Friday, May 1

Why Not 'Cram-Down' Chrysler's Government Debt?

The acting President of Chrysler Motors, President Obama, announced Thursday that Chrysler would be filing for Chapter 11 bankruptcy.

Apparently, the Government is claiming that some of Chrysler's lenders were not interested in writing off enough of their loans and stake in the company that the President's men demanded. The lenders of course think that they were getting screwed in the deal, especially compared to how others were going to make out.
Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders. What riled the group that put out the statement today was the fact that junior creditors, consisting of a workers healthcare trust, would get equity in a new Chrysler entity while they would not.

In the deal Chrysler was trying to conclude out of court, Fiat would have become a 20 percent owner of Chrysler, and a union retiree health-care trust fund would hold 55 percent, with the rest of the company staying in the government’s hands initially, according to people familiar with the matter. The government intends to replicate this, using bankruptcy to set up a new company, people familiar with the plan said.

Junior Creditors

“Junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full,” the dissidents said in the statement.

In bankruptcy court, the absolute priority rule is regularly modified, lawyers said. Two-thirds of the lenders can force the holdouts to go along with them in a procedure called a cramdown. - Bloomberg
As shocking as the Government's strong-arming private lenders is the Democrat politicians opinion of those who currently own Chrysler's loans:
The objections from the group of lenders also drew criticism from Michigan lawmakers, including Democratic Representatives John Dingell and Sander Levin.

“The rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury -- firms I label as the ‘vultures’ -- will now be dealt with accordingly in court,” Dingell said. - Bloomberg
And the President can't figure out why banks don't want to lend money any more. You see, it is the Democrats in charge who get to decide what is fair. What a load of bull. Chrysler borrowed the money. They should be accountable to the lenders, not the lender accountable to the Government. After all, the lenders mistake was only in agreeing to lend money to Chrysler or to take over loans made to Chrysler. But it was Chrysler that flushed the money down the toilet.

To keep Chrysler from filing bankruptcy, the Government loaned Billions of dollars and in the end they plan to be the second largest shareholder in the company when it emerges from bankruptcy court. But, I wonder if the last-minute Government loans in the billions tipped the scale against these holdout lenders who were not interested in playing the game the Government wanted to play, giving the Government along with the union that important 2/3rds majority going into bankruptcy. No I didn't do the math, but I know that if the Government didn't loan the money, they would not have a seat at the table, other than as an observer.

Also, I wonder why isn't the President pushing for the Government loan principal to be 'Crammed-down' which is what he is pushing for bankruptcy judges to have the right to do.
Cramdown -- a court-ordered reduction of the secured balance due on a home mortgage loan, granted to a homeowner who has filed for personal bankruptcy. In a cramdown, the bankruptcy court splits the outstanding mortgage balance into two parts. The amount of debt equal to the current appraised value of the home is treated as a secured claim, which the borrower must continue to pay. The amount of debt in excess of the current property's value becomes an unsecured claim, which is usually not repaid in full. In areas where home prices have depreciated, cramdowns can result in significant mortgage reductions. In some cases, the judge may order the remaining secured debt amortized over the remaining life of the loan term, thus lowering monthly payments. In other cases, monthly payments remain the same as before the cramdown, and the secured mortgage is simply paid off faster. - TeachMeFinance
Is it because in personal bankruptcy the money at stake is owed to the banks (which are evil) and in this case the money is owed to the voters (which are only evil if they don't vote Democrat)? The holdout lenders were looking at a 67% 'haircut' from the face value of the loans they held. To be fair, the other groups, including the unions should be facing a cut of equal proportions but they are not. Not exactly fair is it? It seems, but is not said, that the Democrats are taking the position that since many of these lenders did not pay the face value of the loans that the base of reference is the money that they actually paid, not the amount originally borrowed. This is Bull. Because if the government is going to take that position, they they very well might do so with other things. Take gold. The price is currently hovering in the $900's. Now imagine the Government dictating how much profit you can make when selling your gold and declaring that those who bought gold when it was under $500 and are not trying to sell for over $900 are vultures. It is just plain stupid. Maybe they should try regulating the losers for a change.

Now imagine the public outrage if all that money provided by the Government gets written of during bankruptcy proceedings. That is probably what should happen if the goal is for the company to emerge from court as a viable business. But that outcome would leave lots of Democrats twisting in the breeze.

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