Posted by Jim Lindgren:
http://volokh.com/archives/archive_2009_05_03-2009_05_09.shtml#1241574478
Buried in the Chrysler filings was the revelation that US government
investments in Chrysler [1]will not be paid back, though the
government will probably take an 8% equity interest in Chrysler:
Chrysler LLC will not repay U.S. taxpayers more than $7 billion in
bailout money it received earlier this year and as part of its
bankruptcy filing.
This revelation was buried within Chrysler's bankruptcy filings
last week and confirmed by the Obama administration Tuesday. The
filings included a list of business assumptions from one of the
company's key financial advisors in the bankruptcy case.
Some of the main assumptions listed by Robert Manzo of Capstone
Advisory Group were that the Treasury would forgive a $4 billion
bridge loan given to Chrysler in the closing days of the Bush
administration, a $300 million fee on that loan, and the $3.2
billion in financing approved last week by the Obama administration
to fund Chrysler's operations during bankruptcy.
An Obama administration official confirmed Tuesday that Chrysler
won't be repaying the loans, though a portion of the bridge loan
may be recovered by Treasury from the assets of Chrysler Financial,
the former credit arm of the automaker which is essentially going
out of business as part of the reorganization.
"The reality now is that the face value [of the $4 billion bridge
loan] will be written off in the bankruptcy process," said the
official, who added that the 8% equity stake that Treasury will be
receiving as part of the company's reorganization is meant to
compensate taxpayers for the lost money.
"While we do not expect a recovery of these funds, we are
comfortable that in the totality of the arrangement, the Treasury
and the American taxpayer are being fairly compensated," said the
official.
. . .
The Obama administration official said that other money being made
available to Chrysler, such as the $4.7 billion that will go to the
company as it exits bankruptcy, will be a loan that the government
expects to be paid back. In addition, that loan will be secured by
company assets, unlike the previous loans to Chrysler.
According to the filing, the company's financial advisor also
foresees the need for an additional $1.5 billion loan from the
Treasury Department by June 30, 2010.
. . .
Typically lenders who loan bankrupt companies funds to operate
during reorganization go to the front of the line on getting the
money they are owed repaid. But [Senator Bob] Corker said
Chrysler's dire financial situation left it no chance to even pay
back the bankruptcy financing.
He said the fact that Chrysler isn't paying what is owed should be
a warning that the $15.4 billion loaned to General Motors by
Treasury since December, as well as any bankruptcy financing it
might need, is also at risk.
"Certainly there are red flags," he said.
Even the 3.2 billion loaned just last week will not be paid.
David Yermack wrote in the Wall Street Journal [2]last fall that it
would have been better if the government had simply written a check to
each wolrker -- or even just burned the money:
Today, our government is being asked to put tens of billions of
dollars in GM, Ford and Chrysler, but we would be much better off
if Washington allowed these companies to go bankrupt and disappear.
In 1993, the legendary economist Michael Jensen gave his
presidential address to the American Finance Association. Mr.
Jensen's presentation included a ranking of which U.S. companies
had made the most money-losing investments during the decade of the
1980s. The top two companies on his list were General Motors and
Ford, which between them had destroyed $110 billion in capital
between 1980 and 1990, according to Mr. Jensen's calculations.
Skidding Auto Makers View Interactive
See what Ford, GM have been up to in recent years as their stock
price and sales declined. I was a student in Mr. Jensen's
business-school class around that time, and one day he put those
rankings on the board and shouted "J'accuse!" He wanted his
students to understand that when a company makes money-losing
investments, the cost falls upon all of society. Investment capital
represents our limited stock of national savings, and when
companies spend it badly, our future well-being is compromised. Mr.
Jensen made his presentation more than 15 years ago, and even then
it seemed obvious that the right strategy for GM would be to exit
the car business, because many other companies made better vehicles
at lower cost.
Roger Smith, who retired as chairman in 1990, seemed to understand
that all too well, and so did Chrysler's management, which happily
sold their company to Daimler Benz for $30.5 billion in 1998. That
deal, one of the savviest corporate divestitures ever, ended very
badly for Daimler, which essentially paid Cerberus a few billion
dollars (by agreeing to retain pension liabilities) to take
Chrysler off its hands in 2007.
Over the past decade, the capital destruction by GM has been
breathtaking, on a greater scale than documented by Mr. Jensen for
the 1980s. GM has invested $310 billion in its business between
1998 and 2007. The total depreciation of GM's physical plant during
this period was $128 billion, meaning that a net $182 billion of
society's capital has been pumped into GM over the past decade -- a
waste of about $1.5 billion per month of national savings. The
story at Ford has not been as adverse but is still disheartening,
as Ford has invested $155 billion and consumed $8 billion net of
depreciation since 1998.
As a society, we have very little to show for this $465 billion. At
the end of 1998, GM's market capitalization was $46 billion and
Ford's was $71 billion. Today both firms have negligible value,
with share prices in the low single digits. Both are facing
imminent bankruptcy and delisting from the major stock exchanges.
Along with management, the companies' unions and even their
regulators in Washington may have their own culpability, a topic
that merits its own separate discussion. Yet one can only imagine
how the $465 billion could have been used better -- for instance,
GM and Ford could have closed their own facilities and acquired all
of the shares of Honda, Toyota, Nissan and Volkswagen.
The implications of this story for Washington policy makers are
obvious. Investing in the major auto companies today would be
throwing good money after bad. Many are suggesting that $25 billion
of public money be immediately injected into the auto business in
order to buy time for an even larger bailout to be organized. We
would do better to set this money on fire rather than using it to
keep these dying firms on life support, setting them up for even
more money-losing investments in the future.
References
1. http://money.cnn.com/2009/05/05/news/companies/chrysler_loans/index.htm
2. http://online.wsj.com/article/SB122669746125629365.html
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