Chrysler Folds
It’s early in the day, so there is plenty of time for the usual brinkmanship to play out, but the rejection of the latest government offer to the company’s creditors increases the odds that Chrysler will enter bankruptcy quickly. Possibly as soon as later today or tomorrow.
The creditors group consists of two sub-groups. One is made up of big TARP receiving banks, and the other consists of smaller banks and some hedge funds none of whom are receiving bailout money.
A gap has opened up between the two.
The TARP group finally caved into the government’s pressure and accepted the deal being pushed by the Auto Industry Task Force, the administration’s ‘front line’ on this issue. The second group of creditors are under less political pressure since they have no bailout cash to worry about, and so they are taking a very hard line. They want far more than even the sweetened offer they received yesterday.
Normally I would expect this kind of last minute brinkmanship to extend throughout the dying moments of a deadline for any deal. Don’t forget that the administration set today as the deadline for Chrysler to sort itself out if it wanted more government aid.
This time things are a little different, which is why it’s worth talking about now.
My take is that the government should stand firm. Very firm. Even if that means Chrysler goes into bankruptcy and the courts take over. I suspect that the creditors will not fare as well in court as they would from the latest government offer – $2.25 billion, which was up $250 million from last week’s offer. The holdout group of creditors seems to have two notions it’s banking on:
- That the government desperately wants to avoid bankruptcy for political and national economic reasons and so can be bullied even up to the last moment.
- That the creditors will fare better in court than they would dealing with the government.
Of these two I suspect that it’s the first driving the negotiations. The creditors are testing the government. They are gambling that the political consequences of a major bankruptcy are so dire for the administration that they can be coerced into offering more than the creditors would likely receive in court.
I don’t think this is a good gamble.
Contrary to the holdout group’s calculation, I think the administration has decided to make a stand over Chrysler and thus send a message not just to Chrysler’s creditors, but to all creditors with whom it may have to deal as it cleans up the economy. Look at the timetable: Chrysler is first up, but GM looms hugely in the not too distant future, and there are one or two banks I could name who must have creditors who are watching the Chrysler negotiations very keenly. Were the government to cave in here it drastically undermines the credibility of any ‘hard ball’ it wants to play over the summer with those other groups.
Chrysler is not as iconic in the public’s mind as is GM. So the political damage will be limited by that fact alone. Plus the financial industry is hardly the apple of the public’s eye currently having been the epicenter and original cause of this recession. For a bunch of ‘greedy’ bankers and hedge fund managers to stand in the way of the government’s effort to save thousands of jobs, right after they ‘ruined’ the country is hardly a strong position. I would bet that public opinion could be rallied to the government’s side quite easily on this one. I realize that Fox News, the Wall Street Journal, and sundry financial cable stations will support the bankers. But who else?
It looks to me as if there’s plenty of talking yet to be done. But I wouldn’t be at all surprised to see Chrysler thrown to the dogs by tomorrow.
It’s never a good idea to become a bit player in a larger conflict. Unfortunately for Chrysler that’s what they’ve become.
The Chrysler negotiations have become about GM. And that’s not a good place for Chrysler to be.
Addendum:
Wow. That was quick. No sooner do I post the above, but I read President Obama’s public statement saying the government will allow Chrysler to slip into bankruptcy immediately. Interestingly the court overseeing the process will be in New York, not in Michigan. Naturally the holdout creditors have already issued a statement criticizing the government. Apparently they thinks they could get as much as 65 cents on the dollar if Chrysler is liquidated as opposed to the government’s 33 cents on the dollar offer. I am not sure who they imagine would want to purchase the company’s assets, given the massive over capacity in the auto industry right now, but they seem to be sufficiently angry to attempt to derail what the government hopes will be a swift and ‘surgical’ bankruptcy process.
This could get ugly.
