Rule by fiat: The Problem with the Chrysler Deal

Secured vs unsecured, senior vs junior, constitutional vs unconstitutional, Indiana pension funds vs the United Auto Workers.

The crux of the matter revolves around who gets paid first, normally under US bankruptcy law and precedent secured senior creditors get paid before junior or unsecured creditors. In the Chrysler case the government has thus far put itself and the UAW ahead of senior secured lenders in a bailout and takeover by Fiat sponsored by… the US government. Chrysler has 6.9 billion in secured creditors out there with a vested interest in its bankruptcy, part of that interest includes a group of Indiana pension funds that hold 42 million in secured bonds. Under the governments deal Fiat gets 20 percent of the “new” Chrysler, the UAW, which holds 10.5 billion as a junior creditor, gets 4.5 billion and a 55% stake in the “new” Chrysler. The senior secured creditors get 2 Billion.

This may not seem like such a bad deal on the face of it, after all, as the opposition (US/Chrysler/UAW) argues… they could do much worse under a bankruptcy liquidation, but that is not the problem. The problem is that secured and senior creditors are getting paid 29 cents on the dollar while unsecured, junior creditors are getting 43 cents on the dollar AND a 55% interest in the “new” Chrysler. The US government winds up with 8% and the Canadian government 6% of the “new” Chrysler. Fiat, if it wants to purchase any of its additional stock options has to pay the US government (also a junior creditor) back. The UAW which argues that the senior creditors would do worse under a liquidation, would do much much worse in the same case, now they are getting preferential treatment.

You may at this point be wondering about the undue stress focused on the word “new”. The government has created the artificial distinction of “new” and “old” Chrysler, shielding assets of the “old” Chrysler by moving them to the “new” Chrysler. Own secured bonds in the “old” Chrysler, too bad...you’re screwed, part of the US/Canadian/Fiat/UAW Chrysler? Whoo Hooo! Suddenly your relatively worthless and unsecured interest is worth 4.5 billion and a 55% stake. Under the section 363 bankruptcy sponsored by the government and the courts, Chrysler, in something of a bizarre shell game, gets to move all of it’s assets of value to Fiat while leaving its seniors creditors holding the bag (full of worthless crap). The problem here is that the government (and the courts) are supposed to be unbiased mediators between the parties involved in the bankruptcy, with the government as a major investor in the “new” Chrysler” any hint of unbiased objectivity goes out the window.

The Obama administration has easily, and with little public or media outcry, thus far turned bankruptcy law on its head, ignoring the law and years of legal precedence, while railroading the Chrysler/Fiat deal through amid rumors of strong-arm tactics and threats. Bulldozing the interests of a fairly diverse and unorganized group of senior creditors while rewarding the junior UAW with a cream puff of a deal. But, when election time rolls around again who’s more important? The UAW or an Indiana police pension fund? Change you can believe in! Well it certainly is change… trading corporate favouritism for union favouritism might be change, but in the end it is the average American who still gets screwed. Meet the new boss, same as the old boss.


On top of the raw deal handed to senior creditors, the US government has shielded Fiat from liability lawsuits against the “old” Chrysler, essentially overturning the lemon laws of 25 states and putting those injured by the “old” Chrysler completely out in the cold. Chrysler is also terminating 789 of its 3,200 dealerships under its bankruptcy reorganization. Chrysler argues, in addition to the fact it has too many dealerships, that the dealerships are part of “old” Chrysler which won’t be making cars anymore, thus there won’t be any cars to sell. Interesting argument which belies the question of how the other 2,411 dealerships magically became part of “new” Chrysler.

It seems that law, precedence, and contracts are no longer worth the paper they are printed on as the government runs amok ruling the economy both by fiat and by Fiat.

Now we are left with Ruth Bader Ginsberg as our only possible savior.

God help us all!

~Finntann~

http://online.wsj.com/article/BT-CO-20090607-702686.html

http://www.law.com/jsp/article.jsp?id=1202431279256&nd_Circuit_Ruling_in_Chrysler_Bankruptcy_Upholds_Sale_of_Assets_to_Fiat

http://www.consumeraffairs.com/news04/2009/06/chrysler_consumers03.html

http://www.legalnewsline.com/news/221200-ags-say-they-oppose-chrysler-bankruptcy

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/03/AR2009060303877_2.html?sid=ST2009060304135