Mis-reporting on the Chrysler Bankruptcy?

Quite out of the ordinary that the administration has gotten so involved in the Chrysler bankruptcy, and that deserves to be a story line in the news reports, but I think articles such as this one, U.S. Played Rough with Chrylser Creditors, WSJ 5/11/09, kind of confuse the issues in the minds of most readers. Based on reading the excerpts below, what do you think the Creditors with whom rough was played by the U.S. ended up getting?

The results of these hardball tactics were on display Friday, as the last resisters of a deal to slash the value of Chrysler debt abandoned their effort to fight it in bankruptcy court. That raised the chances for a relatively swift transit through Chapter 11, producing a new Chrysler 55%-owned by a trust for union retirees, 35% by Fiat SpA -- which hasn't even been a Chrysler creditor -- and not at all by the senior secured lenders.

That conclusion would upend a longstanding tradition concerning rights in a bankruptcy: Senior secured lenders get paid in full before lower-priority creditors get anything. Not this time.

[...]

When the issue of the $6.9 billion in debt came up, Mr. Rattner looked at the lending group and said, "We have in mind for you a much lower number." He silenced the room by proposing they get just $1 billion.

While that wasn't the administration's bottom line, the task force had determined what was: the amount lenders would get in a liquidation of Chrysler assets. A Chrysler analysis in January estimated that at $2 billion. The UAW and Fiat knew about this figure, and also knew that the task force was first going to offer lenders just $1 billion. But the lenders, having waited so long to engage with the Treasury, were in the dark.

[...]

After receiving one more bank counteroffer, the Treasury on April 28 offered what it had planned all along, to buy out the lenders for $2 billion. The only sweetener was that it would be in cash, meaning the lenders didn't have to wait for a reorganized Chrysler-Fiat to pay it.

Mr. Rattner called Mr. Lee: "It's $2 billion, take it or leave it."

The big banks quickly agreed to the deal -- equal to 29 cents on the dollar. Though that offered a profit to a few firms that bought debt as low as 15 cents on the dollar, most of the lenders had paid 50 cents to 70 cents, and the banks 100 cents. News that the big banks were accepting the offer leaked before they had told the smaller lenders. "To say the least, we were floored," says one.

So what's the significance of 29 cents on the dollar, and how did that play in to the negotiations? That's the amount that the government estimated the secured lenders could get if the lenders liquidated the Chrysler assets. Maybe that number is a little low, but work with me here: if you lent 100 million dollars to build a Chrylser factory last year, Chrysler owes you 100 Mil, but what's the value of that factory now if you had to foreclose on it and sell it? There might not be a Chrysler company who plans to keep using it, all the competitors have their own plants, no one else is going to needs a plant in order to like... start a car company right now, and even if they did, what are the odds they want one in Michigan? 29 cents on the dollar sounds pretty reasonable, huh?

The rule in Chapter 11 cases is that to reorganize a company, you can force a creditor to take something other than full payment for his claim as long as he gets at least what he would in a liquidation. OK, now we've met that part of the test.

The fight then, was that some, but not all, of the lenders thought they could get more. What else did they want? The venture funds were looking for stock in a reorganized Chrysler. That new Chrysler stock has a lot of really cool built in features. First of all, the owners of the new stock wipe out the owners of the old stock, so they're already ahead of lots of people. Second, the new company benefits from cabining off a lot of the previously open-ended liability of the old company, which could be a really big deal with liabilities for things like retiree health care. Third, a lot of the other liabilities of the company get paid off out of a really good type of loan available in bankruptcy (debtor in possession financing) that really isn't available to businesses outside of bankruptcy. Fourth, the new company can emerge lean and mean by shedding a lot of unprofitable business units or product lines that would have been tough to drop outside of bankruptcy. All in all, this means that the new stock is a product of the bankruptcy process, it can be really valuable, and a lot of the lenders were planning on getting some.

So what did the lenders lose? Their entire investments? Not even close. They got paid that same 29 cents on the dollar they would see in liquidation, but they got none of the upside of participating in a reorganization. This is pretty unusual, because in all but very large cases, the lenders are the only ones with the money or legal position to keep fighting. It's unusual, but it's not illegal, it's not the result of bullying and intimidation, it's not the result of Putin/Chavez-style crony-capitalism, it's just unusual.

My point here isn't that the Obama effort on Chrysler was divinely conceived and should be beyond scrutiny; my point is that just focusing on the Obama administration role and ignoring the underlying legal and business dynamics only gives you a slightly misleading part of the picture. It's not that the lenders were denied something they had a right to, it's more like they were denied instead something they had a chance at. Some would be-Madame DeFarge figure is certainly weaving the Chrysler episode in to the long memory of the right wing, and I don't expect this explanation to influence any of those, but here's hoping that maybe the other 88% of the country can get a better handle on these issues by seeing the shape of the whole Chrysler bankruptcy forest and not just silhouette of the Obama tree.