The New York Times reports that the Chrysler brinkmanship continues, with some small hedge funds acting as pigs in the hope of extracting yet more concessions from the government, as the bankruptcy deadline looms.
The reason the funds can play such hardball is that the Administration does not want to BK Chrysler. Despite all the cheery assertions of a speedy bankruptcy, there is no assurance that would indeed come to pass. Even in prepaks, where the creditors have a an arrangement they want a judge to bless. the process can become protracted. And a Chapter 11 filing with no creditor deal runs the risk of loss of customers as uncertainty hangs over the manufacturer, and a Chapter 11 could morph into a liquidation, with not only big job losses, but damage to significant suppliers who in turn may fail, causing problems for other US automakers and transplants..
The latest update on the negotiations from the New York Times:
Last-minute efforts by the Treasury Department to win over recalcitrant Chrysler debtholders failed Wednesday night, setting up a near-certain bankruptcy filing by the American automaker, according to people briefed on the talks.
Barring an agreement, which looked increasingly difficult, Chrysler was expected to seek Chapter 11 protection on Thursday, most likely in New York, these people said.
The automaker, which is in talks with the Italian automaker Fiat, would file for bankruptcy first. It subsequently would present an agreement with Fiat to the court for approval, possibly on Monday, these people said. They requested anonymity because they were not authorized to speak for the government.
A bankruptcy filing by Chrysler would be the first by one of Detroit’s three auto companies amid a devastating slump, and could serve as a preview of what a filing by General Motors might look like. G.M., which like Chrysler received federal assistance last year, faces a June 1 deadline for its own restructuring.
To win over several hedge funds, which have been holding out for better terms, the Treasury increased its cash offer to holders of Chrysler’s secured debt by $250 million, to $2.25 billion, these people said. If all of the secured holders would agree to the new deal, which would give them the cash in exchange for retiring about $6.9 billion of debt, Chrysler would still have a chance of restructuring out of bankruptcy court.
Several investment funds, however, continued to reject the Treasury’s sweetened offer at a vote of the lenders on Wednesday evening, people familiar with the talks said….
The Obama administration is adamant that every lender participate in the debt swap, according to people close to the talks. One reason is that the deal would face legal challenges.
The Wall Street Journal also sees a Chapter 11 filing as “imminent“
Talks between the Treasury Department and lenders aimed at keeping Chrysler LLC out of bankruptcy broke down Wednesday, making it all but certain the car maker will file for Chapter 11 protection Thursday, according to people familiar with the discussions.
Administration officials, who have been braced for a Chrysler bankruptcy filing for weeks, say all the pieces are in place to get the company through the court quickly, perhaps in a matter of weeks.
The talks with Chrysler’s lenders broke down after the Obama administration’s automotive task force worked into the evening to persuade several hedge funds and other lenders to accept a deal to reduce Chrysler’s debt, said people involved in the talks.
The Treasury boosted its most recent offer to lenders on Wednesday by $250 million to $2.25 billion in cash for the banks and hedge funds to forgive $6.9 billion in Chrysler debt, people familiar with the matter said.
J.P. Morgan Chase & Co., which leads the creditor group as Chrysler’s largest lender, gave the other 45 banks and hedge funds 90 minutes Wednesday to vote on the deal. A large number of the funds voted no and refused to budge, paving the way for an all but unavoidable trip to bankruptcy court, said people close to the talks.
How can the Administration spew such rubbish? Bankruptcies go quickly in the courthouse ONLY if there is a pre-negotiated deal with creditors. With no agreement, the fight with the lenders will continue in court.
James Kwak parsed the Administration’s dilemma:
I’ve been writing a lot about the game of chicken recently, most often in connection with the GM and Chrysler bailouts. On the Chrysler front, the game is in its last hours. Even after a consortium of large banks agreed to the proposed debt-for-equity swap, some smaller hedge funds are holding out for more money, and even the extra $250 million that Treasury agreed to kick in seems unlikely to keep Chrysler out of bankruptcy.
The problem is that bankruptcy is the only weapon Chrysler and Treasury have in this fight, and it’s a strategic nuclear weapon. Bankruptcy is the only threat that can get the bondholders to agree to a swap; but because a bankruptcy carries some risk of destroying Chrysler (because control will lie in the hands of a bankruptcy judge – not Chrysler, Treasury, the UAW, or Fiat), and taking hundreds of thousands of jobs with it, everyone knows that Treasury would prefer not to use it. The bondholders are betting that they can use Treasury’s fear of a bankruptcy to extract better terms at the last minute. (And it’s even possible that the large banks agreed to the swap knowing they could count on the smaller, less politically exposed hedge funds to veto it.) But Treasury may still press the button, because it needs to make a statement in advance of the bigger GM confrontation scheduled for a month from now.
So Treasury cannot win, If it calls the banks’ bluff, it risks a slow motion Lehman. The Times says “people briefed at the negotiation” believe Chrysler would emerge from Chapter 11. But bankruptcy, like war, has uncertain outcomes, and no automaker has emerged from bankruptcy (they have either been liquidated or sold in pieces or entirety).
Note Lehman was not rescued for essentially political reasons, that it was time to draw the line and show that there were indeed consequences for mismanagement. Here, again, some scalps ned to be harvested, since the banks are now completely out of hand in the utter shamelessness of their extortion. Kwak details their intransigence on other fronts in his post.
Revenge for behavior is often served cold. Recall Bear Stearns’ refusal to participate in the LTCM bailout created Ill will that caught up with it a decade later. But that’s no remedy in real time, when this rent seeking is taking place.
In the bad old days, you might have seen extra-legal measures. J, Edgar Hoover, then head of the FBI, was known to have dirt on pretty much anyone of consequence. People who take noisy political stands seem more subject than the average Joe to highly intrusive and costly IRS audits; uncooperative hedgies would seem ideal targets for that sort of harassment, and double goes for any entities that are subject to US regulations.
But I am concerned this behavior is setting the stage for another sort of extra-legal measure: violence. I have been amazed at the vitriol directed at the banking classes. Suggestions for punishment have included the guillotine (frequent), hanging, pitchforks, even burning at the stake. Tar and feathering appears inadequate, and stoning hasn’t yet surfaced as an idea. And mind you, my readership is educated, older, typically well off (even if less so than three years ago). The fuse has to be shorter where the suffering is more acute
But the banksters are eagerly, shamelessly, and openly harvesting their pound of flesh from financially stressed average taxpayers, and setting off a chain reaction in the auto industry which has the very real risk of creating even larger scale unemployment than the economy already faces. It’s reckless, utterly irresponsible, over-the-top greed.
And there is a tipping point, which I sense is closer than most imagine. Nassim Nicholas Taleb points out that thirteen centuries of peaceful ethnic coexistence in Lebanon exploded overnight into brutal, completely unexpected civil war. Everyone assumes America is too complacent for class warfare in the literal sense to erupt. The way the banksters are demanding to be disciplined, that assumption may prove naive.