So Chrysler is filing for Chaper 11 bankruptcy protection. But the terms of the “prepackaged” bankruptcy the government is proposing look…suspiciously exactly like the deal the Treasury was negotiating in hopes of averting bankruptcy.
Here’s the difference: outside the bankruptcy process, secured creditors — meaning holders of bonds secured by collateral like plants and machinery — have to essentially give unanimous consent to any deals, because of the risk the deal would be threatened in court. Inside bankruptcy court, they only need half of the creditors representing more than two thirds of the dollar value of the loans to “cram down” a deal.
The Obama Administration, in a deal already accepted by the four big banks holding 70% of that secured debt, was offering $2 billion to those secured creditors — a figure it raised last night to $2.25 billion.
A few major hedge funds were holding out in hopes of either negotiating a better deal in bankruptcy court, or cashing out on credit default swaps they bought to hedge their investments. (Credit Derivatives Research strategist Tim Backshall says the market for Chrysler CDS is very illiquid, but added that there are $2.6 billion in CDS outstanding from the old Daimler Chrysler; how many are held by the company’s secured bondholders is impossible to say.)
So now the fight is over the agreement of 42 smaller creditors, mostly hedge funds, some of whom have taken to calling themselves the non-TARP lenders — insinuating, of course, that the four TARP banks are having their steep haircut subsidized by bailout money.
(Of course, it’s hard to believe that none of the biggest holdouts — Perella Weinberg Partners, Oppenheimer Funds and Stairway Cap Management — didn’t themselves benefit from a direct backdoor bailout in the form of AIG’s payout to its counterparties — a bailout which, as Spence Bachus has pointed out stiffed secured creditors as well.)
Most experts don’t believe the holdouts who don’t have an ulterior interest in Chrysler going bankrupt — which is to say, credit default swaps, or stakes in Chrysler’s competitors that would benefit from its fall in market share — realistically stand too much to gain in the bankruptcy process. Those willing to go public with their rejection of Treasury’s deal have portrayed their decision as a matter of principle. The Wall Street Journal depicts a hedge fund manager named Geoffrey Gwin today as a man wracked with internal turmoil over whether he should vote to save families from the “painful” bankruptcy process or allow them to suffer the same fate as his father, who lost most of his pension when Delta Air Lines filed for bankruptcy protection in Chapter 11. “Fortunately,” the story adds, Gwin’s dad “had built up a pool of savings over the years because he wanted to become a missionary, and is now living off that.” Now, Julius Gwin preaches the gospel of free markets, telling the Journal:
“I feel personally threatened because of what the government is doing at Chrysler and General Motors and how they are changing the rules of the game, instead of allowing bankruptcy laws to be carried out the way they are written.”The younger Gwin concedes his opposition to the haircut may simply be based on “bitterness” about his father’s fate.