I’ve been hearing for a while that Ford is in the best shape of the three, but I didn’t realize how much better run they were. Raising money before they needed it, selling off brands when they had value instead of waiting till it was worthless like GM did with Hummer… Unlike Wagoner, he was already making the necessary changes before the credit crisis ever happened.
One thing I’d be interested to hear is whether Ford gets to benefit from the consessions forced from the union, without having to threaten bankruptsy themselves. Because while selling cars is a big part of the equation, they’re also saddled with the same legacy benefits as the other two.
It has nothing to do with valuing the debt. They held senior debt, which means that in a bankruptsy they are supposed to get paid first with whatever money can be raised by selling off assets. If GM wanted to avoid bankruptsy by converting debt to equity, then they would’ve had to offer the bondholders more than they would get from the liquidation.
The article said they had already negotiated wages down to make them nearly competitive with foreign manufacturers running US plants. I don’t know if bankruptcy will give GM and Chrysler other advantages, forcing Ford to do the same, kind of like you see in the airline industry. I haven’t followed it much. With the feds involved I’d imagine it’s pretty hard to forecast anything right now.
I think you misunderstood my question. I was asking if there would have been any money left to pay off senior debt if GM had fallen into liquidation. In other words, if the government had completely stayed out and let the court handle this would these creditors have been better off than the current deal.
I don’t know the specifics of GMs finances or its debt obligations but there are plenty of cases of ugly bankruptcies wiping out even senior debt so this isn’t a rhetorical or snarky question. It’s quite possible the value of that debt was quite a bit less than face value in the event of an ugly liquidation of GM, so you’d have to prove that in such an ugly scenario that creditors would have come out better than the current deal. Then you can squawk about the government unjustly compensating them for taking away their GM debt.
I don’t know the specifics of GMs finances or its debt obligations but there are plenty of cases of ugly bankruptcies wiping out even senior debt so this isn’t a rhetorical or snarky question. It’s quite possible the value of that debt was quite a bit less than face value in the event of an ugly liquidation of GM, so you’d have to prove that in such an ugly scenario that creditors would have come out better than the current deal. Then you can squawk about the government unjustly compensating them for taking away their GM debt
that’s a risk that creditor is willing to take, and it’s not right for the government to step in and deny them their chance simply because our government think that this is the best course for everyone.
If your argument is that the government shouldn’t intervene at all, because the creditors deserve a chance to roll the dice and MAYBE get more money than the govt deal from a bankruptcy proceeding, that’s a much weaker argument. And it certainly doesn’t tie in to the arguments being made earlier about the government unfairly compensating the creditors for taking away their GM debt.
Ok, since we’re on legal grounds now, rather than if it’s a good idea, lets review the story:
On Tuesday, Chrysler won a major victory in bankruptcy court when a federal judge, over the strenuous objections of the lenders group, approved a key part of the automaker’s plan to quickly restructure by selling most of its assets to an entity jointly owned by Fiat, the United Auto Workers and the U.S. and Canadian governments.
Chrysler filed for bankruptcy last Thursday after some of Chrysler’s senior secured lenders rejected the government’s debt repayment plan. The Obama administration had made a final offer of 33 cents on the dollar for the loans after negotiations that spanned several weeks. A majority of the lenders, including four large banks, had agreed to the deal. But it was not enough to keep the carmaker out of court.
Please provide evidence this sort of thing is not allowed in bankruptcy filings.
Please provide evidence that even if this sort of thing is allowed, the government can’t be involved as a party, or it becomes an eminent domain claim.
The act prevented mortgage-holding banks from foreclosing on their property for five years and forced struggling farmers to continue paying based on a court-ordered schedule. “The Fifth Amendment,” he declared, “commands that however great the Nation’s need, private property shall not be thus taken over without just compensation.”
I guess 33cents on the dollar is apparently fair for some people in this country…
Man, I’m just trying to figure out what’s going on, same as you are. I’m not so arrogant as to assume I know anything just because I read about it somewhere. If you believed everything you read online, you’d believe that UT-Austin was abandoning the Big XII for the ACC.
I fail to see the relevance of the federal government legislatively rewriting the rules for a nationwide class of all bankruptcies to a judge approving a bankruptcy proposal where the federal government was jawboning the parties involved to do X.
What one earth is the concrete description of what was unconstitutional, illegal, or not proper practice here? See NYTimes overview. Based on this I get the objections even less.
Other way around. Where is the precedence for senior secured lenders getting that kind of shaft in bankruptcy proceedings in consideration of people much further down the line? The Obama administration gave the banks no incentive to not let Chrysler go into bankruptcy considering the hardball terms.
There’s an op-ed in the WSJ about this today. Talks about the Constitution explicitly prohibiting the government from messing with specific debts like this. Congress is granted the authority to enact a “uniform” bankruptcy law, which I would take to mean this sort of retail meddling is pretty expressly verboten.
One, the Obama administration doesn’t need to give anyone incentives. The company can refuse the administration’s loan money and go into liquidation hypothetically, or the holdouts could appeal, but they’ve given up.
My summary, for those who don’t like reading citations from court opinions: The issue with the “restructuring initiative” agreed-upon by Chrysler, the government, Fiat, and the UAW, is that it only pays the senior secured creditors $2 billion in cash for $6.9 billion in secured debt; since secured creditors’ claims should come first, they argue they would get more from a liquidation. In particular, the VEBA created to fund retiree benefits is owed $8.5 billion; it is getting $4.6 billion debt and 55% of the equity in New Chrysler.
The government’s plan is to get around this by creating a new entity, New Chrysler, and having the existing entity, Old Chrysler, sell its assets to New Chrysler. Technically speaking, Old Chrysler is not being reorganized; it is just selling assets. However, as Jankubowski explains, a bankruptcy court can block such an asset sale if it is effectively a reorganization by another name. The Second Circuit (the appeals court that would hear the appeal of the bankruptcy proceeding) has said that such an asset sale may go ahead if there is a “good business reason” for it – a test that is spelled out, not entirely clearly, in other court opinions.
Behind the legal test, the underlying legal principle at issue, discussed in Part 3, is whether the “absolute priority” rule, which determines the order of claims by creditors in bankruptcy, prevails over the general policy consideration that bankruptcy is intended to enable companies to return to healthy operations. To simplify greatly, Chrysler and the government’’s argument is that without the “asset sale,” the company will simply disintegrate; the creditors’ argument is, or could be, that that doesn’t matter.
The further links are good stuff.
Three, really, there’s a constitutional right to have the government loan you money without getting involved in hammering out the terms? And that the government getting involved in the reorganization and loaning = rewriting bankruptcy law to not be uniform?
I guess I don’t see the big deal anymore. Government has become a business entity and are now a player like any other, and will argue in front of a judge for their way like a normal bankruptcy proceeding. If the judge tells them to fuck off, they will go back to the drawing board until they get it right.
