Friday, May 1, 2009

Bankruptcy and Bailout Money for Chrysler?

The shell game in Washington continues on the bailout front. I've been reading this and trying to understand the agreement. The Feds get Chrysler to declare bankruptcy to get rid of annoying creditors and then they pour in billions of bailout money? I don't understand. Doesn't that screw the creditors completely? The Detroit News reports:
Washington -- Chrysler LLC filed for bankruptcy protection Thursday afternoon and announced it has reached a partnership agreement with Italian automaker Fiat SpA.

The filing in U.S. Bankruptcy Court in New York is an effort to quickly wipe clean Chrysler's balance sheet, backed with $8 billion in U.S. government financing, in the hopes that the company will emerge in 30 to 60 days.

The White House forced the move Thursday after talks between the Treasury Department and some of the Auburn Hills automaker's creditors failed to reach an agreement.

"It will be efficient. It's designed to deal with those last few holdouts, and it will be controlled," President Barack Obama said in a 12-minute address from the White House. "It will not disrupt the lives of the people who work at Chrysler or live in communities that depend on it. ... I have every confidence that Chrysler will emerge from this process stronger and more competitive."

Under the plan the administration outlined Thursday, the Treasury Department will provide Chrysler with up to $3.5 billion in debtor-in-possession financing, and the Canadian and Ontario governments will provide around $800 million and get 2 percent of Chrysler's equity.

Obama confirmed Thursday that Chrysler and Turin-based Fiat reached a deal outlining the company's partnership agreement -- as well as confirming Chrysler will need a stay in bankruptcy court to erase some of its debts and liabilities and trim its dealer network.
I'm a layman when it comes to finance, but isn't this unfair to the creditors? The article also mentions that Chrysler pensions will remain intact. What is going on? How can they pick and chose who gets what? Where's the method?

UPDATE: At least one creditor feels ripped off:
At all times in the negotiations, OppenheimerFunds sought fair treatment for the shareholders of our funds and we were willing to make very significant sacrifices to reach an agreement. Along with more than 20 other secured creditors, OppenheimerFunds rejected the Government’s offers because they unfairly asked our fund shareholders to make financial sacrifices greater than those being made by unsecured creditors. Our holdings in secured Chrysler debt are entitled to priority in long-established US bankruptcy law and we are obligated to our fund shareholders to support agreements that respect these laws.


  1. Chapter 11, allows a company to freeze debt payments, and continue to operate. The idea is to get back on track, come out of chapter 11, and then begin to pay back your debt. In Canada our bankruptcy laws are much more strict. Chapter 11 does not exist in Canada.

  2. But in normal circumstances, you don't have a $8-11 billion dollars pledged to you. (Much more than your entire market cap.) Would they allow Chapter 11 knowing you're getting a huge inflow of money? It just seems they are over-manipulating things. The creditors have to wait, but the pensions are untouched?

    I don't know, as I said I'm a layman with this stuff. If you have any feeback toward that, it's be appreciated.

  3. That`s how Chapter 11 works. There have even been companies that declare Chapter 11, before they are broke. This gives them extra funds available to make changes. They no longer have to make debt payments, and the funds can be used elsewhere.
    The pension issue, and government funds, I think we all know is bullshit. Government money is normally not involved with a bankruptcy court.
    Also, bankruptcy used to be a terrible social disgrace. Think of the term deadbeat. That term came from an era when going broke was considered a bad thing. In Victorian England deadbeats even went to prison.
    The Chapter 11 laws, reflect the fact that society no longer views bankruptcy to be on par with a criminal act.

  4. OK. That's for clearing that up. I thought it was a case of being so far under water, you have to freeze payments for a hwile. I didn't know you could get Ch. 11 when you were in less than dire straights. Also, I suppose a judge can rule in favour of the creditors when the hearing comes up.

  5. Chapter 11 (and I am not expert on the issue) is more of chance to get back on track. I don`t think Chrysler would be able to apply, without extra government money.
    Chapter 11 is a very liberal minded part of a bankruptcy proceeding. In Canada the rules are much more strict.
    I wonder if we will see a social attitude swing regarding bankruptcy? This year we will most likely see a massive increase in credit card defaults, and personal bankruptcy. Should a 21 year old be allowed to have a $20,000 credit card debt and owe $50,000 in student loans? This credit party with young people, may be coming to an end.