Time for Chrysler’s bondholders to man up and move on

By Felix Salmon
May 4, 2009

Joe Weisenthal is upset that the UAW seems to be getting the upper hand over hedge funds and vulture investors:

If we’re thinking about the future, we’d much rather ensure that the notion of bondholder seniority and the rule of law is preserved rather than ensuring that institutions of industrial workers known as unions are preserved.

I could go on at some length about how unions really are necessary to the continued survival of the Detroit auto industry, even if they haven’t been used at Japanese-owned car factories in southern states. But really it’s easier to just quote TED:

Here’s a clue for the novices in the room: It’s called politics, you fucking morons. Stop being such a bunch of whiny pansies.

The holdouts didn’t sway the Obama administration, and it doesn’t look like they’re going to have much more luck in bankruptcy court, either: holders of fully 90% of Chrysler’s bonds are now on board with the government’s deal. It’s over. You lost. Move on.

25 comments so far

So we should be happy that political favoritism trumps rule of law and legal precedent?

Posted by taxpayer | Report as abusive

I guess that “whiny pansies” can vote with their checkbook and refuse to buy a GM or Chrysler car.

Posted by Jim | Report as abusive

Leave it to my finely tuned, sophisticated arguments to trump all opposition. For those who are unconvinced, Floyd Norris has a different take:

http://dealbook.blogs.nytimes.com/2009/0 5/04/why-chryslers-bondholders-should-st op-whining/

Fun fact, Felix: the anti-spam word for this comment was “toast.” How appropriate.

Like it or not, you are wrong. And Joe Wiesenthal is right. The law must be above the political expediency, unless we want to raise the red flags over the White House and the Capitol, and rename the country “United Soviet Socialist States of America”.

Posted by Anonymous | Report as abusive

Your faith in your friends is touching. But that Tom Lauria is crazy like a fox. The game is not over until Tom Lauria has slaked his thirst with the blood of his enemies. Here are some Tom Lauria facts:

Tom Lauria does not file first day motions. They just run screaming into court because of his aggressive pre-bankruptcy negotiating tactics.
Tom Lauria tries to form unsecured creditor committees. They all become secured.
Tom Lauria’s original name for debtor-in-possession financing was “Roundhouse Kick to the Capital Structure”
You call them liquidations. Tom Lauria calls them justice.

rule of law and bondholder seniority is not being ignored, the company is bankrupt. No rules of law were broken, and once the company is bankrupt, existing shares are worthless, and debt is negotiable. If the assets of the bankrupt Chrysler are to be worth anything to new shareholders, they need the workers (at least some of them) to stay with the company. If they want to keep the people who know how to build the cars that their current intellectual property covers, they have to make a deal for the workers’ (union) debt. The new company doesn’t need the bondholders for anything, and it was their intransigence that ultimately led to bankruptcy.

The right-sizing of Chrysler, and its’ reconstruction is happening as it should, the best way to salvage some of the value of the company. The problem with Chrysler, and with many other companies (like banks and newspaper holding companies) is not that they can’t build their product with profit margins, it’s that they have too much debt and not enough equity. Get rid of the debt, and they have a chance to survive.

Posted by KenG | Report as abusive

Reactions like this make me hope that Chrysler liquidates.

Posted by Eagle | Report as abusive

What a bunch of morons. Everyone’s all concerned about rule of law, but nobody seems to actually know what the law is. 11 USC 1129(a) and (b) govern the bankruptcy procedure known as cramdown. If anyone bothered to read it, they’d find that even UCC secured creditors can be crammed down in a variety of circumstances, not least of which when their collateral is worthless. Bankruptcy law balances a variety of competing interests, and the law itself provides processes by which sometimes senior creditors have to take a haircut. This isn’t fiat by Obama, it’s statute and well established precedent.

Posted by HAL | Report as abusive

you mean lenders, not bondholders

Posted by Murray | Report as abusive

” I could go on at some length about how unions really are necessary ”

Felix, they’re not. Honda and Toyota have been successful without unions b/c they utilize a skill set known as industrial engineering.

You want to rail about how team Obama makes policy without understanding the issues.. yet you have absolutely no concept of how or why the UAW is completely against all forms of process improvement in their factories.

The tools encapsulated by lean and six sigma.. are nothing more than the latest wrapper around the skillset since the early 1900′s of industrial engineers. The UAW is wholly against all implementation of lean and six sigma because usage of IE’s would require the UAW to work *with* management – rather than their comfortable role of being entirely adversarial.

Unions are not necessary within the car manufacturing industry TODAY. Yes, Felix, they had a purpose prior to world war 2.. but not now. The UAW accomplishes NOTHING that Honda and Toyota don’t already give their workers. The UAW wants to do no work and get paid a giant pension for it — that’s appalling and disgusting, and should be an affront to your existence, because their pensions are coming from OUR pockets, not their own.

