Chrysler bankruptcy taken to Supreme Court by unhappy shareholders
As the movie Hoosiers amply demonstrated, Indiana natives don't quit. That's also true for three Indiana state pension funds who have fought Chrysler's bankruptcy all the way to the federal appeals court in New York and, having lost their case there, are filing papers with the Supreme Court today.
The central issue is that the funds feel Chrysler's post-bankruptcy remuneration plans have unfairly cost the funds a great deal of value by putting unsecured debtors such as the UAW ahead of the funds' claims. They are fighting the bankruptcy by alleging that the government's TARP disbursal to Chrysler was unconstitutional and that the subsequent events amount to a covert reorganization, not Chapter 11.
Yet when asked whether a Chrysler liquidation would be better for the pension funds than the Fiat deal, the funds' lawyer replied that he was looking for more remuneration for secured debtors. The filing will go to Justice Ginsburg who will decide whether to accept it at all, to handle it alone or to refer to the full court for hearing. Chrysler has until June 15 to emerge free and clear, else Fiat can walk away. And if that happens, Chrysler might owe Fiat $35 million -- which is just $7 million short of what the three Indiana funds together have invested in the Pentastar. Thanks for the tip, MM!
[Source: Automotive News, sub. req'd]
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Reader Comments (Page 1 of 2)
gfrc2002 8:48AM (6/08/2009)
In the linked story, it was the judge that made the Studebaker comment, not the lawyer.
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Jonathon Ramsey 10:29AM (6/08/2009)
My bad -- and corrected. Thanks.
Kumar 8:51AM (6/08/2009)
I've been reading conflicting reports on this. I read somewhere local (live in Indianapolis) that the state bought these bonds at a discount during the bad times of last year (something like 42.5 cents on the dollar), banking on a 'traditional' bankruptcy. And this traditional bankruptcy apparently rewards such shady investments by paying back more than you paid in, so this tool that invested the 43 million had much more than a 43 million dollar payback on his mind.
I could be wrong on this, but if it's anywhere close to true, then I'm all for this change in bankruptcy funds distributions.
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mapoftazifosho 8:56AM (6/08/2009)
If this is true. I hope they get screwed.
The Other Bob 9:04AM (6/08/2009)
What you describe is also what some of the so-called hold out bondholders did when they recently invested in Chrysler. They were hoping for Chaper 7 liquidation.
Indiana's Treasurer should be canned.
HCL3 9:27AM (6/08/2009)
Yeah... and allow the feds to run roughshod over the bankruptcy code and years of bankruptcy law precedent for no other reason than to protect the UAW from facing the consequences of their behavior over the last 70+ years.
Chrysler should be in chapter 7. Fiat or whoever else could buy up the pieces they want and the bondholders get paid 1st.
Sea Urchin 9:54AM (6/08/2009)
Wow, you are AMAZING.
If what you call is true it is simply another way to "short" the stock, instead of making money when stock goes up, you make money when stock loses value.
Your comment is borderline ridiculous, just because you dislike how people invest money is not a reason to abandon a rule that in some form was on the books for THOUSANDS of years. When someone takes a LOAN they fully understand that should they default some of their assets will go directly to whoever gave you the loan. Lo and Behold, Jesus himself visits the earth and decides to abandon our rules and ignore the law because he feels like he has a mandate to govern.
If bondholders will be screwed every bond from now on will require some sort of a Obama premium, just in case the government decided to ignore the law and do as it wishes.
Len_A 12:54PM (6/08/2009)
Sea Urchin, you need to calm the heck down. According to the testimony of Indiana's treasurer last week, in the federal appellate court, that is EXACTLY what they did. Indiana DID NOT loan Chrysler a damn thing. Indiana bought the existing debt at somewhere around 42.5 cents on the dollar, last August, 2008, when it was already known that Chrysler was in trouble, and the rumors were circulating that they were in merger talks with GM. Indiana's two pension funds and one construction fund were betting on exactly that - shorting the bonds and making money on a conventional Chapter 7 liquidation. The administration was dead-on when they called them "speculators" and that's what they are - speculators, not investors. And to further the outrage, this is being done with someone's pension money?!?!? If it were my pension doing that, I wouldn't hesitate to put my boot up someone's arse. Talk about Indiana violating their fiduciary obligations - one of them in managing pension funds is to NOT speculate.
Sea Urchin 1:08PM (6/08/2009)
Len, WHAT? They speculated, but so what? They speculated and but they did so without knowing that government would break the rules.
Len_A 2:48PM (6/08/2009)
Sea Urchin, that's right - they're speculators, not lenders. And on top of that, we're talking about $42 million out of $7 to $8 billion of these bonds. We're going to let a minority of the bondholders force a liquidation? I think not.
As far as the rules, that's subject to the courts interpretation as the final arbiter. I guess we'll see what we'll see. As far as the bankruptcy rules, the DIP financing source has always called the tune, but in the past, the DIP financing source was often a group of the biggest debt holders.
harlanx6 9:06AM (6/08/2009)
The question is the legality of the whole thing, and it is not a slam dunk. Is this whole transaction conforming to existing law, or is it being allowed to run roughshod over over the law by the Feds?
