Toxicroach says he’s not a C11 guy by training; C7’s more his style. Still, it’s obvious that he shares our OCD. Which is not so good for him. But very good for the greater good. Thanks, bug man.
“Nuts & Bolts: The first day emergency motions were granted for the most part. Chrysler can continue on and doesn’t have to file a complete list of creditors or a complete petition until June. Some minor creditor action that I’m going to mostly ignore. We already covered the main objections, but Uzzi (counsel for Chrysler’s non-TARP engorged creditors) filed another objection to the use of DIP financing (download pdf here). This sums up their argument quite nicely:
According to the Debtors, the only payment that is relevant is the $2 billion to be paid to the first lien lenders. This amount they say represents the rough equivalent of what the first lien lenders would likely receive in a liquidation of the business (which is what the Debtors contend would happen absent the new financing promised by the United States government). If the Court can suspend its disbelief sufficiently to accept the Debtors’ argument, the transaction is still fatally flawed.
First, the Chrysler Non-TARP Lenders believe that the liquidation value of Chrysler is substantially higher than $2 billion. Second, the financing is in fact being provided and apparently drives an enterprise value of $27 billion. The fact that the postpetition lender, the United States Department of the Treasury (the “Treasury Department”), wishes to allocate that value among junior interests that it views from a political or policy perspective as more important than the contractually senior first lien debt is an insufficient basis for such a result.
It is incomprehensible that billions in cash should be borrowed and then paid out in satisfaction of obligations necessary to preserve going concern value, but that the recovery to the estates and their first lien lenders is nevertheless limited to an amount that the Debtors claim is roughly equivalent to liquidation value—if going concern value is preserved, the upside is to be paid first to the senior-most creditors.
“The argument that Uzzi and the non-TARP bondholders are making is this: the Chrysler Chapter 11 is in fact a Chapter 7, as evidenced by the fact that the ‘good’ assets are to be immediately sold to another company. Chapter 11 is for a reorganization of the company, not selling the viable parts of the company to Fiat. The motions pretending that Chrysler needs to pay all these unsecured creditors to protect Chrysler’s value as a going concern are therefore bogus.
“They also argue that the government financing is so constrictive (with its many covenants and milestones) that accepting it would force the judge to accept the sale of all the assets, because failing to do so would cause the Department of Treasury to immediately demand all of its money back and leave the rest of the creditors more exposed than if Chrysler had never taken the money in the first place.
“They further argue that the financing was not arranged at arms length or in good faith (this is very true), and that financing arrangements that try to dictate the Chapter 11 reorganization should be rejected (also true).
“They also content that using TARP powers to strip the senior liens to be replaced by liens to protect the TARP money is a violation of the 5 amendment takings clause, at least without “just compensation” for the taking.
“I haven’t had the time to sit down and study the cases they are citing, but my gut from reading the motions and objections, and Chrysler’s responses so far, is that the Non-TARP creditors are basically sitting on some very solid law, and that Chrysler is relying on scaring the judge into compliance.
“Which is not to say that what they are doing is extra-legal—so far.
“Asset valuation is largely a matter of opinion. It is possible that the assets are worth two billion, or at least arguable that they are only worth two billion. Debtor’s attorney’s will always pick the lowest plausible value for an asset. It’s then the creditor’s job to argue for the highest plausible value.
“What is so offensive about what is going on” the attempt to shut down the judicial process. Chrysler, the feds and Fiat don’t want to file a full petition, they don’t want to file a full list of creditors, they try to ambush the creditors with a last minute motion and hearing, they want to deny the creditor’s the standard 10-day stay to appeal the decision to sell the assets, and so on.
“They seem to be pinning their hopes on Gonzalez being so afraid of causing 50k people to lose their jobs that he will be their rubber stamp, and by the time an appeals court gets their eyes on the case, it will be a fait accompli.”
Does the Judge have big brass balls?
Onslaught of Obama and UAW.
Maybe the Judge will start to get death threats if he enforces the law…
Everyone who doesn’t love Obama’s plan, please take one step forward so you can be adjusted….
Thank you Toxicroach for your excellent on-going coverage and analysis.
In before the Obama cheerleaders tell us this is all for the best and the political influence of the UAW has nothing, NOTHING, to do with this.
They also content that using TARP powers to strip the senior liens to be replaced by liens to protect the TARP money is a violation of the 5 amendment takings clause, at least without “just compensation” for the taking.
I think raising a constitutional objection almost guarantees an appeal. I’d think that a federal bankruptcy judge might punt this part of the case to a federal appeals court. If Oppenheimer wants to make a stand, it will go to the SCOTUS.
It won’t have to go to appeals. If the bondholders manage to fend off the initial onslaught, the feds will just up it to 4 billion or something and everyone goes home happy.
Come on, folks, a little more calm and less ideology, please.
It’s fairly simple: the bondholders don’t want any change in priorities, and they want to argue that the deal is worth more than what they’re offered.
The rebuttal to this is that it’s a reorganization (i.e. cramdowns are fair game) and that the bondholders are overvaluing the deal.
All very predictable, really. But good luck to the bondholders with this one — the economic benefits argument for 11 is hard to refute, and they won’t have any comps to support their asset values. The enterprise value is speculative at best — the new company is a bunch of DIP debt with few assets and no income, so that sounds like a go-nowhere argument.
I suspect that this will prove to be a bad strategy if they stick with it. They’d probably be better off arguing that they want to be part of the 11, and that some of their existing debt should be carried forward as debt into the new entity. Maybe they’ll switch to that angle when this approach fails.
Reorganization was designed for this very purpose — allow the business to survive while discharging debts. It’s in the Constitution. Unless some of you are planning on amending the Constitution this week, this isn’t looking good for you (although the judge could be a wild card, who knows?)
And where is the MSM in all this? The ramifications of this case are frightening. Just imagine the screaming and front page headlines about an “Imperial Presidency” and disregard for rule of law if this were the prior administration.
The ramifications of this case are frightening. Just imagine the screaming and front page headlines about an “Imperial Presidency” and disregard for rule of law if this were the prior administration.
The last administration did do a version of this with Washington Mutual. Where was your outrage then?
PCH— that’s the thing though— legally the business IS NOT going on. It will get liquidated once the good assets are gone to the new company. Selling the assets to a new company, even as a going concern, is in fact a liquidation.
The purpose of C11 is to maximize value for the creditors, especially the secured creditors. It certainly isn’t about keeping the debtor happy, I can assure you of that.
Someone here mentioned that moving the assets to New Chrysler was an ‘unlawful conveyance’. That sound like the Government plan.
Also, a liquidated Chrysler’s got to be worth more than $2 billion. The Jeep and Ram brands (with a few factories and tooling) gotta be worth more than that.
Then again, if you subtract (wildly fluctuating) political liabilities, Jeep & Ram may be worthless.
that’s the thing though— legally the business IS NOT going on. It will get liquidated once the good assets are gone to the new company.
