Chrysler Bankruptcy Fallout

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In a strange turn of events, the news broke that Chrysler is filing for Chapter 11 bankruptcy so that they can undergo re-organization.

As far as bankruptcy is concerned, Chapter 11 has a much rosier outlook than does it’s counterpart Chapter 7. Under Chapter 11 bankruptcy, the company is allowed time to re-structure. During this time, it’s debt holders are banned from trying to collect on their debt. Under Chapter 7 the assets of the timorous company are liquidated, and the proceeds go to pay off the lenders. Companies that have recently filed Chapter 7 bankruptcy include Circuit City, Linens N Things, and Bennigan’s.

The thing that seems outlandish to me in relation to Chrysler filing Chapter 11 is that Chrysler’s parent company, Cerberus Capital Management, is still for the most part financially strong. They bought out Daimler’s stake in the company earlier this week to facilitate bankruptcy proceedings. Furthermore, they will give up their ownership stake in Chrysler in order to facilitate restructuring. Basically, that’s a nice way of saying that they want to be rid of this company just as bad as the Obama administration wants to restructure it.

So what will happen to the Auburn Hills, Mich. based company during restructuring? Currently, it sounds like Fiat is going to obtain a 20% stake in the company while 55% of the company will be owned by a union employee owned pension fund. The remaining 25% of the company would be owned by you and me – the American Taxpayer. Furthermore, the US Treasury is going to give Chrysler’s creditors $2.5 billion to extinguish $6.9 billion in secured debt.

Let’s stop there for a small. The government is using our tax dollars to pay off secured debt for pennies on the dollar. Secured debt is debt that allows a creditor to choose an asset upon default. Your mortgage is a secured debt. What happens when you default on your mortgage? Exactly. They take your house. This is not how it goes in the Motor City, though. In Detroit if you default on your loans you can blame it on the economy, whine a little, get taxpayer money, and be sold to a foreign company.

Besides that, Sheila Bair (the chairwoman of the FDIC) is concerned about possibilities of FDIC guarantees on new debt and is reluctant to bail out the automotive industry at the possible expense of FDIC insurance funds.

The whole deal is being thrown together. This is going to have consequences that Americans will feel for years. You can be sure that when things go sour, it won’t be the union employee Pension fund that will receive the brunt of the impact – nor will it be Italy based Fiat. It will be you and me, the American tax payer.

Even though current news is centering on the swine flu outbreak, it’s valuable to support an eye on other stories as they develop.

Resources:

www.bloomberg.com