Saturday, May 9, 2009

Some interesting items on Chrysler, etc.

David Skeel wrote an interesting item for The American (the Journal of the American Enterprise Institute). He talks about how the Obama Administration's efforts in Chrysler contrast with the policies of FDR's New Deal. Here's a quick excerpt:

In the early 20th century, large troubled corporations did not file for Chapter 11 like they do today. They used a process known as “equity receivership,” which involved an artificial “sale” of the company to a new entity set up by the debtor and the investment banks who represented its bondholders and stockholders. The new entity was the only bidder at the sale, and creditors who were unhappy with the terms of the reorganization had very little opportunity to interfere.

New Dealers hated the process, which they saw as opaque and designed to foist a deal crafted by the insiders on everyone else. Jerome Frank, a lawyer who later headed an important New Deal agency and became a federal judge, complained in 1933 that the judicial sale in these cases “was a mockery and a sham.” He said, “A sale at which there can be only one bidder, is a sale in name only.” In 1938, thanks to the handiwork of another prominent New Dealer, future Supreme Court Justice and then-SEC Chairman William Douglas, Congress dramatically altered the bankruptcy laws, eliminating the former practice.

The Obama administration blueprint for Chrysler’s bankruptcy looks startlingly like the artificial sales that the New Dealers so abhorred. Unlike a traditional reorganization, in which the parties negotiate the terms of a restructuring that is then voted on by each class of creditors and shareholders, the administration plans to quickly sell Chrysler’s most important assets to a new entity—“New Chrysler”—whose stock will be owned by Chrysler’s employees and Fiat. The senior lenders who objected to the government’s offer (which amounted to little more than 30 percent of their claims) will not have any vote on the sale. Their only option is the one they have pursued: objecting to the sale, and praying that bankruptcy judge Arthur Gonzalez takes a hard look at its terms even while the government is breathing down his neck and saying in a sense, he better approve or else.

Over at Zero Hedge, they wrote a piece entitled "Will The Real Chryslergate Fallout Please Stand Up" that quotes extensively from research written by Moody's. These quotes relate not only to the direct impact of the Chrysler bankruptcy, but also the impact on their supply chain (both suppliers and dealers) and comments on the implications for regional lenders.

The Financial Post of Toronto published a piece titled "Debt holders battle political, judicial forces" that discusses the situations with Chrysler, GM, and AtibitiBowater (although the writer mistakes the first lien bank loans of Chrysler to be bonds - many commentators have made this mistake). This article quotes a number of players including Jim McGovern, the CEO of Arrow Hedge Partners Inc. A fund managed by Arrow Hedge apparently held the first lien debt, but ultimately capitulated to the Government's plan. The article notes that "while the experience has not soured him on investments in all 'distressed' bonds, Mr. McGovern says his strategy will be to stay clear of investments in entities a government might consider crucial to the economy." There are also discussions of other possible fall-out from Chrysler, GM, and AtibitiBowater.

Bob Nardelli seems pleased at the capitulation of the Non-TARP lenders. He wrote a note to Chrysler employees about it yesterday.

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