We’ve had this discussion before. The good/bad company model has already been used before. You’ll need to be able to show why this is so unique.
The problem is that it isn’t unique. There are enough issues of controversy that the bondholders aren’t in all that great of a position. Their main leverage is time — if the government is in a hurry, the bondholders’ ability to slow things down may help them to get a better payout.
The bondholders may not be that serious with this argument, it may ultimately just be a stall in order to wear down the government position and compromise their ability to close fast. That may be good enough; if I was a bondholder, I might do the same.
Someone here mentioned that moving the assets to New Chrysler was an ‘unlawful conveyance’.
I mentioned the possibility of that. The bondholders seem to be approaching that with their reference to the lack of an arms-length deal, which is good as saying that one party accepted too little because of the nature of their relationship.
Again, good luck to the bondholders with that. Used assets with little alternative use, operated by a losing company that got dumped for very little money by Daimler a few years back, and that has only gotten worse since then, and no buyers rushing in to provide a counteroffer. Sorry, but this thing is barely worth the $2 billion, particularly when it has to start its life loaded down with debt and is producing no earnings.
PCH101: What’s so unique about this is that they are trying to ram this through over the creditors (muffled) objections. There’s nothing wrong with the good company/bad company idea in theory, but when your hosing the secureds for the sake of the new LLCs convenience is problematic.
If the Department of Treasury offers 3 or 4 billion, I’m sure the creditors bitching would stop.
Also, PCH, a factory is worth something to somebody. It’s entirely (even likely) that Chrysler is worth more parted out than it is as a going concern. Even in this market. Evidently the creditors think so, and even if they are wrong they are perfectly within their rights to insist that they have the chance to find out.
The last administration did do a version of this with Washington Mutual. Where was your outrage then?
Yes, Treasury engineered a bank takeover, and we give the gov’t a little latitude with regulating banks, but your analogy only goes so far. What equity does the government hold in WaMu? What unsecured creditors in WaMu got disproportionate equity compared to creditors senior to them?
The more you keep insisting that Obama’s plan to turn Chrysler and GM into quasi-nationalized properties of the UAW is nothing unusual in bankruptcies, the more you sound like you’re telling us to pay no attention to the man behind the curtain.
There are serious property rights issues in this case as well as constitutional issues both in terms of the takings clause and the authority of the president. We were warned about the hazard to capital markets if the gov’t were to cut in line ahead of senior debt.
Now, the government wants the same hedge funds that the Prez demonizes to invest in distressed assets in the proposed public/private gizmo to deal with the toxic mortgages.
Who’s going to want to invest money in the United States? Today it’s Chrysler’s bondholders. Next week it will be some other longstanding rule of business law that Obama will cavalierly dismiss as “greedy”.
What difference does bankruptcy law and the constitution make when confronted with ‘Yes I can, because I won’ and a compliant press is enchanted with the president? It’s interesting that Tom Lauria said that Rattner said the Prez would sic the White House Press Corps on the recalcitrant bondholders and not a single member of the White House Press Corps (except for Jake Tapper of ABC) has even issued some kind of pro forma ‘I’d never allow myself to be used by the White House’ denial.
According to rumors in the financial community, what Rattner really threatened Perella Weinberg (which does other business with the gov’t) with was not the White House press corps but rather SEC investigations of their entire company and IRS audits of all their employees.
I’ve asked this many times but none of you guys that think this deal is hunky dory have answered, where in the constitution is the president authorized to hold equity stakes in private enterprises?
There are serious property rights issues in this case as well as constitutional issues both in terms of the takings clause and the authority of the president
OK, go run to court and try to get someone to entertain that argument. They won’t.
where in the constitution is the president authorized to hold equity stakes in private enterprises?
The Constitution is silent on that point, but more relevant, that isn’t happening here.
You can feel how you want about this stuff, pro or con, but just making stuff up and throwing things up against the wall isn’t particularly informative. The court won’t look at it that way, so either buy yourself a few seats on the Supreme Court, or else give it up.
Better yet, let the judge do his thing. He’ll be surrounded by all kinds of high priced legal talent, so both sides will get vigorous advocates to serve them. If your cause is just, you should prevail. If it’s not, you should get over it.
The point of the bankruptcy court is to encourage risk taking and to give worthy enterprises that create economic benefit a fresh start. You can debate whether Cry-sler is particularly worthy, but it’s big, and right now, that may just be enough.
What’s so unique about this is that they are trying to ram this through over the creditors (muffled) objections.
You’re surprised that debtor’s counsel is representing the interests of his client?
You know that this is an adversarial legal system. It’s up to the creditors to make an argument, and up to the judge to sort out who’s right about what. It’s not up to the BK lawyer to be nice to the bondholders.
If the Department of Treasury offers 3 or 4 billion, I’m sure the creditors bitching would stop.
Agreed. It’s ultimately about the price.
It’s entirely (even likely) that Chrysler is worth more parted out than it is as a going concern
Try proving that. The lack of comps does not support that position. Daimler just gave away their 20% and wrote it off, so should we value the enterprise at zero or a negative number?
Evidently the creditors think so
Of course they do. They have to at least pretend to, or else they have no claim.
Each side has to argue its side, and their arguments are fairly predictable. But just because the creditors argue it doesn’t make it so. That’s up to the court to decide.
Bottom line, Chrysler is so deep in debt with little chance of ever truly recovering. All this other stuff is nonsense the Executive Branch has no business being involved with.
It’s time to end this charade and move on with life.
It looks like the government is using as much of the FDIC’s playbook for dealing with failed banks as possible. The big difference is that people are not used to seeing or doing this kind of thing with an industrial company as opposed to a financial institution.
BTW, the capital markets do not seem to share the grave systemic concern some people say they have about all this. So far, the judge does not seem swayed by the arguments of this minority of creditors. Remember, over 70% of the secured debt in question is in the hands of banks and funds which have already agreed to the plan.
http://news.yahoo.com/s/ap/20090505/ap_on_bi_ge/us_chrysler_bankruptcy_8
Try proving its only worth 2 billion.
Kind of hard to do with a week to do it, isn’t it?
If the creditors are going to overvalue an asset, the debtor is sure to undervalue it. We just don’t know. Which is why the judicial process takes time to figure this out. The debtors are using fear tactics to try to get this done without the adversarial process. It’s about as ethical as a prosecutor using the media to prep the jury pool. Zealous representation of your client is a must; but trying to use emotion to quash the judicial process isn’t ethical. I think that is what is happening here, because there is no way, no way at all, that a debtors whose business was only worth 2 million would be getting anywhere near the amount of slack that Chrysler has already gotten. I don’t care how much the creditors end up getting. I really don’t. I just want the law to be followed, and the creditors given their full chance to defend their position.
Pch101,
Simply put, why should an unsecured creditor, the UAW VEBA, get 55% of the new “good” company and the secured creditors get 10%?