Posted by Unsympathetic | Report as abusive

At some point, you really crossed over the line to the dark side. When business and rule of law issues become political issues, our system has fundamentally changed for the worse. One of the main reasons investors have loved the US for so long is precisely because we haven’t allowed politicians to rewrite business contracts. This is what happens in “emerging” markets. Sadly, that period is over for the auto industry. Hopefully, the rest of the country can escape this fate.
-Mr Juggles

Even if you’re right Felix, what will happen if a reborn Chrysler needs to issue debt. Who (in the private sector) would ever lend them a dime?

Posted by Dave | Report as abusive

Obama has another very good reason to prioritize the claims of the UAW retirement trust over the hedge funds: if the UAW retirement trust goes bust, guess who’ll probably end up picking up the tab? That’s right, the taxpayer — in the form of Medicare and other social welfare programs. So Obama is just doing his fiduciary duty on behalf of the taxpayer by sticking up for the UAW retirees.

Posted by Nate | Report as abusive

I know I’m not the first to say it, but it is so striking to me–everyone bellowing about the sacred principles of senior debt and the “rule of law” seem to want nothing to do with the rule of law once it starts to cut against them.

A supermajority of bondholders can force a cramdown on the holdouts, and that, my friends, _is_ the rule of law. Just one of the many reasons I’ve wanted Chrysler in bankruptcy lo these many months.

Next thing you know, the corporatist crowd will be griping about the sanctity of contracts with suppliers and dealers (but not labor, of course–those aren’t _real_ contracts).

Posted by Craig | Report as abusive

Really dude? Allowing politicians to rewrite business contracts? If by “politicians” you mean judges, and by “rewrite business contracts” you mean administer chapter 11 as they’ve done for decades, then okay.

Free legal lesson:

http://backslashinsanity.blogspot.com/20 09/05/chrysler-and-1129b.html

To Craig, HAL, & Felix, the legal problem with your argument that these secured lenders can be crammed down is that the Obama administration is trying to push through a 363 sale which does not require approval of the lenders so that they can avoid the reorganization plan approval process. If there was due process and a proper approval of a reorganization plan, this would be a different story and the lenders could be fairly crammed down.

That is the problem here, and I believe that the Non-Tarp lenders will prevail in their objection to the 363 sale. As it is an illegal “sub-rosa reorganization” with no outside buyer. If not, this case will set a dangerous precedent, and no company will ever go through the restructuring process. Companies will do 363 sales which take the company’s crown jewels and hand them to whomever the company wants.

Posted by Aiden | Report as abusive

The UAW’s gained a pyrrhic victory over management and the bond holders that will be short lived. Unlike a craft union the barriers to entry to labor union membership are low. Connections and little to no skill will get you in. For years their relative high pay and poor work were swallowed because American car buyers had no choice. Now, the Japanese, Koreans, Germans, Chinese and perhaps the Indians are putting an end to protected American dominance of our domestic car manufacturing market. I am 65 and have driven crappy cars from Chrysler and excellent cars from Honda and Toyota. If Detroit were smart-lol! they would copy Finland who have become contract manufacturers for Porsche where they must meet the standard or lose the contract. They can’t and won’t do that and so the UAW and Detroit management will continue to be crushed by the market.

Posted by RLH | Report as abusive

Felix, assuming that Fiatsler gets the “necessary” unions on board, are you planning to invest?

Posted by J Mann | Report as abusive


They haven’t lost until the court says they’ve lost.

Even then there are appellate rights.

Accepting a loss when you don’t have to isn’t the American way. When George Washington had gotten his butt kicked all the way through Long Island, Westchester County, and New Jersey, and as Christmas approached things looked hopeless … did he “stop whining” and surrender?


Obama and his Hessian legal troops might have trouble in store for him yet.

I agree with you about the unions. While I don’t know what the legal position is in the US, I don’t think the secured bondholders should necessarily have a prior claim. In the UK they wouldn’t. However I don’t follow your argumentation. You have suggested that the union is in some way contributing “new money” to the deal and this distinguishes its claim in some way from that of the bondholders. I just don’t follow the logic here. Isn’t the union simply commuting one claim on Chrysler’s assets (on behalf of pensionholders, many of whom no longer work for the firm) for an equity stake. How is this “new money” in any meaningful sense or am I missing something?

Posted by Jonathan F | Report as abusive

Then our “whining” is also just “politics”, you fucking Communist.

Posted by TheTrollingOne | Report as abusive

The rights of the minority are happily not bound by the 90% that have signed on. This is not a class-action suit, and even if it were, those not agreeing to be part of the class would have their separate rights in law. Won’t the 90% look stupid for having signed on if the 10% win their case on the merits? The fly in the ointment seems to be the judge, who so far sounds like he’s prejudged the case. Jonathan F., I think you’re correct. Releasing a claim on existing money is not the same as adding new money. While we’re on the topic of unions and necessity, if the playing field were level, companies could train and bring in replacements when unions go on strike, and unions could not shut down the industry by proxy or any other way. The pendulum is upside down.

