Chrysler: bulls make money, bears make money, pigs get slaughtered

It looks like Chrysler is going down for the count. A few piggish bondholders decided to play chicken with the Federal Government. They are going to lose this game and, consequently, lots of money too. Chrysler and the Obama Administration did not have a strong hand. Their best alternative to a negotiated agreement (BATNA) was bankruptcy – not a very good fallback option. James Kwak calls Chapter 11 the government’s nuclear option because bondholders are not the only one’s who are going to lose here. The holdouts amongst the bondholders knew this and pushed their piggish agenda. Now they are going to get slaughtered.

But what about everyone else?  I am not optimistic that a bankruptcy can be controlled unless the administration puts in some cash after the filing.  They have promised to put in $6 billion if the Fiat deal comes through. This would make their money senior to all other claims and give them much more say over the course of events during bankruptcy.  That would also give Chrysler time to work through a bankruptcy without liquidation.  Here’s how I see things playing out for some major constituencies.

• Auto Workers.  There will likely be massive job losses here.  Let’s see what Obama does regarding funding the newly-insolvent company to prevent more job losses.  The dealer network will be cut back significantly, so the job losses will not necessarily be concentrated in Detroit.
• Shareholders.  They will get nothing. They will be replaced by the unions (new majority owners in deal with Administration), the government, and Fiat (if the deal goes through)
• Bond holders.  They are going to get stuffed..big time.  It is a case where they should say, “I fought the law and the law won.”  End of story.
• CDS insurance writers.  Get ready for major pain.  If bond holders are getting screwed, you know the companies who guaranteed credit default swaps (CDS) are not going to be very happy here.  Question: are bond holders playing chicken because they have insurance?  If so, you can consider the CDS writers another negotiating party that did not get a seat at the table and are going to be left holding the bag – a reason to want some major changes in how the CDS market is run.
• General Motors.  This is a dry run for them.  Now, they have a chance to see how things play out for Chrysler and use this as leverage to say, “see, you don’t want to hold out on us. Look at Chrysler.”  But, again, the CDS insurance problem may be at play in bondholder negotiations.
• Fiat.  This is good for Fiat.  Chrysler will be cheaper now and this also gives them more leverage over Opel and Vauxhall in those negotiations.  On that score, it is a net loss for GM, which owns those two European subsidiaries.
• Chrysler retirees.  They are going to take it on the chin.  I guarantee you there will be pain felt in Chapter 11 for the pension fund.  Chrysler can pull an airline maneuver and slough off some of the pension income and health care liabilities too.  The unions have already made large concessions here, so perhaps this will be less of a factor.

A good article to read in all this is “Exploring the New Corporate Bankruptcy Strategy” on the PBS Frontline website. It has quotes from a number of bankruptcy experts including Elizabeth Warren, now Congress’ TARP watchdog.  In her full interview, Warren gives some insight into the effect Chapter 11 has on pension funds and the net effect of ERISA and moving from defined benefit to defined contribution schemes.