Investors To Feds: See You In Court

An obviously ticked off Barack Obama announced this morning that Chrysler would seek the protection of the bankruptcy courts after negotiations with the secured creditors came to naught. 

The Issues

Purportedly all parties had agreed to a recapatilization plan hammered out with the Obama auto task force. A group of secured bondholders holding approximately $1 billion of the $6.9 billion of secured debt refused to go along with the plan. There are approximately 46 institutions that own the debt and the group of dissidents numbered about 20. Four large banks, JPMorgan ChaseCitigroupMorgan Stanley and Goldman Sachs, hold 70% of the debt and had voted in favor of the plan.

In a letter released today, the smaller institutions spelled out their reasons for refusing to vote aye. They cited their fiduciary duty to their investors, the fact that the deal offered to them was substantially different than is being offered to GM secured debt holders and their perception that the four banks who hold the majority of the debt and were responsible for negotiating on behalf of the senior creditors are all TARP fund recipients and therefore conflicted.

Obama Statement

The President announced the stalemate this morning. He noted that agreement had been reached with Fiat for a strategic alliance and that with the exception of the bondholders all other parties had agreed to the terms put forth.

He then turned on the holdouts with visible anger:

While many stakeholders made sacrifices and worked constructively, I have to tell you some did not.  In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout.  They were hoping that everybody else would make sacrifices, and they would have to make none.  Some demanded twice the return that other lenders were getting.  I don’t stand with them.  I stand with Chrysler’s employees and their families and communities.  I stand with Chrysler’s management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.  I don’t stand with those who held out when everybody else is making sacrifices.  And that’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success.

The President also expressed his hope that anyone planning to buy a car would buy an American car.


Despite the picture painted by the President this morning that all would have been fine were it not for the holdouts, there is a better than even chance that the bankruptcy outcome is not unwelcome. The hanging thread in all of the discussion leading up to this has been the dealer network. The dealer franchises are notoriously difficult and expensive to terminate outside of bankruptcy. The filing is going to considerably satisfy that process.

Demonizing the investors who held out is a dangerous game. Those same investment and hedge funds that he attacked today are the investors he will need tomorrow to help recapitalize the banks. When the time comes for TARP banks to go to them for more capital it shouldn’t be too surprising if they decide they’ve had quite enough with investing in companies alongside the government.

Obama’s suggestion that Americans buy American cars is once again a slap in the face to the large number of workers at the foreign headquartered U.S. auto makers. It was pure politics and flies in the face of his previous statements, at the G-20 for instance, that protectionism has no place in the current crisis. 

Finally, I think that the bankruptcy outcome represents a positive trend right now. There’s a disturbing drift towards an imperial approach on the part of the government towards solving various company issues. The auto industry bailout particularly has become overtly political with some dangerous long-term implications. Greg Mankiw put it well on his blog this morning.

As the President intervenes in more and more industries, a key question is how he does it and what he is trying to achieve. Is he trying to reorganize insolvent firms while, as much as possible, preserving the rights of stakeholders as established under existing contracts? Or is he trying to achieve a “fair” outcome as he judges it, regardless of preexisting rules and agreements? I fear it may be the latter, in which case politics may start to trump the rule of law.

It’s time all the parties took a deep breath and figured out how to work through this situation. It’s especially time for the government to stop and think long and hard about how much it’s willing to sacrifice in pursuit of a set of policy goals. In the meantime, we should take some comfort in the fact that a few people asserting a position — whether that position is right or wrong is immaterial — are able to get an impartial hearing in front of a court of law.

Here is a list of links to further thoughts on this issue:

WSJ-Today’s report.

NYT-Todays report.

Letter from minority secured creditors.

Obama statement. Report

WSJ-Editorial today.

WSJ-Paul Ingrassia’s analysis.

WSJ-Holman Jenkins historical review of the car industry.

Greg Mankiw’s blog post.

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