Friday, May 08, 2009

Chrysler in Bankruptcy

The American Enterprise Institute offers a drawn-out whine about how the Chrysler bankruptcy isn't sufficiently fair to creditors. As if you haven't guessed, I'm not impressed. The piece opens by comparing the Chrysler bankruptcy to "equity receivership", a contrived mechanism for the sale of distressed companies that predates Chapter 11 bankruptcy. The author, David Skeel, complains that the Obama Administration's desire for the bankruptcy court to quickly sell Chrysler to Fiat amounts to the same thing.

Except... Fiat's the only interested bidder. There may be other companies willing to buy small pieces of Chrysler, or who will buy some of its intellectual property, brands, equipment or real estate holdings at auction. But there's no other company even slightly interested in acquiring Chrysler as a going concern. The Obama Administration's pressure for a quick sale has to do with maintaining Chrysler's viability and not scaring off that single bidder. If the creditors who want to squeeze more money out of Chrysler manage to slow things down or increase the cost to Fiat, the odds are that Chrysler will fail. Skeel assumes that the creditors who are imeding the sale (who hold a minority share of Chrysler's debt) are acting in good faith; but it seems more like a continuing game of chicken. Can they coerce more money out of the other creditors, or out of Fiat, and will they really risk losing even more of their investment if they don't get the concessions they demand? Maybe; but it would not be responsible for the bankruptcy court to risk killing off Chrysler to find out.

As for Skeel's whinging about the union's share of the future Chrysler, coming out of bankruptcy:
It also seems to flout bankruptcy’s priority rules by giving Chrysler’s employees (who are general creditors) a big stake in New Chrysler while forcing senior lenders to take a major haircut. The usual rule is that senior creditors must be paid in full before lower priority creditors are entitled to anything.
Here's the deal: Chrysler only presently survives at all because it's benefiting from huge infusions of taxpayer money that, realistically speaking, won't be paid back. If Chrysler also backs out of its commitments to retirees, that's another burden that's places on the taxpayer, as the Pension Benefit Guaranty Corp. covers Chrysler's default on its pensions. While the AEI seems to be a huge fan of lemon socialism, some of us don't think it's unreasonable that at least some portion of the private losses involved remain in private hands. After all, but for the government bailout, the creditors who are whining about their losses would be suffering a far worse fate.

From there, it gets sillier. To "protect" creditors from the sale to Fiat, Skeel suggests,
First, [the bankruptcy judge] could insist on an independent valuation of the sale, rather than just taking the administration’s numbers for granted. Inviting competing bids, which Judge Gonzalez did this week, might serve as an adequate test of the government’s price in an ordinary case.
So we get an appraisal. But here's the thing about appraisals: They don't actually tell you market value. Do you know how you find out what something will sell for on the market? You sell it.

Oh, but "bidders who are willing to go head to head with the U.S. government are not likely to be thick on the ground"? Give me a break. Cerberus has been ready to dump Chrysler for at least a year, and the only company who made a viable offer was Fiat. It's childish to pretend that the dearth of bidders comes from Administration pressures, as opposed to the fact that Chrysler's a basket case that nobody wants. And while I'm sure the creditors who are trying to squeeze more money out of Chrysler's carcass are happy to have Skeel shill for them, the fact is that any attempt to "restructure" the deal could cause the only company willing to take on Chrysler to change its mind, or to line up with other companies to pick over the carcass of a dead company, returning far less to creditors than will be obtained through Chrysler's sale as a going concern.

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