposal would give the creditors with $6.9 billion in secured debt $2 billion in cash, subsequently raised to $2.25 billion. They asked for an additional $250 million. The UAW would end up with 55% of Chrysler (through the new union health plan, the Voluntary Employee benefit Association), the federal government 8%, Fiat 20-35%, and the governments of Canada and Ontario 2%.

Four major creditors owning 70% of Chrysler’s debt agreed, but the remainder refused, scuttling the plan and sending Chrysler into Chapter 11.

President Obama called the holdout “speculators” who were greedy and placing their interests above others. That was mild! Governor Granholm of Michigan and Congressman Dingell referred to them as vultures.

As I write this posting, ironically on May Day, the international day of worker solidarity, President Obama has clearly adopted the Marxist-socialist approach of subordinating capital to labor. Both are necessary for economic success and should work as partners.

The creditors were merely asserting their legal rights. Under bankruptcy law, secured creditors have priority over unsecured creditors. Their debt is secured, but the UAW, an unsecured creditor, would exchange $10 billion in unsecured promises for 55% of the company.

The four banks agreeing to the deal, J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, and Citigroup, were in a difficult position. They have received billions in TARP funds from the Treasury and could not refuse.

Fiat is not bringing any cash to the deal. Indeed, it can’t, having lost $543 million last quarter and witnessing its debt rise 12%`to $8.7 billion. It will be giving Chrysler “technology.” In other words, Chrysler will be building Fiat automobiles in its remaining factories. Even if you put a Chrysler, Dodge, or Jeep name on them, they’re still a Fiat.

The government, which has already advanced $4 billion to Chrysler, will throw in another $8 billion. The expectation is for a quick 30-60 day turnaround in bankruptcy with the bankruptcy court approving the rejected plan. The plan is to quickly sell off major Chrysler assets to Fiat, with the remaining facilities being closed by Chrysler.

Perhaps, but debtors are due their day in court, and that includes the secured creditors, the unsecured creditors (suppliers, dealers, tort claimants), and workers. The government’s hope is also that the bankruptcy judge will also quickly rescind Chrysler’s contracts with dealers, override state dealer protection laws, and then let Chrysler terminate about half of its 3,300 dealers. They too get their day in court, and right to appeal.

Other claimants have appeared, such as the Ad Hoc Committee for Mesothelioma and Lung Cancer Claimants.

Delphi Corp., the parts subsidiary spun off by GM, has been in bankruptcy for four years with no end in sight.

The concept of the Obama Administration of a “surgical bankruptcy” is probably an oxymoron.

Most dealers are small business entrepreneurs, who have invested their own capital into their facilities. As they lose their investments, 100,000-200,000 employees will lose their jobs.

In the meantime, Chrysler has shut its assembly plants hoping to reopen them when the bankruptcy plan is approved. The UAW workers will receive 80% of their regular pay during the shutdown.

Chrysler shut the plants because it cannot sell cars, trucks, or Jeeps. Indeed, it even shopped itself and its pieces around to auto companies everywhere. Only Fiat, a company with a near economic death experience three years ago, bit.

Remember Chrysler Finance, Cerberus ran that into the ground too. It can no longer finance the sale of Chrysler products, and will even discontinue floor financing of dealers. Both customers and dealers will have to turn to GMAC, 51% owned by Cerberus, for financing.

Will GM and the Obama Administration learn from the Chrysler debacle?