Customising Capitalism…
The battle over the reconstruction of Chrysler looks like a seminal moment in the transition towards a new order in the conduct of financial capitalism. There will be plenty of such moments this year no doubt, and this is one of them.
The Obama administration brokered a deal with four major banks – all of them government supplicants – to swap $US6.9 billion of debt for $US2.25 billion cash. Existing shareholders are wiped out and Fiat ends up with 35 per cent and no recourse to its debt, the Auto Workers Union has a $US10 billion debt converted into a 55 per cent equity stake and the government gets 10 per cent equity in return for $US4 billion in previous loans.
In other words, the
A group calling itself the “non-TARP lenders” – secured bondholders owed about $US1 billion – are objecting and calling the plan “patently illegal”, and pushing the company towards Chapter 11 bankruptcy.
President Obama responded by saying: “I stand with Chrysler’s employees and their families and communities.
I stand with millions of Americans who want to buy Chrysler cars.
I do not stand with a group of investment firms and hedge funds who decided to hold out for the prospect of an unjustified taxpayer-funded bailout.”
Here is the key paragraph from the non-TARP lenders’ statement: “…junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full.
Nevertheless, to facilitate Chrysler’s rehabilitation, we offered to take a 40 per cent haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50 per cent or more and being allowed to take out billions of dollars.”
An application to the Bankruptcy Court filed by
Neither side is giving an inch at this stage, while calling the other side names.
It looks like a mismatch, although the bondholders seem to have the law on their side.
Nevertheless White & Case partner, Tom Lauria, told the court this week that some of his clients had even received death threats.
From this distance it also looks something like the
For the moment, at least, they have the money.
Bill Gross of Pimco wrote this week that the transition signals an “increasing uncertainty of cash flows from financial assets”.
He says there will be increasing risk premium and a diminishing multiple of annual receipts.
“As wealth is redistributed, and the invisible private hand of Adam Smith begins to resemble more and more the public fist of government, then asset values should be negatively affected.”
Meanwhile if Chrysler is to survive, it must make fewer cars and cut staff.
How it will do this under the control of the union is not explained
Source - 5 May 2009 Alan Kohler Business Spectator
Remember Live with Passion and Ethics
George Mihos
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