The debtors are using fear tactics to try to get this done without the adversarial process.
The debtor is trying to win his case, just as the creditor is trying to win his. There’s no difference.
It’s up to the judge to decide. If the judge buys the debtor’s argument, then the creditor has a problem. But that is the court’s decision to make. The debtor can present the argument, but they can’t force it on anyone.
Pch— you never taken an ethics class?
If I cut an opposing attorneys tires so that he missed a critical hearing, I would be representing my clients interest. I should still get disbarred.
Hard as it may be to believe, but lawyers are supposed to adhere to an ethical code. One version of the oath:
I solemnly swear (or affirm) I will support the Constitution of the United States and the Constitution of the State of Louisiana;
I will maintain the respect due to courts of justice and judicial officers;
I will not counsel or maintain any suit or proceeding which shall appear to me to be unjust, nor any defense except such as I believe to be honestly debatable under the law of the land;
I will employ for the purpose of maintaining the causes confided to me such means only as are consistent with truth and honor, and will never seek to mislead the judge or jury by an artifice or false statement of fact or law;
I will maintain the confidence and preserve inviolate the secrets of my client, and will accept no compensation in connection with a client’s business except from the client or with the client’s knowledge and approval;
I will abstain from all offensive personality, and advance no fact prejudicial to the honor or reputation of a party or witness, unless required by the justice of the cause with which I am charged;
I will never reject, from any consideration personal to myself, the cause of the defenseless or oppressed, or delay any person’s cause for lucre or malice.
So help me God.
I agree with Pch101 above. Objecting to the DIP credit facility is a delay tactic, being used in an attempt to get “go away” money. In this case, it’s not gonna get them from $2 billion to $4 billion, though.
No way in hell in the liquidation value of Chrysler worth $2 billion, and everyone knows it. There is also no way in hell that the going concern value is worth $27 billion.
Remember, over 70% of the secured debt in question is in the hands of banks and funds which have already agreed to the plan.
The same banks that are financially beholden to the Treasury and the President via the TARP. With Gov. Granholm of Michigan already threatening to withhold state business from those financial institutions that are resisting Obama’s restructuring plans for GM & Chrysler it’s clear that the government can exercise undue pressure.
Of course it’s all about price. The secured bondholders want themselves to get a higher percentage of the company and the UAW to get a smaller percentage.
I am sorry, but it shines and it stinks. Absolute Priority is the bedrock of reorganization.
The first legal memorandum I ever wrote was a 47 pager explaining why a partners bright idea, of using a non-arms length sale to screw the creditors of a troubled hotel project, was going to go down in flames.
This deal stinks as much or more than that one, or any other stinky deal I have seen in the intervening third of a century.
This isn’t even socialism, it is just good old fashioned Chicago style thuggery.
Simply put, why should an unsecured creditor, the UAW VEBA, get 55% of the new “good” company and the secured creditors get 10%?
I’ve stated this before — it’s not about the percentage of (worthless) equity, but the priority of payout.
The bondholders want cash. The UAW settled for equity, with no cash.
Just get over your UAWphobia for a second and be honest about the situation — the equity sucks. It’s not a gift, it’s a sorry compromise that nobody except for Fiat really wants. It’s about as appealing as a loaf of stale bread that has gotten about a week’s worth of sun.
The UAW is betting the farm that the equity will be worth something some day, because right now, its effective market value is zero. As in null. Nothing. Nada.
The UAW has no choice, though, so it took the deal when it realized that it had no other option. (The leadership must be wondering when their heads are going to roll for putting the membership into the VEBA in the first place.)
The UAW leadership had better hope that their membership is just as prone as are their opponents to overestimating the value of their now-worthless stock. If Fiat fails and these guys wake up to find that they have nothing in those accounts, there are going to be some pissed off guys who know how to use power tools. It may not be pretty.
I will not counsel or maintain any suit or proceeding which shall appear to me to be unjust, nor any defense except such as I believe to be honestly debatable under the law of the land
Just because you disagree with debtor’s counsel doesn’t mean that his case is unethical. You’re really taking it way too far with comments like that.
I expect both sides to advocate for their respective clients. **That’s** the ethical thing to do. An attorney who doesn’t serve his client’s case because he has decided to play judge instead of hustling for his fee should be disbarred for malpractice.
It is the judge’s role to decide who is right here. Everybody deserves to have an advocate, both the bondholders and the company.
Detroit Todd:
No way in hell in the liquidation value of Chrysler worth $2 billion, and everyone knows it.
???
Do you mean it must be more or less than $2 billion?
Properly managed, the Jeep brand, factories and tooling have to be worth that. More if you can get a non-UAW work force together.
Try proving its only worth 2 billion.
Kind of hard to do with a week to do it, isn’t it?
OK, but there has to be credible pushback against the Manzo/Capstone model (52 on the docket, around 150 pages, filed 4/30) and Manzo’s expert opinion that recovery to the secured bondholders in liquidation would likely be at the low end of his range, i.e. 9 cents. And there has to be someone to refute affidavits from Capstone and (I think Greenhill?) that they weren’t able to secure non-Treasury DIP financing at any price. Agreed, creditors should have a chance to prove otherwise, but the judge is also required to consider whether the assets are deteriorating (probably) and whether the creditors are ever likely to find a set of new bidders to push recoveries materially north of the bid in the hand. LaSorda’s rather pathetic affidavit (also filed 4/30; I think it is 51) describing how little interest the global car industry had in bidding for Chrysler’s assets is pretty compelling.
To strip away some of the politics, consider the judge’s responsibility to the different secured lenders. In other words, assume he doesn’t spare a thought for employees, the gov’t, suppliers, or any of the other junior creditors.
There are secured lenders, both TARP and non-TARP who were ready to accept 32.6 cents last week. Due to the holdouts (perfectly legit) action, they’re now facing a high bid of 29 cents. The holdouts, who own less than ten percent of the secured debt, are asking to block that bid. Should the judge force the overwhelming majority of senior secured bondholders to risk ending up with 9 cents when an offer of 29 cents is on the table?
No way in hell in the liquidation value of Chrysler worth $2 billion, and everyone knows it. There is also no way in hell that the going concern value is worth $27 billion.
I can’t find it but somewhere in the secured creditors’ filings is an argument that the gov’t is valuing their stake at $2B while exchanging those assets for a much larger debt of an unsecured creditor.
Maybe I am not being clear, so let me put it this way:
I do not think it is unethical that the debtors have filed this motion.
I think it is unethical that they are trying cheap tricks like filing the motion Sunday evening, and having the hearing the next morning, when I can pretty much tell you to a certainty that the motion was substantially done before they even filed bankruptcy. I think its cheap that they can’t wait 10 days to let the creditors appeal.
