Sandy Leeds, CFA is a Senior Lecturer at The University of Texas at Austin where he teaches graduate level classes in the MBA program. From his Leeds on Finance website:
ENOUGH IS ENOUGH
By Sandy Leeds
May 9, 2009
Barack, you’re wearing me out. I voted for you, but you’re wearing me out. Your latest populist rhetoric is putting me over the edge. You’re a smart guy and your communication skills give you great power. But, you’re starting to abuse that power and it’s really getting to me.
You have a law degree and you taught in law school - so you understand the law. You know that there are secured creditors and unsecured creditors. In bankruptcy, secured creditors have priority over unsecured creditors. We all know the deal - secured creditors charge a lower interest rate because they will be protected in bankruptcy court. Unsecured creditors take the risk that they may not receive anything in bankruptcy.
You have put together a plan for Chrysler which violates these legal principles. Prior to filing for bankruptcy, Chrysler owed money to the following parties:
1. secured lenders: $6.9 billion
2. the US government: $4 billion
3. the UAW healthcare plan (unsecured): $10.6 billion
The US government will throw in the following:
1. $2 billion to pay off the secured lenders
2. $1.3 billion to help the company during bankruptcy
3. $4.76 billion when Chrysler emerges from bankruptcy
You and your band of merry men came up with the following payouts for each of the parties:
1. secured lenders: $2.25 billion
2. US government: 8%
3. Canadian government: 2%
4. UAW healthcare plan: $4.6 billion promissory note (paid off with 9% interest over 13 years) + 55% of Chrysler
5. Fiat: 20% of company - but this will go to 35% if they introduce a car in the US that gets 40 miles per gallon
I just don’t understand this. The secured creditors are giving up $4.6 billion (they are supposed to take $2.25 billion to satisfy the $6.9 billion they are owed) and will receive nothing in return. In effect, they are getting 33 cents on the dollar. The unsecured creditors are receiving 43 cents on the dollar plus 55% of the new company. This defies logic.
So let me list out the problems that I have with what you’ve done:
1. you have single-handedly changed the law - under your regime, secured creditors no longer have priority over unsecured creditors.
2. You know that 70% of the secured creditors are TARP recipients (GS, JPM, MS and C) and that they are not in a position to fight with you (particularly because your edict came out before the stress test results). You have effectively forced them to violate their fiduciary duty to their shareholders - as they have voted against their financial interest. Even you can’t say with a straight face that these institutions would have voted in favor of this plan if they were not wearing TARP handcuffs.
3. In what might have been your most evil, reprehensible act, you used your populist pulpit to turn the public against the secured lenders who wanted to enforce their legal rights. I’ve put your exact words below to remind you of what you said. It sounds great to the average financial moron when you blame the evil hedge funds and claim that they were "hold[ing] out for the prospect of an unjustified taxpayer-funded bailout." In reality, they are supposed to be paid back in full before unsecured creditors receive anything. I don’t want to speak for them, but I think that they just were relying on their legal rights. Can you explain an unjustified taxpayer-funded bailout to me? The only example that I can think of is when you use my money to bail out the UAW’s healthcare plan and then give them 55% of Chrysler.
While many stakeholders made sacrifices and worked constructively, I have to tell you some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. The were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting. I don’t stand with them. I stand with Chrysler’s employees and their families and communities. I stand with Chrysler’s management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars. I don’t stand with those who held out when everybody else is making sacrifices. And that’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success.
4. You have referred to secured creditors are "speculators." How is a secured creditor a "speculator"? If anyone is a speculator, it’s shareholders in a company. Yet, you have used taxpayer money to bail out shareholders and creditors of many large banks. Even you have to see the hypocrisy in these comments, don’t you?
I know that there are some who will insist that bankruptcy, even for these limited purposes, is a step that should not have been taken. But it was unsustainable to let enormous liabilities remain on Chrysler’s books, and it was unacceptable to let a small group of speculators endanger Chrysler’s future by refusing to sacrifice like everyone else. So I recognize that the path we’re taking is hard. But as is often the case, the hard path is the right one.
To be fair, while you’re the most culpable, there are others that are wrong in this deal:
1. JPM, GS, MS and C have put themselves in a position where they are having to accept the Obama haircut on this debt. If these banks didn’t have TARP money, they wouldn’t be accepting these terms.
2. Other investors have succumbed to political pressure and supported this plan. Perella Weinberg suddenly became supportive and said "we believe that this is in the best interests of all Chrysler stakeholders, and our own investors and partners." Here’s the problem…you have a fiduciary duty to your investors, not to "all Chrysler stakeholders." Personally, I would fire any investment firm that goes along with this plan.
3. Representative John Dingell (Michigan) called the secured creditors "vultures" and said that they "will now be dealt with accordingly in court." I would say that anyone who loans money to a unionized company (given the Administration’s desire to transfer wealth) is an idiot, but I don’t see how they are vultures.
As you know, there are long term repercussions to all of our acts. Some of the problems that will result from this Chrysler debacle include:
1. Secured lenders are going to demand higher interest rates when lending to unionized companies. The risk is clear - capital structure no longer matters.
2. The Republicans are going to have a field day using this against future Democrats. This is the stereotypical Democratic wealth transfer and if people figure it out, it won’t play well.
I Don’t Buy the Argument, Some people have defended your action by arguing that absent the government funding, there would have been a liquidation and the secured creditors probably would have had difficulty recovering $2.25 billion (the amount you offered them). Unfortunately, there are problems with this argument:
1. If you assume that the liquidation value is somewhere around $2 billion, why should the unsecured creditors receive all of the "going-concern" benefit?
2. Fiat clearly wants Chrysler. Why wouldn’t they pay for the company? Clearly, they place value in Chrysler. Chrysler would have been worth even more to Fiat after a true bankruptcy if bankruptcy was used to break contracts.
In sum, the dissenting creditors only held $1 billion of loans. As public sentiment turned against them, more caved in to your populist demands. You won - the dissenters won’t be able to slow the bankruptcy process. But for a small amount of money, you’ve altered the way that investors view capital structure and changed the cost of capital. You’ve vilified lenders and rewarded a union that has helped to drive a company into the ground. You really need to hope that in four years you run against another moose-hunting Alaskan who is less intelligent than her prey.
No comments:
Post a Comment