CHEVY CAPRICE?

5/27/09

Secured lenders wound up with 29 cents on the dollar in the bankruptcy of Walter P. Chrysler’s company. Under the latest government proposal, which looks likely to prevail whether Billy Durant’s creation ends up in bankruptcy or somehow miraculously manages to avoid that once sorry fate, GM secured creditors will get 100 cents on the dollar.

Hmm…

What’s going on here? Why do GM’s secured lenders get treated so royally while the Chrysler lenders get stiffed? Could it be the relative sizes of the secured debt obligations? Admittedly, almost all of Chrysler’s debt (other than debt to the government and Cerberus) was secured, while most of GM’s debt ($27 of $33 billion) is unsecured. However, total GM secured debt of $6b is less than total Chrysler secured debt of $6.9b. Admittedly, GM has a much bigger balance sheet than Chrysler, but whose balance sheet is relevant here, the car companies’ or the U.S. government’s? After all, the government, by the time this is all over, is projected to put about $12b into Chrysler and about $70b into GM. And those numbers are probably a best case scenario.

Could GM’s lenders’ preferential treatment arise from GM’s being in better shape than Chrysler? Operationally, as I have argued on many occasions, GM is in far better condition than the hapless, productless Chrysler. Some might argue that the General is financially stronger than Chrysler, but both companies are bankrupt, de jure, de facto, or both. So to argue that GM can “afford” to pay its secured creditors while Chrysler can’t is silly, especially when the money is coming out of your, not either of the companies’, pockets.

Perhaps the government feels it was in a better position to muscle Chrysler’s secured creditors. Even though the lead lenders, most notably Chase and Citicorp, are the same in both instances, there might be something to this argument. GM’s assets are more valuable than Chrysler’s assets, or at least it would appear so. Consequently, GM’s secured creditors could be more bothersome in court, especially since they have so much unsecured debt under them. However, the hyper-talented and stouthearted Jim Lee (See my now immortal 5/11/09 post “MY HEART IS ACHIN’….FOR YOU MR. LEE”) has shown how easily he can be rolled, so it’s hard to see Chase and Citi, both wards of the state, putting up much resistance to being back-doored by the government in the GM case. And the other secured lenders, two fisted Wall Street tough talking types all, showed that they can fold more quickly than a certain north side ball club in September once the government decides to make their lives the least bit uncomfortable. So the comparative regal treatment of GM secured holders cannot be ascribed to the difficulty of getting these lending lapdogs to roll over and play dead.

The relative treatment of GM is indeed a mystery, but it leads to two conclusions. First, Chrysler secured lenders should be figuratively screaming bloody murder in the wake of the GM deal. This point is moot, however; it looks as though only various pension funds in the proud state of Indiana are putting up any kind of a fight in the Chrysler instance, and they will be steamrolled, with the complicity of the hard talking lenders who spend much of their spare time deriding the investment acumen of those in charge of public pension funds, resulting in what looks like a quick exit of Chrysler from bankruptcy, an outcome that, should it indeed come to pass, will very much surprise me, by the way.

More important, the disparity in the GM and Chrysler outcomes for these former titans’ secured lenders reeks of the capriciousness that the Bush/Obama administrations has shown in its efforts to have the taxpayers come to the rescue of the U.S. economy. Most people get bailed out, but some (e.g., Lehman and the smaller banks) don’t. Some people keep their jobs and get huge bonuses (e.g., Wall Street wonderboys who spend half their time espousing the glories of the free market and the other half begging the government for handouts when they prove they can’t handle the free markets) and some people just have to suck it up because they are so outrageously overpaid (e.g., line workers at the Big 3). Some get treated according to established contract law (e.g., GM secured lenders), some don’t (e.g., Chrysler secured lenders). Such capriciousness will do little to encourage the type of saving, investing, and capital formation this country so desperately needs.