May 2, 2009
High & Low Finance
Why Chrysler’s Bondholders Should Stop Whining
“It’s not fair.”
That is the response from many on Wall Street to the Obama administration’s rescue plan for Chrysler. The union is being treated better than the bondholders, and that is said to violate decades of bankruptcy law traditions.
If this were a normal bankruptcy, that complaint might be justified. But this one is far from normal.
The relevant law, it seems to me, is not bankruptcy but charity. Uncle Sam is acting as a philanthropist coming to the aid of a dying corporation. If this were Bill Gates choosing to fund public health agencies in Kenya but not Ethiopia, we might question his judgment, or try to persuade him to change his mind, but no one would argue he had a legal obligation to spread the money around.
If Chrysler were going into bankruptcy with available exit financing, the bondholders would have every right to fight for their share of the pie, and to argue that other creditors were getting an unfair share. It has no such financing available, other than from a government with no legal obligation to provide it.
If President Obama is willing to let Chrysler die if creditors do not accept his division of the money provided by the government, then creditors of Chrysler face a relatively simple set of questions.
First, can Chrysler raise the needed cash elsewhere? No.
Second, are bondholders likely to do better forcing a liquidation, and standing in line to collect whatever the assets bring at a bankruptcy auction? (What is the bid for an auto assembly plant in Detroit, with machines built to produce cars that will not be produced anymore?)
It is hard to imagine that the bondholders would be better off with such a sell-off. If so, and if the bondholders cannot persuade the government to raise its offer, they should take what is available, whether or not it seems fair. If Mr. Gates chose to offer less money to Ethiopia than to Kenya, would anyone recommend Ethiopia turn down the money because the split is unfair?
Analyses going around of how the new Chrysler stock would be distributed in a typical bankruptcy assume that Chrysler has the right to claim the government’s billions, and then split them among its own creditors. It does not.
To be sure, it is disquieting that in a capitalist economy it is the government making these decisions. But that is one result of the mistakes made by Detroit and Wall Street, over decades and in recent years. This is a company that cannot be saved without a lot of government help.
What is amazing in the Obama plan is how tough it is on the company. Rather than accepting optimistic assumptions of miraculous recovery, the administration forced the company to make some tough choices that it had been unable or unwilling to make in the past. Workers will lose their jobs. Dealers will lose their franchises, probably without the compensation that state laws seemed to provide. The current owners are losing everything they invested, and the former owner, Daimler, has been forced to put up a lot of money to avoid being sued.
In essence, the Obama administration has decided to spread around the stock in the new company based on its evaluations of the relative claims of differing groups. Would others make the same evaluation? Perhaps not, but that does not make it improper.
The stock being handed out will have value only if the new Chrysler survives. It is to be distributed to Fiat and the United States government, which are putting up a lot of cash and assets to help the company, and to retiree benefit plans. That increases the chance, but certainly does not assure, that more of the health care promises will be kept for Chrysler’s elderly former employees.
There is an argument to be made that bondholders have a better claim than the retirees, but it seems to me that a reasonable person could make the choice Mr. Obama made. The president chose to emphasize the contrast by calling the hedge funds, which bought the bonds at discount, speculators. That sounds nasty to some, but it is accurate. It is no doubt true that there is pension money invested in those hedge funds, but no one thought a hedge fund investment was risk-free.
It is said that the United Automobile Workers, which supported Mr. Obama in the election last year, is effectively being paid off by treating the bondholders worse than the retirees. I disagree. The retirees may have a little better chance of getting benefits they were promised, but the current workers are getting little more than being allowed to keep some of their jobs. Walter Reuther, the man who built the U.A.W., must be spinning in his grave at the concessions his successors are making.
This may come to be seen as Mr. Obama’s “Nixon in China” moment. Just as it took a conservative Republican to open relations with the largest Communist country in the world, it took a liberal Democrat to break the U.A.W.