Bloomberg reports that the rumors circulating around the autobologosphere are true: Uncle Sam “forgot” to put itself ahead of other creditors before writing $17.4b worth of “bridge loans” to Chrysler and GM. Of course, doing so would have rewritten bankruptcy law and pretty much turned the feds into something roughly akin to Chile in the copper-bottomed days of 1972. But, hey, the buffet must go on! “U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury’s Web site.” Doh! And so the government hired the flying Cadwaladers to correct that little problem, who’ve let it be known throughout the land that “If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid.” Well, they had that option all along. Anyway, what are the chances that the people holding the paper at Chrysler and GM won’t let Uncle Sam go to the head of the [they hope] theoretical queue? Actually, a lot higher than you might think . . .
The people who have to make this work are Chrysler’s STILL UNNAMED Cerberusian co-investors and GM bondholders. Although Cerberus can probably quell any internal insurrection about going to the back of the bus, GM’s meeting today with its bondholders to try to get that federally-mandated debt-for-equity deal happening, and those bondholders may like their current position a lot better than that which Uncle Sam’s now “requesting.”
It’s a kind of damned if they do, damned if they don’t deal, whereby the financiers on the sharp gladly pull the plug if they can make more money by doing so than by not. The flying Cadwaladers are negotiating to see if they can reach an agreement,” [Don] Workman, a bankruptcy lawyer based in Washington told Bloomies, “If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’ to be first in line for repayment.”
Stripped down to its basics, we have 10 days before the thumbs up thumbs down decision. Never mind the union wages, debt-for-equity and business plan provisions. A slam dunk has just hit the rim.
Here’s my prediction: The creditors call the government’s bluff. The bailout bucks flow anyway.
The federal government was not free to just unilaterally decide to give itself something akin to DIP status without bankruptcy actually being filed. The existing secured creditors would sue to retain their priority and they would win, because the law on this is fairly straightforward.
Those who advocated the DIP-without-bankruptcy position missed this fairly critical point. It would have been necessary to negotiate this before the fact, and that clearly didn’t happen. The price of this thing just keeps going up, and we’re never going to get that money back.
RF –
“Anyway, what are the chances that Chrysler and GM won’t let Uncle Sam go to the head of the [they hope] theoretical queue? Actually, a lot higher than you might think…”
This has nothing to do with whether GM and Chrysler are willing or not willing to make this change – it is entirely up to the other creditors. My thoughts are that this is an attempt by the government to convince the other creditors to go for the debt for equity deal or risk losing substantially more.
How quickly can I retrain as a bankrupcy lawyer? Seems like a pretty good gig right now.
Since when did FedGov ever want money paid back? They can print up as much money as they want – for free. These are vote-buying payoffs…Not loans.
anoldbikeguy :
My writing wasn’t clear enough. I agree with what you’re saying 100%. I’ll amend the text…
Thanks
I would think that someone owning some GM debt would be deeply disturbed that another party also owning debt gets to write the rules (or change them whenever they feel like it). Just because the current BK laws are straight forward doesn’t mean they will stay that way.
>>How quickly can I retrain as a bankrupcy lawyer? Seems like a pretty good gig right now.<<
It’s not a bad position to be in — if you are in a firm that does that sort of business and if you have connections to bring more business in. If you want to start in the field, it is pretty full right now and there are thousands of lawyers being laid off in this recession. By definition, these existing are way closer to being ready to enter this part of the legal market – and there aren’t enough open positions out there to absorb them.
Just a thought on the realities of this situation.
General Motors and Chrysler have a debt load there is not a chance in hell they will ever be able to pay down.
It’s going to take the creditors, suppliers, or dealers shoving General Motors and Chrysler into bankruptcy to get this train wreck sorted out and moving forward to some type of real resolution.
Why are we being put through this foreplay?
Before this is over, trillions of dollars worth of worthless paper are going to have to be written down or written off, and I’m not just talking about the car industry.
Un-payable debt burdens are strewn about the landscape from credit-card junkies up through huge commercial real estate firms. Almost nobody wants to admit just how big the pile of crap is that Wall Street & Company have been paying themselves handsomely to pile up. Buyout firm debts, strip mall debts, manufacturers, retailers, governments … all have been on a borrow binge and now can’t pay the bill.
@Pch101: to quote Barney Frank “who do you think made that law to begin with? And we can make another one to say whatever we want it to say….”
anoldbikeguy: now you’ve got me thinking – the govt might have left this out intentionally, to see if the companies could come to an agreement with the debt holders on their own, (and avoid the very messy task of having to re-write debt law overnight). They had the luxury of knowing that if the debt holders didn’t play ball, the govt still had the option down the road to move to the head of the line, re-write the law, force C11, whatever.
It’s good to be the king!
Re: guyincognito –
You know that’s right! It is so on!
The people holding GM debt these days are the real investment pro’s. The widows and orphans are long gone.
They know full well that the Gov’t is going to blink. If I owned a couple of million of GM bond’s I for sure wouldn’t give the Fed’s the time of day. Why should I?
The question of whether federal bailout loans should/could/would have priority in bankruptcy was one of the issues analyzed in the Congressional Research Service paper.
You might think the government was conscious of this issue at the beginning, but experience makes me doubt that. Politicians rarely bother to read such analytical documents; they make decisions on other bases. (Politics, mainly.) I should know; in a prior life I wrote those kind of reports.
@ Retardedsparks
To quote Barney Frank “who do you think made that law to begin with? And we can make another one to say whatever we want it to say….”
An unfortunate spray toward Prof Edward Altman who clearly stated that by re-ordering debt priority outside Chapter 11 such arrangements would most certainly be successfully challenged.
He also reminded members that it would re-write the rules of investment in the US for any party with a current, or considering, an investment in the USA.
Who would have thought Bush would “miss” that detail? Just put it on the pile of Reign-Of-Error mistakes.