Thursday, April 30, 2009

Chrysler's Secured Creditors Want -- Wait For It -- Secured Creditor Status!

The Obama administration gave Chrysler a deadline for getting all its creditors on board with a restructuring plan before getting more federal hand-outs, but some of the creditors aren't buying it. It seems that certain small secured creditors don't want to take less than they're owed or give up the security for which they negotiated when they became Chrysler creditors.

President Obama had a curious take on this, apparently hoping to shame creditors into volunteering to suffer avoidable economic loss, with no apparent objective other than to help ensure lower-priority claimants against Chrysler's assets could get paid from the funds taken from the priority claimants. Claimants who are not priority claimants -- like union health care funds and employees hoping to be paid future (rather than already-earned) wages -- have made deals to accept less attractive terms than agreed, in order to stave off annhililation of their agreements. President Obama rhetorically asked attendees at a Missouri town-hoall-style meeting whether Chrysler's "bondholders -- the lenders, the money people -- [were] willing to make sacrifices as well[.]"

This Jaded Consumer question may seem simplistic or harsh, but let's face it: why on Earth should people who were promised security and accepted a lower return on their investment as a result of the security be expected to roll over and take a hit in the back pocket simply so that strangers who did not negotiate such terms, or whose contractual demands helped create the existing emergency in the first place, could be paid? One fiduciary described the thinking that led to purchase of Chrysler debt last year, and the expectations that went with the purchase: "We did not contemplate having our first liens invalidated by a sitting president."

Accepting a pay cut in the hope of keeping a job is certainly the kind of sacrifice a person can understand. Accepting $0.33 instead of $1.00 so strangers who didn't prevent the existing mess can profit in the future is just not sensible any way you cut it. Maybe a publicly-traded corporation that plays with strangers' money can agree to a stunt like this in order to maintain good relations with federal lender/regulators, but small creditors who are not insulated from the consequences of their actions simply can't take obviously crummy deals.

The deadline being blown, Chrysler is headed (according to an Obama administration official, a curious source for information on impending corporate bankruptcy filings) into a Chapter 11 bankruptcy filing.

The Jaded Consumer's next question is what the UAW's recently-negotiated majority stake in Chrysler will be worth following a Chapter 11 proceeding in which creditors enjoy priority. Or will government regulators try to erase existing priority rules, too?

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