I inadvertently send the post below to Raghu and not the entire list.
Raghu writes:
>> Can you explain how? News reports suggest that the renegade hedge
>> funds are unlikely to make much more under bankruptcy than what the
>> Treasury offered (around 30c on the dollar). See for e.g. this quote:
>> "A person at a hedge-fund firm that owns Chrysler loans, speaking
>> anonymously, told Dow Jones Newswires that the difference between what
>> loanholders would get in bankruptcy and out of bankruptcy wasn't that
>> much, meaning the non-TARP lenders are making a political statement
>> more than anything."
>> from http://online.wsj.com/article/BT-CO-20090430-725724.html
>>
Here is a link to Chrysler's balance sheet:
http://www.distressed-debt-investing.com/. The existing plan proposes to pay
secured creditors, who have a first priority lien on all assets, $2 billion.
What immediately stands out? How about the fact Chrysler, today, is sitting
on $1.89 billion in cash. Add in $1.6 billion in receivables. Add in $4.6
billion in inventory. Add in $16 billion in property, plant and equipment.
Are you going to tell me that when Chrysler is sitting on $1.89 billion cash,
its liquidation value is $2 billion?
>> Two points. First of all, can you explain exactly how the Chrysler
>> workers are being bailed out here? Or are we debating a purely
>> hypothetical scenario?
They are being bailed out. Chrysler is broke. In chapter 11, Chrysler could
"reject" the retirement and health obligations, leaving the plans with
essentially worthless claims. Instead, the obligations, as modified pursuant
to the plan, are being assumed by "New Chrysler," which is almost entirely
financed by the US government.
>> Secondly, on a fundamental level, how does it make any sense to treat
>> workers and hedge fund investors identically? How is a worker and a
>> hedge fund comparable in any reasonable sense? They each have
>> different roles and different stakes and it only makes sense to treat
>> each stakeholder taking the peculiar nature of their stake into
>> account. What am I missing here?
To greatly simplify, as far as the bankruptcy system is concerned, unsecured
claims are unsecured claims and should be treated pro rata. That being said,
as I have explained several times on this list, worker and union claims are
uniquely favored under the bankruptcy code and have special protections. In
fact, it is not uncommon for such obligations to be assumed by buyers of
assets. However, from a bankruptcy conceptual perspective, claims are claims.
David Shemano
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