It’s not their argument— its that they are going the extra mile to try to make sure the creditors don’t get their day in court. I also think that the reason they are trying to avoid it is because the creditors would win under the law. Under normal circumstances creditors are given 20 days notice (Local Rule 2002-2). In this case, they are given 15 hours or so.
I call that unethical. Let the creditors give their arguments about the value of the assets. Let the debtors give theirs. That’s all I really want. I really truly don’t give a rats ass if the creditors get a dime, as long as they get their due process.
Also, unless you are an expert on the value of factories, patents, and all that jazz, you have no idea what the liquidation value of Chrysler is. If you assume it is less than 2 billion, you are assuming the govt. is stupidly overpaying, and that 10% of the bondholders are stupidly resisting a good deal. If its over 2 billion, the govt. is wisely underbidding, and the bondholders are smartly resisting a lowball.
I figure at least one of them is smart, which means Chrysler is probably worth more than 2 billion in liquidation.
Daimler giving away its share doesn’t prove the assets are worth 0, it is evidence that the going concern value is 0. Secured lenders come first, then unsecured, then equity holders. Daimler was last in line. It’s possible that there is enough value to pay off the secured creditors, and maybe a few morsels for the unsecured creditors, but fat chance any will be left for the equity holders. Daimler knew there was no equity left so, like Elvis, it left the building.
Congress, the Bush administration and the Obama administration missed the boat in getting the best value for the public dollar. We knew Chrysler and GM would need a big chunk of money last fall. We could have amended the bankruptcy code to give the government quasi-debtor-in-possession status for the government lifeline loans that companies like GM and Chrysler receive. Congress could still put in a new chapter, but it wouldn’t get done in time for these transactions. Maybe we can learn from what we did wrong and have better tools the next time.
I think the liquidation valuation is correct. Chrysler is worthless as a going concern according to a number of significant interested parties, namely: Diamler, Cerberus both walked away from it, just about every ratings agency and financial institution values the company at zero. The only reason the company has value is due to the Treasury’s backing.
Therefore, I dont think it is such an unfair position for the treasury to displace first lien holders to some extent and surely the takings clause of the fifth amendment has been pushed aside for policy purposes and in times of public need time and again (though the crisis is debatable). In the end, you will find that $2 billion will be deemed “just compensation” for the secured debts of a worthless company.
Part of me sides with the holdouts in that they are ultimately going to get no say in this matter. But I also feel that they would not be in a substantially better position had the government not stepped in and liquidation allowed to run its course naturally.
Congress, the Bush administration and the Obama administration missed the boat in getting the best value for the public dollar. We knew Chrysler and GM would need a big chunk of money last fall.
I wonder how big Dick, Shelby feels about Chrysler and GM being owned by the UAW and the federal government.
At least Sen. Corker tried to work out a deal that would have given some congressional oversight, but Shelby and the rest of the Senate Republicans punted to Bush, who had enough authority under the TARP and the Fed to loan the money.
Arguing about the value is beside the point. It is the courts job to find that value. Let both sides duke it out (quickly but thoroughly), and let the adversarial system come to a close approximation of the truth.
Or, just pay them an extra billion and be done with it. You always have to pay for speed.
This is the best discussion of the Chrysler affair to be found on the interwebs.
Thanks.
How is the Chrysler or Jeep, or any part of Chrysler worth anything when Mercedes stripped them of all their cash, and Cerberus stripped them of all their realestate assets? They are burning through over 1B they don’t have every single month, and presently over 50B in debt, with very little in new product coming. It’s time!
@toxicroach
I agree with everything you’ve said.
I don’t think this is about Chrysler per se. I think there are dozens if not hundreds of VERY large bankruptcies coming soon and Obama needs this precedent to cram down secured bond holders.
Likely dozens of large companies will liquidate without this precedent.
“Absolute Priority is the bedrock of reorganization.” Many published scholars disagree, for example:
Some financial economists give confusing treatment to the subject of violations of the absolute priority rule (APR) in bankruptcy. Specifically, they define it as a rule of strict, inflexible priority that mandates that senior creditors – a category that includes secured creditors – be paid in full before junior creditors or equity interests receive any share of a reorganized corporation. (This definition is sometimes found in the legal literature as well.) We refer to this concept as the “laymen’s APR.” The definition implies that if equity interests retain even one share of their old stock while some creditors are not paid in full, there is a deviation from the standard.(1)
Despite the fact the laymen’s APR is not current bankruptcy law, some financial writers express surprise at finding that a substantial majority of reorganizations involve the retention of some old equity even when creditors have not been paid in full. Thus they conclude that bankruptcy courts frequently violate this rule. What is more important is that these writers often fail to advise the reader unfamiliar with bankruptcy that the laymen’s APR is not current bankruptcy law.(2) Moreover, the laymen’s APR has never been statutory law, nor is it mandated by any recent federal court decisions. As we describe more fully further in this paper, it fails to account for at least two major factors: 1) Current bankruptcy law mandates that creditors have the power to waive their priority positions and 2) a partially secured creditor may have senior status in part of its claim and junior status for the balance. In other words, there does exist a concept of bifurcation of claims. We refer to a legal standard that recognizes both of these factors as the “legal APR.” Although this standard has been further modified, it is an essential part of current bankruptcy law.(3)
From http://findarticles.com/p/articles/mi_m4130/is_n3_v25/ai_19161964/
Thanks for the analysis Toxicroach! This post was great. Also, I appreciated the arguments from PCH, really made this into an informative thread.
Also don’t forget that if Chrysler goes under, car prices will go up…
They will go up even more if/when GM goes belly up…
Say what you will, but the incentives game has been good to all consumers for many years…
We’ve had 0% financing for almost 8 YEARS!
@lw:
Agree that unless the credit markets change significantly, there may be a substantial number of large defaults and ensuing filings.
The question is, will a Chrysler cramdown precedent–if it happens–do anything other than further impair the credit markets?
Also, how many of these can/will the USG deem worthy of bailouts? The crux of the issue with the autos is that the USG is willing to intervene to prevent a sudden collapse of the companies and, potentially, a restructuring.
Absolute Priority is the bedrock of reorganization.
The opposite is true. Cramdown is the preferred and perfectly legal path when the social and economic benefits of reorganization are deemed to be more important than the claims of the creditors.
It’s possible that there is enough value to pay off the secured creditors
The government is a secured creditor, and I am quite confident that there isn’t enough money to pay them (in other words, us) back.
Both sides have created some potential issues with how this is being done, but the creditors can’t argue for a 7 liquidation out of one side of their mouths while arguing for enterprise value out of the other.
If the enterprise value is so awesome, then they should be grabbing that equity, but they obviously don’t feel the love. If they wish to say that the assets should be ground up and sold for their benefit, then they have a tough time arguing that the breakup value is much above the $2 billion.
A few years back, Cerberus acquired 80% for $7.4 billion. One might say that this would put the value of the entire company at that time at about $9.2 billion, when it actually was a going concern.
