Felix Salmon

Chrysler: The view from the White House

By Felix Salmon
October 21, 2009

Steven Rattner’s first-hand account of the automaker bailout is self-serving (of course), but still very much worth reading. He’s very much the office-bound technocrat: “we recognized the importance of a trip to Detroit,” he writes at one point, “so in March, several of us made the journey”. Well, yes, that would probably make sense.

At the same time, this financier understands clearly and intuitively that in bankruptcy proceedings, seniority of creditors doesn’t matter:

The lenders were particularly aggrieved that the UAW’s health-care trust, which ranked below the secured creditors, was slated to exchange an $8 billion existing claim for $4.6 billion in notes and 55% of the equity in the reorganized company. While arguably close to a 50% haircut, it was a higher-percentage recovery than we were offering the banks.

The lenders felt that this represented an ideological decision by the Obama administration to tilt in favor of labor and against capital. That was simply not the case. At no time during our months of work did the White House ever ask us to favor or punish any stakeholder.

Many other unsecured creditors — notably, suppliers and consumers holding warranties — actually received 100¢ on the dollar. The fact was, Chrysler had to have workers, suppliers, and customers to succeed and therefore needed to give them more than called for by their rank in the capital structure…

The outcome of the Chrysler restructuring had virtually nothing to do with the heavy hand of government and everything to do with the fact that Treasury was the reluctant investor of last resort.

Every stakeholder did better under our plan than they would have in the alternative: a liquidation, in which the lenders would have gotten far less than the $2 billion they wound up with.

Rattner’s job was to create a viable company, not to maximize recovery for bondholders. If those creditors wanted to put their own new money into Chrysler, and run it themselves, they were more than welcome to. But even the government came very close to simply letting Chrysler fail, until it worked out the magnitude of the knock-on effects on jobs at dealers and suppliers. No one else would put a penny in, and the fact that TARP money was found for the automakers meant that hundreds of thousands of jobs, and billions of dollars, were saved. The creditors really were lucky to get what they got.

3 comments so far | RSS Comments RSS

Although Rattner might have done what you consider the “right thing”, what about the blatant disregard existing bankruptcy laws? Is it okay not to follow the law if you’re doing the right thing? I’d appreciate if you’d elaborate a bit more on how you feel about the selective enforcement of the law.

Posted by AZ_Cowboy | Report as abusive

To what blatant disregard are you referring? It was a 363 sale. Those may suck, but they are in the law. Quit making up stuff.

http://www.creditslips.org/creditslips/2 009/05/chrysler-363-sales-again.html

Posted by zach | Report as abusive

I get so tired of ill-informed commenters who are forever stamping their feet and insisting that “the law” is what they think it ought to be. Perhaps they should spend their time explaining the nuances of bankruptcy law to the judge that oversaw the case.

The only thing that ticks me off even more is the fraction of Chrysler and GM bondholders who never really cared about whether reorganization or liquidation was the better deal for _them_–their priority was to make sure that the UAW got screwed worse than they did.

The car deals were a masterpiece, although no one really gets praised for limiting the downside of a catastrophe. Chrysler may still fail in five years or ten, and that doesn’t take anything away from the achievement of not letting them fail in 2009.

Posted by Craig | Report as abusive

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