Chrysler: A Discouraging Follow-Up

In our story below about Chrysler's debt and bankruptcy, we related that some lenders held back from signing onto a proposal to settle the outstanding debts for substantially less than their face value. We explained that they were disturbed by the dilution in their supposedly "secured credit" in this plan, even as a union organization was being promised a proportionately larger share in whatever proceeds there will be when Chrysler's assets are sold. In withholding their approval, these lenders took considerable heat from Washington policymakers, from talking heads and others.

As the days passed following the bankruptcy filing on April 30, these lenders began to back away from their backing away. In the end, by this past Friday, May 8, only three small money managers remained, and they too gave in to the proposal. As their numbers dwindled and the first bankruptcy court rulings started to come, it became apparent that they would not be able to increase the value of their returns. The prudent course became to stop fighting the plan, to stop throwing good legal fees after an evidently hopeless cause. So now, the reorganization will go through as planned and the company will be sold, in all probability to Fiat, the Italian automaker. Production at Chrysler plants, which has been suspended, will be able to resume and work will start toward a new small, high-gas-mileage car of Fiat design.

We want to reiterate our sentiment here in favor of those hold-out lenders. Assuming we can believe their public statements of the last 10 days, we see that they are not mean-spirited and greedy, out to cheat others or only in this for whatever bucks they can grab from everybody else. Back in 2007 and through the middle of last year, these firms made what markets there were in Chrysler's "distressed debt". They priced their participation in the company's borrowing on the basis of the words in the security agreements supposedly backing the bonds. But these terms have been abrogated. These investment funds, which took no taxpayer bailout, are themselves being cheated. Possibly everyone will interpret this event as a "special case", that people should have known that Chrysler would go down the tubes and anybody should be glad to get any of their money back. At the same time, these very factors were presumably at play in the way the dissenting firms' valued their original investments.

One of the goals of Ways of the World is to try to demystify Wall Street and business behavior. That's a tall order, especially at times like this, and it's hard to give this particular situation a realistic appraisal without resorting to harsh criticism of several parties here, including some very popular and highly placed political leaders. The dissolution of the group of dissenting lenders means that the principle of secured lending will not be hashed out in law courts at this time. This is unfortunate. Lack of transparency and complexity have already been big problems in the current financial meltdown, and at the least, we are missing an opportunity to get some clarity. The result is likely to be still more complexity – and higher borrowing costs – in the future as lenders try harder to ensure that "security" means something in the final resolution of financial transactions that go awry, that is, when the security itself actually matters.