Break that down, though, and you realize that pretty much all of that money went to working capital or came right back to Chrysler LLC, etc. in the form of “loans” from Daimler. So they didn’t really buy a $9 billion business at all; they got it virtually for free, on the condition that they feed it once they’ve taken it. They then subsequently levered it up with new bonds, and that’s the company that the bondholders got.
Since then, the company’s fortunes have obviously fallen. Without Uncle Sam’s generosity, the failure would have already occurred, the old Chrysler wouldn’t have gotten the loan proceeds that it did, and there would have been no one on God’s green, recessionary earth to buy those precious factories and defective parts for any price. Ditto with getting new private financing and the rest of it.
With all this, I’m just not seeing a compelling story for value. If the judge is smart, he won’t either. The liquidation value of the assets must be less than the sum of their parts. Maybe they could put it on Craigslist, and see what kind of response they get. (Rent a hooker, and get the IP rights to the Sebring for just $1 more! Call now!)
Re cardeveloper :
Jeep’s value is derived from it’s intellectual property (IP – all those engineering drawings and the right to use them), physical assets (tooling,factories, employee cafeteria), and most of all the brand itself.
A scenario being kicked around is that Jeep (made up of all of the above) does in fact have significant value, if pried loose from Chrysler.
This could theoretically take several forms.
1. A new Jeep partnered with an existing auto manufacturer starts over again.
2. Jeep products being manufactured in a different location, presumably in a right to work state.
3. Or, the doomsday option. That Jeep’s IP and tooling are purchased and moved offshore.
Option #3, while the most extreme is actually quite doable. The problems are political, not technical. Unfortunately, it is also the most practical and likely to happen in the long run.
Re Pch101 :
Maybe they could put it on Craigslist, and see what kind of response they get. (Rent a hooker, and get the IP rights to the Sebring for just $1 more! Call now!)
And what color is this Sebring? And the Hooker, is she driving it over to my house, or do I have to meet her somewhere and pay for gas.
I’m interested of course, but I want more details…..
Mike has a good point, eh? (sorry, had to)
What is this new company worth? Are the non-tarps on record saying they want cash and no part of this newco?
Personally, I think there are plenty of folks that would highly value a car company, even if it were chrysler. I am not so quick to accept this part of your argument PCH.
Pch101 :
Cramdown is the preferred and perfectly legal path when the social and economic benefits of reorganization are deemed to be more important than the claims of the creditors.
Deemed by whom? All I see are incompetent government bureaucrats and a fawning, slobbering press. And normally smart people defending all this lunacy! It’s disgusting and sad.
And frightening, with the government gaining more power with every day. Please don’t anybody try to tell me that isn’t so; you’ll just lose more credibility with me.
Bigger government means less freedom. This is the problem I have with it, and it’s also the problem that the Founding Fathers had with it. It’s the reason they wrote about it and made the Bill of Rights all about what the government CAN’T do; not about what We The People can’t do.
The first guy who says he’s qualified to be one of these bureaucrats should be the first one crossed off the list. And maybe be made to pick out his own switch before being taken to the woodshed.
If this keeps on, we are all doomed to a penniless existence. I think that “sign guy” on the corner may end up being the superior life form after all. Think about it, he has already adapted to what is quickly becoming the new socialist order. He already knows how to get along in this world of beggars.
This is getting depressing.
I’m not one to ruin a perfectly good paranoid fantasy but if you look around, you might notice that the reason the government has all this power is because giant corporations have run themselves into the ground and come begging for government money to keep them from going under.
How does that fact fit in with the socialist takeover theory?
From this:
Also, unless you are an expert on the value of factories, patents, and all that jazz, you have no idea what the liquidation value of Chrysler is. If you assume it is less than 2 billion, you are assuming the govt. is stupidly overpaying, and that 10% of the bondholders are stupidly resisting a good deal. If its over 2 billion, the govt. is wisely underbidding, and the bondholders are smartly resisting a lowball.
I figure at least one of them is smart, which means Chrysler is probably worth more than 2 billion in liquidation.
To this:
Arguing about the value is beside the point. It is the courts job to find that value. Let both sides duke it out (quickly but thoroughly), and let the adversarial system come to a close approximation of the truth.
Or, just pay them an extra billion and be done with it. You always have to pay for speed.
I think it’s rather clear nobody including you believe it’s worth even 2bil; and the hold-outs are doing exactly that, stalling (taking newco hostage) and shaking the tax-payer down for more money.
As I’ve said in the past, certain peeps pretend to be for greed and against gov spending, but only of those is true (the later objective is to enable cut their tax bill). Gov spending into their own pocket is the ideal goal no matter how you cut it.
And normally smart people defending all this lunacy!
When the smart folk are on one side of an issue, and you are not, carefully consider the possibility that you got played by those angling for the inverted demographic.
“Come on, folks, a little more calm and less ideology, please.”
“Cramdown is the preferred and perfectly legal path when the social and economic benefits of reorganization are deemed to be more important than the claims of the creditors”
Huh? Want to take the first one back?
Thanks for your efforts and insights Toxicroach.
Disobeying the Master will be a career-ender for Judge Gonzalez…What will he do? His current term is almost up.
The government went shopping for the judge. Unlikely that he will rule against the government.
Some of the products at Chrysler are worth a considerable amount of money. Now if you took Jeep and got rid of the UAW and all those pesky financial obligations to retirees and such it is a very valuable commodity. And the minivan and the Ram pickup would be worth money.
This is just a payback to the UAW.
I can’t imagine wanting to buy a Chrysler product manufacturered in plants managed by committee with committee members Fiat, the UAW, and the federal government. This feels like the plot of The Producers with this Fiatsco as Springtime for Hitler. Maybe this is just political cover to kill Chrysler with Fiat taking the blame.
Regarding the liquidation value of Chrysler, how have parts of companies been shopped around or auctioned off in the past? Do MikeInCanada’s three scenerios for a Jeep sale independent of Chrysler have to wait for the dream team of Fiat, the UAW, and the feds to try to run the organization or can Jeep exit the Fiatsco sooner?
“Come on, folks, a little more calm and less ideology, please.”
“Cramdown is the preferred and perfectly legal path when the social and economic benefits of reorganization are deemed to be more important than the claims of the creditors”
Huh? Want to take the first one back?
Nope. Folks, bankruptcy is in the Constitution. The whole point of BK is to permit businesses and individuals to get permission to not pay their bills! Not only is this permissible, but the founders made a point of putting it in the Constitution.
Put it into a bit of historical context. Back when the Constitution was written, it was common for countries to have debtor’s prisons. If you didn’t pay your bills, it was a criminal act and you went to jail. Similarly, your creditor could own you until your debt was paid, which meant that you could be an indentured servant for years or decades, until you unshackled yourselves from your debt.
The Founders cared about individual freedom, plus they wanted to encourage entrepreneurship. You’ll notice that the Constitution has a couple of things to encourage business risk — patent protection and bankruptcy.
