So far I have stayed away from the Chrysler debate, largely because I’m pretty sure the company ceased operating when Daimler bought it in the least equal merger of equals since England and Scotland tied up in 1707. Like its predecessor, DaimlerChrysler created an army of exiles from the target and ended with the realization by the acquiring entity that in the name of global dominance it picked up a rather expensive and quarrelsome province it would as soon be rid of. And Cerberus did about as well as Bonnie Prince Charlie.
Recently, though, Chrysler has gone from being a small dress rehearsal for GM to a test case of the Obama Administration’s financial mettle.
Larry Summers famously said the government had to stay away from the AIG bonuses because we are a nation of laws and a contract is a contract. That didn’t work out so well. So the Administration decided to change course and dictate an outcome for Chrysler that it felt more politically defensible.
The government is putting up the cash to keep Chrysler running, so even though its preferred outcome is an asinine merger with FIAT, well, putting up the money gives some control over what happens. But putting up DIP financing is not supposed to allow one party to short-circuit the bankruptcy process, and the Obama Administration has, as it were, an inconvenient fact pattern:
- Chrysler’s senior secured lenders have priority in a bankruptcy proceeding over the United Auto Workers.
- The Obama Administration does not want to hurt the interests of the UAW.
- The Obama Administration does not want to make its subsidies for the UAW explicit.
See, the Administration could let Chrysler liquidate, buy up the assets, and recombine them with FIAT or Magna or anyone else to create whatever car company it wishes. But this would destroy the UAW retiree health care trust (the VEBA), and the Administration is not confident that there would be any political will to simply give the UAW retirees that amount of free equity in a new company. So it needs the senior secured to voluntarily get out of the way and let the UAW claim jump the senior secured claim.
Voluntary is a curious word. Many of the senior secured lenders, including lead arranger JPMorgan, are TARP recipients. They can hardly be considered disinterested third parties, and not surprisingly, they bent fairly quickly to the Administration’s will. That left the hedge funds, and bringing them in line with the Administration fell to auto czar Steve Rattner. And Steve may have overplayed his hand a bit. According to Finem Respice, one call went like this:
Who the fuck do you think you’re dealing with? We’ll have the IRS audit your fund. Every one of your employees. Your investors. Then we will have the Securities and Exchange Commission rip through your books looking for anything and everything and nothing we find to destroy you with.
Steve, Steve, Steve. Not only would any direct instruction to the IRS need to be specifically requested by the President in a signed letter to Congress (26 USC 6103(g)), Cabinet heads and other executive branch personnel are specifically barred from making any inquiries of the IRS.
SEC. 7217. PROHIBITION ON EXECUTIVE BRANCH INFLUENCE OVER TAXPAYER AUDITS AND OTHER INVESTIGATIONS.
`(a) PROHIBITION- It shall be unlawful for any applicable person to request, directly or indirectly, any officer or employee of the Internal Revenue Service to conduct or terminate an audit or other investigation of any particular taxpayer with respect to the tax liability of such taxpayer.
And that includes you, Steve. Do you really think that someone else in the Administration is going to take the fall for you here?
I know, it’s an unsourced claim on a website. Well, what about Tom Lauria stating on the record that Steve threatened Perella Weinberg (how they were holding out at all when they advise the FDIC is beyond me) with having the White House Press Corps embarrass them?
Even more bizarrely, just as Obama was going on TV to blame hedge funds for being greedy and Rattner was doing his best Michael Corleone, the FDIC says this:
The Federal Deposit Insurance Corp. may offer investors financing to buy distressed U.S. bank assets without requiring them to share an equity stake with the Treasury, people familiar with the matter said…Treasury capital probably won’t be applied to the FDIC’s pilot program to buy as much as $1 billion of so-called legacy loans that is planned for June.
The proposal reflects officials’ efforts to make the program more attractive to hedge funds and other investors fearing government attempts to impose limits on their pay. Regulators are hoping the initiative will bolster lenders’ capital levels after stress tests to gauge their health are completed next week.
This is a debate, in the end, about a tiny amount of money; the senior secured asked for $2.5bn, the Treasury offered $2.25bn. If, as claimed by the White House, 70% of the senior secured tendered on the Treasury’s terms, the squeeze-out premium we are talking about is on the order of $50-75mm, depending on the size of the remaining holders. They’re going to regret this last-minute tantrum, just as they regret the AIG bonus debacle.