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lloydruby 11:14PM (6/12/2009)
Personally, I hope this case does go to the Supreme Court because the issues at stake are pretty important.
The bond holders in this instance are "secured" bondholders, i.e., the bonds they bought were backed by collateral from the Company. In return for greater security relative to other "stakeholders" in the firm, like shareholders (these guys are not shareholders, by the way) who accept greater risk in return for greater control, they accept a lower return. When these guys bought the bonds is irrelevant (and given that these are state pension funds, it's pretty unlikely that they bought these things in order to make a fast buck). The government pretty much ran right over their legal rights, and if the government is willing to do this now, what does it means for bondholders in other companies? It could make it much more difficult for other companies to raise capital - in the auto industry, in particular.
Finally, on the Fiat deal, while folks keep reporting it as a "sale," that's not really what's happening. Fiat isn't putting a dime into Chrysler. They are getting a stake in the Company in return for the promise to provide cars to Chrysler, and build at least one here in the States. Any capital infusion that results will be tiny. There were much better ways of handling this than basically giving Chrysler to Fiat.
The underlying argument for the Fiat deal is that Chrysler got into trouble because they didn't have the cars Americans' "wanted," i.e., smaller, fuel-efficient, vehicles - which is bad argument on two accounts. First, that Americans weren't buying more Chryslers because they wanted smaller cars, and second, that Fiat would effectively address this problem. The bottom line is that Chrysler was in trouble because they couldn't produce a quality product at a cost effective basis. Teaming them up with Fiat is probably the opposite of what you would want to do if you wanted to solve this problem.
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dougjp 9:42AM (6/08/2009)
I think the Pension Fund is right. Nobody is "above the law" is the well worn phrase. So why do Ohobo and his Zappies figure they can get away with it?
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Redeemed 9:49AM (6/08/2009)
What a mess.
I do think the bondholders are getting the short end of the stick and should fight. There is a lot of folks with retirement money tied up via those bonds.
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BoxerFanatic 10:26AM (6/08/2009)
Exactly.
Regardless of the motive (immaterial) for buying Chrysler bonds... BONDS ARE SUPPOSED TO BE BONDS.
This wasn't unsecured stock equity. This was bonds, and it was part of the state's retirement fund structure, and usually those can only invest in Bonds of a certain rating or above. AA, or AAA... And that is factored in that even if the company goes bankrupt, the sale of company assets pays the return. And pays the bond FIRST in line, not last.
There is more than 150 years of contract law precedent that puts secured bondholders at the front of the line. That is why bonds are safe, and that is why bonds don't yield like stocks. These were not supposed to be high-yield (junk) bonds.
If the government can just flout the terms of the bond contract, then no contract is safe.
Expect a bond market crash, if the government's actions are not rectified. Nobody will trust a piece of paper anymore. Nor should they, in this economic climate.
Sea Urchin 10:50AM (6/08/2009)
Boxer it is amazing how certain people flat out ignore the law.
Kumar 10:53AM (6/08/2009)
While this is a major departure from American bankruptcy law and precedent, don't feel too badly for Indiana.
In a weekend article, it was revealed that 2 of the 3 Indiana funds hit in this debacle get a huge yearly payout from the lottery. They'll have that money back within the year thanks to all the people paying the fool's tax.
http://www.indystar.com/article/20090607/LOCAL/906070386/Wealthy+benefit+most+from+lottery+profits
"The distribution of Hoosier Lottery profits always includes $30 million annual payments each to the teachers' retirement fund and the Police Officers and Firefighters' Pension and Disability Fund."
pmalik 10:59AM (6/08/2009)
+million on boxerfanatic's comments.
Regardless of when and how you bought the bonds, you are LEGALLY ENTITLED to the collateral assets if the company goes the bankruptcy. UAW and all the other people do NOT have an inherent claim on Chrysler's assets, yet somehow they managed to cut the line in front of the secured debt holders.
If Obama does end up screwing the secured debt holders with this BS populist talk ("everyone is making sacrifices"), expect the cost of capital skyrocketing for US companies. You're de facto making secured debt into secured unless government decides that someone goes ahead of you debt, which means you will need to compensate investors more for each dollar issued.
Evan 12:23PM (6/08/2009)
Right. It seems like the government is changing the rules as they go along, because following the rules would force Chrysler in liquidation. Boo Hoo! Other companies have to follow the rules and face liquidation, I don't think the government should bend the rules for one or two companies.
Len_A 12:58PM (6/08/2009)
BoxerFanatic, bonds purchased at 42.5 cents on the dollar, and this is according to Indiana's treasury officials own testimony last week), are NOT AA or AAA rated bonds. And such, Indiana's pension officials violated their fiduciary duties in managing a pension fund, and Indiana's voters can state taxpayers can deal with the ramifications. Speculators, bondholders or not, shouldn't be allowed to liquidate a company for a payoff. According to what I read in the Wall Street Journal, that was exactly Indiana's game plan when they bought these bonds last August, 2008. If Chrysler makes it, big payoff. If they don't, push them into Chapter 11 and get paid off anyway. Not kosher, in any way, shape, or form.