If a company files bankruptcy, it’s basically telling the court: Listen, Judge, I know that I owe these guys money, but the benefits that I bring to America with these jobs, products, GDP growth, etc. are more important than the bills that I owe these guys. Let’s work something out.
It’s up to the party filing BK to prove the merits of that story, which means showing that the new business plan has merit. If it does, then yes, the court can rule in its favor, and tell the creditors to surrender part or all of their claims forever. That can involve recarving some of the priority, because some of those creditors are more important to the reorganized business than others, and the point of the reorganization is to get that new business off the ground. If the business can’t prove it, the plan is rejected and the bits sold off.
That’s the issue being argued here. The company is saying that the BK is beneficial enough that the court should approve it. The creditors are arguing that it isn’t, and that if they’re right, that the priority rules should be followed because cramdowns are for reorganizations, not for liquidations. (No need to humor the unsecureds if the whole thing is being liquidated.)
Ironically, this is what Richard Tilton was arguing for in his columns here — Chapter 11, with government DIP financing. This is now what you’re getting. What’s funny is that some of the posters here just loved this idea until it starting happening, and now you don’t like it.
The government is behaving like a creditor that wants its money back. Any major lender or hedge fund in its position would be doing the very same thing. If anything, you should be proud that your Uncle Sam acts like he grew up on Wall Street, and didn’t just attend law school.
The constitution merely gives bankruptcy jurisdiction to the federal government exclusively. It has nothing to do with the content of that law (the entirety of that law could perfectly well be “pay your damn bills”).
Also, a cramdown is only permissible down to the fair market value of the secured property. The logic being that this is as much as they would get in a liquidation, so there isn’t any “taking” of their property; they are getting everything they are entitled to. There is no social need component. The rest of the claim is treated as unsecured and gets whatever the unsecured creditors get.
Yawn. This is an entirely routine, non-newsworthy Chapter 11. It does not deserve any play by play breathless editorializing and excited comments.
The government is a secured creditor, and I am quite confident that there isn’t enough money to pay them (in other words, us) back.
That’s not true. The government is absolutely not a secured creditor. The loans were not secured with any assets and as of the congressional hearings in December, the opinion of both Democrats and Republicans in Congress was that the law would have to be changed to allow the government to cut in line ahead of senior secured creditors.
So the Constitution gives the President the right to takeover and run a business while paying off the union that voted for him, while stiffing the investors?
Didn’t know that. Where is that in the Constitution?
Or maybe you’re talking about the Zimbabwe constitution?
The government is absolutely not a secured creditor.
That’s just BS, it really is. The loan documents have security agreements, for Christ’s sake. They also have recourse provisions and guarantors. I was kind enough to provide you links, so that you could see that for yourself.
Your byline is on your posts, and you write for this site, so when you make blatant misstatements like this, you harm the credibility of the site.
You need to stop confusing your wishful thinking with the facts of the matter. You may hope that the loans are unsecured. You may prefer that they weren’t secured.
Or you may argue that the value of the security isn’t all that great. (That last point is probably true, as a matter of arithmetic.)
But as a point of fact, the loans are secured, whether or not you like it. If you want the site to be accurate, don’t confuse your goals and dreams with the facts.
toxicroach:
“Also, PCH, a factory is worth something to somebody. It’s entirely (even likely) that Chrysler is worth more parted out than it is as a going concern. Even in this market.”
No. Chrysler is not worth anything, and this is coming from a guy who has purchased their products and has had good experieneces with them, and believes the company has a future if they could get back the kind of motivation and talent they had in the 90’s. They have no value because of the economy. And that’s the conditions under which they would have to be liquidated to pay off the creditors. There’s no there there.
But before you some of you get all self satisfied with yourselve and plaster a smug smile on your faces, know this: GM is not worth anything either. Again because of the economy. Don’t beleive me? Ok let’s look at one of their best cars. Malibu. Let’s liquidate GM and sell the parts. Who wants Malibu? Toyota? No. Honda? No thank you. Ford? Nope. Daimler? Nein. Nissan? No, but we’re broke anyway. See what I mean? Same for Jeep, they’re SUV’s for God’s sake.
Those vehicles have an iffy future at best, especially with the Soft Drink in the White House. And Jeep’s don’t sell that many vehicles. Dodge sells more vehicles and sells alot of higher profit trucks like Jeep. Last month Dodge sold more vehicles than Buick and Pontiac put together. Dodge sold more vehicles the Buick, Pontiac, Hummer, and Saab put together. This fascination with Jeep is not based on market realities, but enthusiasts fantasies. A good brand to be sure, but not worth anything in a liquidation in THIS market.
In a growing market, yes, the parts have value. But in this market, no. Selling pieces of an auto company is harder than selling your house right now, BECAUSE NO ONE (FIGURATIVELY) IS BUYING ANY F’CKING CARS. Until that changes any talk of getting significant money from liquidation is notgonnahappen.com. No one is worth much of anything right now, especially domestic automakers and I include Ford in that because if things stay the way they are for a few more months they are going to run out of money and will be in the same position as GM and Chrysler.
The future could be quite different. Things can’t be bad forever. In the future Chrysler could be profitable, but that will be then and this is NOW. So stop saying Jeep is worth something, or Caddilac is worth something, because right now they are worth nothing, zero, zip, nada. Except for the Chinese because they have not penetrated this market. But they would not pay enough for Chrysler to cover the 2 billion, so it’s a moot point. And then we let another competior into the market where they can make life tougher for everyone but especially Ford and GM, which would be the only two automakers selling in the US who do not have a protected home market. I don’t believe the administration wants to throw the door open to Chinese to give them an easy entry to the North American market and I agree with them. So the Chrysler and GM bankruptcy to come are time machines to allow both companies to get to a point where they will (future tense) be worth something because right now they are not worth anything.
John Horner :
May 4th, 2009 at 9:55 pm
“Absolute Priority is the bedrock of reorganization.” Many published scholars disagree, for example:
Some financial economists give confusing treatment to the subject of violations of the absolute priority rule (APR) in bankruptcy.”
Justice Brandeis in the Radford case ruled that a statute which violated secured creditors’ rights, but which was passed for sound public purposes relating to the Great Depression, could not be saved because “the Fifth Amendment commands that, however great the nation’s need, private property shall not be thus taken even for a wholly public use without just compensation.”
You guys who are rah rahing about the government “acting like any other creditor” don’t get it. The government may not act like any other creditor. Even when it loans money, it can’t act like a bank because the constitution limits its actions. What in a normal hardball business negotiation might be legal, when the government is one of the parties to the negotiation may indeed be unconstitutional. The Chrysler bondholders argue that the government is using its power to effect the transfer of their property to another party and thus runs afoul of the takings clause in the Fifth Amendment.
