The political momentum and legal logic of the Chrysler case argues for going forward.
Judge Arthur Gonzales sitting in the U.S. Bankruptcy Court for the Southern District of New York will determine starting tomorrow morning if the sale of virtually all of the good assets of bankrupt Chrysler LLC to Fiat SpA will proceed. If he doesn’t approve, the company will liquidate, taking with it any hope of preserving U.S. manufacturing jobs at the once proud Michigan automaker.
Chrysler’s largest creditors, 98% of them, support the plan. The United Auto Workers Union and the Canadian Auto Workers Union have made once unthinkable concessions to support the plan. And the judge, thus far, has moved the case along the lines that members the U.S. Treasury’s Auto Task Force outlined in a background briefing to media on the morning that President Obama made the restructuring announcement and Chrysler LLC filed for court protection. Pundits who said it couldn’t be done swiftly have, thus far, been proven wrong.
Political momentum and legal logic for Chrysler and GM
With Treasury and President Obama supporting the latest version of a restructuring plan that Chrysler has put together, it is my bet that a new Chrysler Group will emerge from court protection soon. Then the really hard work begins. It is by no means certain that Chrysler and its Dodge and Jeep brands can generate enough sales to remain viable in the toughest global car market since the Great Depression. And the Fiat small cars and engines that are its $10 billion contribution to the plan are years away from production reality.
Some creditors and dealers remain the only significant objectors to the Chrysler sale. However, the political momentum and legal logic of the Chrysler case argues for going forward. Yes, it is a bet, and yes we might just be prolonging the agony, but dissolution right now appears to be a worse choice.
The same political push and legal logic are also directly applicable to a pending GM bankruptcy filing, which could come at any time. GM’s debt-for-equity swap for $27 billion worth of bonds expires this midnight, and its bondholders taking the same “no-way” approach that Chrysler’s did.
Simply put, a “quick rinse bankruptcy” backed by funding from U.S. taxpayers via the Treasury is the only way to give either company a chance – and it is just a chance – to survive after decades of failed decisions, non-competitive product lines, and now the ongoing Great Recession teetering on the edge of depression that was caused by the speculative abuses and fraud of unregulated U.S. finance capitalism.
A Chrysler rebuttal to the Indiana State Treasurer who is protesting tomorrow’s sale to Fiat — and it is clearly a legal rebuttal prepared for the court — is an example of the relentless logic for bankruptcy and a quick emergence. It is the only way at this point to preserve anything.
Indiana is owed $17 million from investments by three pension plans in Chrysler and it wants all of its money even though this will prevent the Fiat plan from going forward. The cumulative loss on these investments under the proposed transaction would be approximately $2 million, Chrysler argues.
Indiana wanted the sale blocked so it could have more time to prepare its arguments. The judge denied the stay and said the hearing will proceed as planned tomorrow, which is just the latest setback for those arguing against a quick emergence from bankruptcy.
Chrysler’s liquidation analysis shows first lien lenders would get between zero and 18 cents on the dollar in liquidation, versus 29 cents in the proposed reorganization. And you could argue, as Chrysler does, that the 18 cents is on the high side if the company does not emerge quickly from bankruptcy. What, if anything, is saleable to another auto company? Small volume Viper – more a hobby than business might attract a small bid, but high volume, high loss making trucks, chances appear to be slim. Bankruptcy means the loss of more than 4,000 Chrysler jobs and 9,000 retiree pensions in Indiana alone.
Historically, Chrysler operations in Indiana pay employees more than $150 million annually, which means, $20 million in state taxes are paid by Chrysler employees. About $3 billion of materials are purchased from more than 200 Indiana-based suppliers, and approximately 3,750 people are employed at 75 Chrysler dealerships. So you decide, liquidate or place the reorganization wager? My bet is placed.
Prolonged bankruptcy has dire effects on U.S. unemployment
Not coincidentally, a study was released late today that said unsuccessful auto bankruptcies would reduce employment in the United States by more than 1.3 million jobs by December 2009, according to a new analysis, released by the Center for Automotive Research (CAR) in Ann Arbor, Michigan. CAR, which derives much of its income from auto companies, is hardly disinterested in this fight, but its estimate is for the first year of prolonged court proceedings alone. A 90% reduction in the operations of the Chrysler and GM could result.
“Our model estimates that a successful bankruptcy process for both GM and Chrysler would have a major impact on the U.S. economy in terms of the maintenance of wages, social security receipts, personal income taxes paid, and a reduction in the need for transfer payments,” said Sean McAlinden, CAR chief economist and the study’s leader.
In the case of unsuccessful bankruptcies where the companies do not re-emerge, the government stands to lose revenue on the level of $37 billion in the first two years alone, says CAR.
Who pays?
The only real uncertainty now is who ultimately pays for the auto bailouts, what forms they take and how much it costs?
Well, if you pay taxes you will most assuredly pay to an as yet unknown degree. Previous estimates of government bailouts in other industries should give you pause – the ultimate costs were sometimes orders of magnitude higher than what politicians initially said. This is clearly the case in the ever escalating bailout of the U.S. financial industry that started under President Bush, which will run in the trillions of dollars.
There are other losers, too: Certainly, auto workers, both blue and white collar ones who still have jobs will face the diminished wage and benefits. Bigger losers are the hundreds of thousands who are out of work, with grim prospects of securing equivalent compensation in any field, if they return to work ever again. Retirees at a minimum will lose benefits, too. Terminated dealers lose as well. And bondholders will lose much of their investment for the foreseeable future, perhaps all of it, if the companies do not stage miraculous comebacks.