The Chrysler Fallout: Obama Takes Sides
by Francis Cianfrocca
Chrysler LLC’s bankruptcy filing represents something very new and different for the American economy. We don’t have all the answers, but that’s partly because we don’t even have all the questions. There’s a tremendous number of moving parts here, and no one is being very clear about it. I have at least two very big questions, one of which is public and the other isn’t, and one major concern about what Chrysler’s situation suggests could happen to GM and the largest banks.
The public question relates to Fiat. Fiat CEO Sergio Marchionne, focused as he is on overtaking Volkswagen, has been very emphatic that he will put no cash into Chrysler in return for Fiat’s stake, which starts at 20% and could go as high as 51% by 2016. Fiat is giving nothing but access to small-car technology. That can only mean that the government intends to dictate Chrysler’s production mix. That in turn means that the government has chosen to enter the auto business in a forthright and unprecedented way.
The private question relates to the current owner of Chrysler, which is Cerberus Capital Management, one of the most powerful, most wealthy, and most feared private equity groups in the world. They easily have access to billions of dollars they could invest in Chrysler. As of a month ago, they had gotten more than $5.5 billion from the feds. The fact that they simply don’t want to invest their own money tells you that Chrysler as a company isn’t worth investing in, and ipso facto the taxpayers are flushing money down the toilet.
But I want to know much more than that. I want to know exactly what consideration will be paid to Cerberus in return for the common stock that will be ceded to Fiat, to the government, and to the UAW. I don’t think they’re cutting losses so much as turning them into gains. The question becomes: are we just bailing out a bunch of politically-connected billionaires? Whenever you get a chance, ask anyone who will listen: Why has President Obama not told us what he plans to give Cerberus in exchange for Chrysler?
I suspect that the objective of this Chapter 11 filing (which has to be an odd one when it is announced by the President of the United States as opposed to Cerberus’s Nardelli) is to give a bankruptcy judge the opportunity to tell all of Chrysler’s unsecured creditors, including debtholders and trade creditors, to go to hell. Among much else, I want to know if the holders of unsecured debt are, first and foremost, the bankers who provided the leverage for Cerberus to purchase Chrysler from Daimler-Benz in the first place.
If so, then how many of those banks are TARP recipients, and therefore in no position whatsoever to tell the US President that they don’t like the deal he’s offered them? And then there about 40 hedge funds who are said to own much of the outstanding debt. Are they principal lenders to Cerberus and/or to Chrysler? Or are they vultures who purchased Chrysler debt from banks at a heavy discount?
In any case, it’s now clear that Obama has two objectives in mind. First, he doesn’t want to see massive layoffs at Chrysler and its network of suppliers and dealers. That’s just basic political cowardice and very easy to understand. But second, he’s seeing an opportunity to change the auto industry in his own image and likeness. And we really need to be asking whether that should be the job of the US President. Nothing could be more important, because this is a fundamental expansion of the scope of government that no one seems prepared to challenge. Remember, Chrysler is small fry: what does this say about the way GM and the largest banks are going to go?
This leads us to another disturbing aspect of this situation, and here we get to my concerns. Obama’s public remarks in announcing the bankruptcy included a most remarkable statement in regard to those hedge funds: “I don’t stand with them.” Please excuse me if you think this is overheated, but if I’m one of those hedge funds, I’m thinking that Darth Vader just declared war on me. And Thomas Lauria’s story over the weekend bears that out:
A leading bankruptcy attorney representing hedge funds and money managers told ABC News Saturday that Steve Rattner, the leader of the Obama administration’s Auto Industry Task Force, threatened one of the firms, an investment bank, that if it continued to oppose the administration’s Chrysler bankruptcy plan, the White House would use the White House press corps to destroy its reputation…
Thomas Lauria, Global Practice Head of the Financial Restructuring and Insolvency Group at White & Case, told ABC News that Rattner suggested to an official of the boutique investment bank Perella Weinberg Partners that officials of the Obama White House would embarrass the firm for opposing the Obama administration plan, which President Obama announced Thursday, and which requires creditors to accept roughly 29 cents on the dollar for an estimated $6.8 billion owed by Chrysler. Lauria first told the story, without naming Rattner, to Frank Beckmann on Detroit’s WJR-AM radio.
Perella Weinberg Partners, Lauria said, “was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the threat that the full force of the White House press corps would destroy its reputation if it continued to fight. That’s how hard it is to stand on this side of the fence.”
There’s no way to speak directly to the accusation that Rattner threatened Perella Weinberg to use the White House press corps to destroy their reputation. But taken at face value, Lauria’s story makes all the sense in the world. When the President of the United States, who happens to embody the most powerful brand in the world, directly calls you out as a bad-faith actor in any situation, you don’t have any leverage.
In fact, in the initial Chrysler bankruptcy court hearings in New York on Friday, none of the hedge funds that the President threatened lifted a finger to object to the settlement terms that are being discussed. You can’t fight City Hall, and it’s senseless to try. It was more than enough for Obama to say the things he said in his speech on Wednesday. There’s no real need to feed tendentious lies to a sedulously credulous White House press corps.
The real import of the story, of course, is that President Obama is picking sides. Bankruptcy proceedings are adversarial, and the goal is for an impartial judge or trustee to balance the competing claims in light of the rule of law, the existing contracts, and the ultimate good of all the parties.
Obama has decided a priori, however, that the interests of the United Auto Workers come first. Forget the fact that many of the people who now own Chrysler debt are secured creditors, and thus entitled by centuries of precedent to a preferred position in the disposition of Chrysler’s assets, ahead of the government (which lent unsecured TARP funds) and the UAW (to whose health-care fund Chrysler is obligated to pay cash).
What appears to have happened, according to published reports, is that holders of about $6 billion in Chrysler debt were offered $2 billion, and then $2.25 billion. When they asked for more, Obama got mad and broke off the negotiation.
Imagine telling your bank that you’ve decided to pay off your mortgage in full, but you’re only going to give them 35 cents on the dollar, take it or leave it. Then when they protest, you lose patience, walk out of the room, and go on national television to say that your bank is a bad actor, they’ve exhausted your patience, and now they’ll have to settle for a big fat zero. And by the way, maybe the White House press corps will start spreading nasty rumors about them.
That analogy in no way exaggerates the situation that Chrysler’s debtholders find themselves in. It’s very, very hard to escape the conclusion that the President of the United States has decided to declare war on a group of people who have lent their own money in pursuit of an honest return, and are guilty of nothing more looking out for their own interests.
As it seldom has before, the US government under Barack Obama is directly superseding private contracts, ex post facto. They can change the rules on anyone, anytime, for reasons they only have to explain through a cowed and uninquisitive press.
The next time you have money to invest, give that some very careful thought.
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