The government is not just another creditor. The government can take away your liberty. No other creditor can do that. Why do you think that the feminist movement has worked so hard to have the state collect child “support” and alimony? The state has powers simply unavailable to any other creditor. The same founders who instituted the world’s fairest and most productive bankruptcy procedures also were concerned about the government taking people’s property unfairly.
The President’s powers are limited. Just because the constitution doesn’t specifically prohibit the executive branch from taking over and owning private enterprises, doesn’t mean the president may do so. The president can only do what that Constitution provides and what enabling legislation permits and is rule constitutional. When Pres. Bush’s administration insisted on unitary executive powers, Democrats howled about overreaching presidential powers. In Youngstown Sheet & Tube, the Supreme Court ruled that Pres. Truman did not have either the constitutional authority nor statutory power granted by Congress to seize the steel industry. The Chrysler bondholders are arguing that the enabling legislation for the TARP doesn’t provide the President with enough authority to do what his PTFOA is trying to engineer.
I don’t have a problem with employee ownership and don’t really care if the UAW’s VEBA owns equity in an automaker (though there are conflict of interest issues). There are some successful examples of ESOPs, and every small business is employee owned. I do have a problem with the government owning businesses and engineering a deal that puts campaign contributors to the President and his party ahead of more senior creditors. I also have a problem with the government owning businesses. I don’t like it when non-profits compete with businesses (because of the unfairness of having to compete with folks who don’t pay taxes). Having to compete with the government is even more problematic. Note how the US Postal Service has a monopoly on First Class letter delivery – the commercial carriers can only offer “overnight” letter service. Even when the IRS or the SBA seizes businesses, they are supposed to be disposed of promptly, not owned and operated by the gov’t. Or do you want the IRS to operate brothels in Nevada?
This is why we have courts. I see few folks in the middle on this one. You have supporters of the President (who only weeks ago were cheerleading for bankruptcy but now want to keep it out of the courts) who keep insisting that there’s nothing to see here, we should move it along, and pay no attention to the man behind the curtain. On the other side you have people talking about radical changes, a threat to the rule of law, and threats to capital markets, contracts and property rights.
The courts will decide and there is enough money and money at stake on both sides that our adversarial legal system will make sure that both sides get heard. It seems, however, as toxicroach pointed out, that the legal maneuvering by the gov’t to rush this 363 “sale” to Fiat and the UAW is designed to prevent a full hearing of all the merits and demerits of all sides of the Chrysler bankruptcy.
That’s just BS, it really is. The loan documents have security agreements, for Christ’s sake. They also have recourse provisions and guarantors. I was kind enough to provide you links, so that you could see that for yourself.
Please provide those links again. It’s interesting that you claim there are “recourse provisions and guarantors” and “security agreements”, but you don’t cite how the loans are specifically secured by what collateral.
What exactly was left (after the collateral securing the bondholders’ paper) to secure the government loans?
The publicly discussed terms at the time of the gov’t loans were that if Chrysler could not prove viability the loans would have to be paid back. The consensus of both parties in Congress and of the experts who testified at the congressional hearings was that the government could not step in ahead of more senior creditors in the event of a bankruptcy.
When the smart folk are on one side of an issue, and you are not, carefully consider the possibility that you got played by those angling for the inverted demographic.
Eugenics, fascism, communism, Nazism. All of those ideologies were quite fashionable with the smart set at one time or another.
Some of histories most discredited ideas have been the product of smart people. There have also been some people with indisputable genius who have been complete crackpots in other areas. Ford, Shockley, and Wagner come to mind. It’s been estimated that at least 1/3 of Nazi concentration, labor and death camp kommandants held either MD or PhD degrees. Al-Quaeda’s and Hamas’ leaderships are rife with physicians and engineers.
Good is good and smart is smart and they are not the same thing. Smart people can rationalize a lot of bad behavior and convince less smart folks to act likewise.
Please provide those links again.
So you want to put this back onto me?
You are the one affirming a position here. It’s your name attached to the comment. The responsibility is on you to support your position.
If you can’t do that (and I know that you can’t), just admit it. As a point of fact, you’re just wrong, and you do yourself no favors by confusing your wishful thinking with the language of the loan documents.
We could just chuck the concepts of earned property rights, Titles, and Deeds and just have a “For the Greater Good” free-for-all…We could call it the War of the Primitives or Obamanation…Maybe Obamavikism.
agenthex :
When the smart folk are on one side of an issue, and you are not, carefully consider the possibility that you got played by those angling for the inverted demographic.
I don’t know what “angling for the inverted demographic” means. But you’re right, we’ve been played. By Congress and the President.
I cannot see a good reason to expect that the same incompetent people are even capable of fixing what they broke.
But the worse thing is all the people who are defending them.
Thanks Ronnie Schreiber, I do think threatening IRS audits and SEC investigations is more the USA’s style. They will probably be put and a Department of Homeland Security’s “no fly list” to disrupt their travel. Branding your political enemies as “terrorist” is the oldest governmental play in the book. A black South African who resisted apartheid was definitely referred to as a terrorist by the SA government. It’s ironic that bond holders are now to be considered “revolutionary terrorist” because they are standing up for the rule of law. The US Gov is very likely to be using the NSA to gather intel on their legal strategies, tapping their phones, trying to hack their computers, etc…The general playbook for that hacking involves not just gathering information but also planting some child porn images and bombmaking instructions on their computers. Then they pull a FBI raid and bring some stolen automatic weapons to plant at the scene.
Please provide those links again.
So you want to put this back onto me?
No, I just want to check out the links and see what exactly secures the gov’t loans, if anything.
You said you provided links, so I asked for them. If they say what you claim they say, I don’t see why you should object to providing them again. Or, at least point me to your comment that posted those links.
I’ve been trying to keep it respectful here and you’re the one saying that I’m not arguing in good faith. Meanwhile you won’t say what secures the loans and keep dancing around instead of providing the links that you said you posted.
Ronnie,
Arguing with PCH101 is useless. He changes the perception of things and puts the onus on you to prove him wrong with facts that no one could ever substantiate or prove without scripture or violating confidentiality agreements. He even goes so far as to assume you don’t know what you’re talking about even if you’re a subject matter expert.
For example, when discussing hybrid vehicles in 2008 he basically said “I my guess is the hybrid price premium covers the incremental variable cost.” He gives himself the privilege of making “guesses” which are always 100% right.
Others then posted details showing that the Prius at the time probably had a variable margin around 5%. However, a simple glance at any financial statement for a volume automaker shows variable margin around 20% to 30%. Any first hand knowledge of the volume auto industry will tell you that variable margin is far greater than 5% for a normal car. Any consultant or engineer who has done a tear-down of a Prius will tell you the incremental variable cost necessary to pull off the hybrid vehicle is far more than the price increase on top of a regular petrol engine vehicle of similar size, feature-content, and manufacturing complexity.