Posted by Bill | Report as abusive

Oppenheimer Mutual Funds is one of the holdouts…when did they become either “hedge funds and vulture investors”??? Perhaps the instance they stood up for the thousands of middle class investors whose retirement accounts will suffer for the benefit of the UAW. I guess the administration is afraid the truth won’t sufficently agitate the proletariat.

Posted by fxtrader | Report as abusive

Oppenheimer, aren’t they the geniuses that put together a “Core Bond” fund that managed to lose 35% last year by levering up without bothering to tell anyone that’s what they were doing? If they really are managing money that people can’t afford to lose and decided to loan it to Chrysler, then they have a lot to answer for but that has no bearing on how the Chrysler case should be disposed.

Posted by Tom | Report as abusive

Defender of the corrupt UAW, even after essentially admitting its corrupt ways- Felix Salmon at Reuters. I have been watching an interesting back and forth between Business Insider blogger Joe Weisenthal, and Felix Salmon from Reuters. Essentially Felix Salmon has been arguing on the UAW’s side, saying that Chrysler bondholders should just “man up” and take the hit while the UAW should be allowed to jump ahead of the technically senior bondholders. A few days back Mr. Salmon said the following:

I’m frankly surprised at the amount of pushback against the entirely sensible notion that Chrysler’s creditors (and, by implication, GM’s as well) should accept an enormous haircut on their failed investment.

And in response to Mr. Weisenthal arguing that the Chrysler situation would make anyone think twice about lending to any company with a large union in the future, Mr. Salmon followed with:

Oh come on. When Detroit raised debt capital in the past, its lenders weren’t operating on the assumption that they would be paid off in full before the UAW got a penny — and if they were, they were being foolish in the extreme.

Thus Mr. Salmon says that creditors were being foolish to believe that their contractual rights would be honored. What a chaos business would be if only fools were expected to trust contract law.

The UAW, after all, is necessary for the continued existence of the company: they’re doing the equivalent of putting new money in to the operation, in the form of their labor going forwards. I don’t see the creditors offering to put up any new capital.

This is hilarious. Chrylser would have loved to toss this union out years ago. They are not necessary for the continued existence of the company, but rather they continue the problems Chrysler faces. New money in the form of labor going forwards? They are getting paid salaries, this isn’t some act of charity. And frequently they are getting paid at rates higher than what could be achieved by workers who don’t operate as a institutionalized mafia, such as US workers for Toyota. They extort higher salaries and benefits than would be available on the open market for labor, thus they are actually sucking capital out of Chrysler, beyond what their labor is worth.

Sure, the creditors might have a point about seniority if the firms were to be liquidated with the loss of all jobs. But let’s not forget that a huge part of the reason why they lent their money in the first case was that the US auto industry is systemically important, and that the government would never allow it to be liquidated. They were making a moral hazard play, and believed the car companies when they said that bankruptcy would be disastrous, and so they assumed that the government would keep the car companies out of bankruptcy.

Wrong again. A lot of creditors would have loved a normal bankruptcy without the government intruding its UAW-corrupt nose. The UAW has very little power in a normal bankruptcy, and the creditors have substantial power, as they should. (Which is why they have coerced the government to intervene)

So now I can barely believe it when the creditors start talking about how much they might receive in liquidation. For one thing, I don’t believe them. If GM and Chrysler liquidate, their assets are worth very little if anything at all: how are you going to monetize a mothballed production line?

Well let the creditors go ahead with it and find out. Its their money, its their risk, allow them to use their own judgement. If the liquidation value is less than they expect then they simply get less money.

After Mr. Weisenthal highlighted in a post that the UAW was in no way necessary to Chrylser and was actually very problematic, Felix came back and no didn’t defend his clearly collapsed arguments, but rather abandoned logic and went for the “that’s just the way its gonna be and you better like it” route.

I could go on at some length about how unions really are necessary to the continued survival of the Detroit auto industry, even if they haven’t been used at Japanese-owned car factories in southern states. But really it’s easier to just quote TED: Here’s a clue for the novices in the room:

It’s called politics, you fucking morons. Stop being such a bunch of whiny pansies.

The holdouts didn’t sway the Obama administration, and it doesn’t look like they’re going to have much more luck in bankruptcy court, either: holders of fully 90% of Chrysler’s bonds are now on board with the government’s deal. It’s over. You lost. Move on.

Thus by his failure to defend his original points with any form of reasonable argument, Felix makes it very clear that in the end, logic lost. Its just a bunch of corruption. And a corrupt UAW won. The same UAW Felix says is necessary. Please Felix, one day please do go at length about how the UAW is necessary for the survival of the auto industry. It will be an interesting piece in stark contrast with the reality recent history.

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