But instead of acknowledging that the Prius has a variable margin that is far less than conventional cars, he jumps in with some broad generalization like “so you’re saying Toyota doesn’t make money and is dumb.” Then he proceeds to demand some proof that the variable cost increase on the Prius is higher than the pricing premium. And he demands proof of Toyota’s capital spending on a project-detail basis.
Ronnie Schreiber writes:
The government may not act like any other creditor. Even when it loans money, it can’t act like a bank because the constitution limits its actions. What in a normal hardball business negotiation might be legal, when the government is one of the parties to the negotiation may indeed be unconstitutional.
This statement appears to be basically untrue, as a matter of law.
Please furnish some support for it (e.g. citations to cases, scholarly legal writings, etc.) if you want me, or anyone else with a sound legal education, to begin to accept it.
After all, your entire case basically boils down to it. If the government can do things that any private creditor can do, the Obama Administration has probably not crossed and lines yet. If the government cannot, and must fight with one hand tied behind its back (as you claim), then it may well have crossed a bunch of lines already.
Claims that the government is threatening to send the SEC, IRS and whatever other investigatory agency after the bondholders are disturbing, but non-unique. They should get media attention in true, and ignored if not. The government interacts with plenty of claimants and creditors all the time, and the possibility that the government might misuse its other powers when dealing with such people is a pervasive and longstanding issue — hardly unique to the Chrysler case.
He changes the perception of things and puts the onus on you to prove him wrong with facts that no one could ever substantiate
Forgive me, but I like to see proof of statements when they contradict all of the other information that is available.
In this case, the government loan is a “Secured Term Loan Facility” with recourse and guaranties. There is no way that one can look at this and refer to the loans as being “unsecured.”
http://www.treas.gov/press/releases/reports/chrysler%20final%20term%20&%20appendix.pdf
Now, I think that it’s fair to speculate whether the feds could ever expect to actually collect the money that we’re owed, given the lack of asset value here — I’ve been referring to them sarcastically as “grants” for awhile now — but in terms of legal standing, they are loans and they are secured. Misrepresenting the government’s legal standing in the case because of one’s loathing of the president may be fun, but it isn’t factual.
NBK,
Ronnie may have overstated his case, but it is undeniable that when the government loans money to private enterprises, it has crossed an ethical line. Part of the government’s mandate is to act as an umpire. You can’t be the umpire and the coach and the batter all at once. You just can’t. If you take sides in a disagreement outside of a court, how is that fair? Legal or not, it’s just wrong.
They take my taxes, so they should not take those taxes and compete with me in the market place, which is precisely what they are doing when they lend money to Chrysler and GM. Now, that doesn’t absolutely mean they should NEVER do it, but it does mean that great restraint should be used, and that is certainly not what is happening here.
PCH,
As I said before, secured has an english meaning, and a legal meaning, and the two aren’t quite the same. No use in arguing about it. I will say in your defense that I don’t find that you usually fight unfairly though you are as hard headed as I am, but I don’t think you realize it.
:)
Landcrusher writes:
[W]hen the government loans money to private enterprises, it has crossed an ethical line. Part of the government’s mandate is to act as an umpire. You can’t be the umpire and the coach and the batter all at once. You just can’t. If you take sides in a disagreement outside of a court, how is that fair? Legal or not, it’s just wrong.
This is a rather strong libertarian view of the role of government, and from your previous posts, Landcrusher, I know that this really is what you think. But it’s not a very tenable position.
The first problem is that this view is not really shared by most Americans, I would guess. The government gets into all manner of lending businesses at a matter of course — student loans and SBA loans are just the first two categories that come to mind. And when you default, it gets to be creditor, lawgiver on the subject of debts and bankruptcies, and judge all at the same time. Millions of people have borrowed billions of dollars, right from the Feds (or sometimes through intermediaries), in programs that compete with the lending business of traditional banks and finance companies. That’s just how our countrymen prefer to do things, and it’s considered a commonplace and acceptable role for government, notwithstanding the seeming conflicts of interest.
The second problem, which is more fundamental, is that the government, by necessity, is often on multiple sides of an issue, even if it didn’t lend a cent of money to get there. This happens all the time, and it’s something we’ve learned to live with. It’s not a sufficient reason to oppose a particular government program.
Suppose, for example, the Air Force accidentally bombs your house — a training accident. You, quite naturally, want them to pay for rebuilding. So you file a claim, and end up in court under the provisions of the Federal Tort Claims Act. The Air Force is the defendant. The Department of Justice’s Aviation and Admiralty litigation office is defense counsel (firsthand experience there). The judge is a federal employee. Batter, umpire, coach, and all the rest, all in one. And you know what? You’ll probably manage to get a fair hearing. Even more familiar to viewers of prime-time TV: Criminal law. There, the government hires the police, retains the prosecutors, and pays the judge (and the jury stipends, too, for that matter). Again, the government has agents in multiple, sometimes conflicting roles in the same case, all affecting the liberty of a citizen.
Similarly, having the Treasury be the lender and a bankruptcy judge of the Southern District of NY preside over the case is not, to my eye, an impossible situation. You may be right in that it is an undesireable one, for any number of reasons. But having different government organs sit on several sides of an issue is not immediately fatal, in the way you suggest.
Now you overstate my case! I never said anything about fatal.
At any rate, you are helping me explain my frustration. Take your example, and interject the President taking sides. Claiming the plaintiffs are taking advantage to get rich, or blaming the whole thing on the pilot, or manufacturer.
This is a lot bigger than the SBA.
secured has an english meaning, and a legal meaning
You have posters on this site who have been misusing the legal definition to misstate the legal facts. That is what I am correcting.
The government loans are secured. Accordingly, the government is not queue jumping when they assert their rights as secured creditors. In the case of GM, the government is actually ahead of the GM bondholders, because GM bonds are not secured. This issue of security has been misrepresented by more than one person posting here, and it is appropriate to correct them.
There is a second, more pragmatic question as to whether the government’s priority and security are actually worth a damn. That is a different matter, and not what I’m critiquing — I would tend to agree with those who have low hopes of getting our money back.
Landcrusher: I agree that it is unseemly for the President to get up on national TV and take sides, as he has done. I think I’ve said that before somewhere. But that is pretty much all I’ve seen, so far, that qualifies as a real misdeed.
I do not agree that it “crosses an ethical line” for the government to loan money to people or businesses, or that there is a major problem with seeing the government on several sides of a single issue or case. I also don’t have a problem with lawyers aligned with the government’s side making the usual brinksmanship moves in a high-stakes bankruptcy proceeding. To the extent those lawyers have done fink moves (requesting an absurdly accelerated hearing schedule, for example), the judge can and should slap them down, and even impose sanctions, if warranted. And, based on recent reports, he seems to have come up with a somewhat longer and more reasonable auction timeline, and not foreclosed on the judicial review of the auction results. I’m fairly satisfied with what I’ve heard so far.
We can disagree about the ethics, but don’t get me started onthe bar.
:)