Opinion: Chrysler sale to Fiat clears another hurdle
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A federal appeals court in New York today rejected a bid by public pension funds in Indiana to halt the government-backed sale of Chrysler to Fiat, leaving only the Supreme Court potentially standing in the way of the deal. This move will no doubt disappoint the free-marketeers who bemoaned the Obama administration’s role as Puppet Master in the automakers’ reorganization. They argued that the administration gave less favorable treatment to some of Chrysler’s and GM’s debt holders so that it could advance the interests of certain unsecured creditors -- i.e., unionized workers.
Despite the unmistakable whiff of conspiracy theory, opponents of the deal have a point. Failing companies in desperate need of restructuring, as GM and Chrysler have been, usually try to reach a deal with their major creditors for a ‘prepackaged’ bankruptcy filing. The threat of a messy, customer-alienating Chapter 11 (or worse, a liquidation that reduces assets to their fire-sale value) is often enough to wring concessions out of all concerned. But last year, sensing a political opportunity, the automakers played the too-big-to-fail card. The Bush administration responded, providing billions of dollars in short-term loans. The Obama administration then intensified the feds’ involvement in the process, ostensibly to force the companies and their creditors to agree to a more profound restructuring that had a better chance of succeeding in the long term.
But there are a couple of things to bear in mind about this whole affair. First, the government’s involvement came at the behest of GM, Chrysler and Ford, all of whom sought a federal bailout. (To its credit, Ford did not ask for immediate help from Washington, at least not directly.) GM and Chrysler did so because they were running out of cash and couldn’t find private lenders. The money that GM and Chrysler needed to stay alive, both before and during their sojourns in bankruptcy court, needed to come from Washington, and the amount was so large that the administration couldn’t reasonably take the role of a passive creditor. In other words, the clear choice here was between liquidation and deep government involvement, and the automakers chose the latter.
Second, although they’ve raised interesting legal questions about whether the Bush and Obama administrations had the authority to use TARP dollars to aid the automakers, the Indiana pension funds seem more interested in wringing more dollars out of the deal. It’s hard to sympathize with the pension funds on this point. According to Business Week, the funds bought Chrysler’s debt at a deep discount in June 2008, after the company’s credit rating had been downgraded. They were essentially playing the role of vulture investors, paying 43 cents on the dollar. Now they’re complaining about a bankruptcy plan that gives them 29 cents on the dollar, which supporters of the plan say is far more than the funds would get if Chrysler were liquidated.
But then, this is the kind of fight that arises when the government tries to steer a company through the treacherous waters of bankruptcy, rather than leaving it and its creditors to protect their entwined interests as best they can. The process becomes inescapably politicized, with critics assuming that the result favored the unions because of the Democrats’ ties to labor. The best argument that the administration can make to the contrary is that every creditor would have been worse off had Washington withheld its cash and allowed the automakers to go straight to liquidation. But that doesn’t address the question of whether bond holders took too great a haircut for the sake of sparing creditors whose interests should have been subordinate to theirs.
Updated Monday at 2:38 p.m.: The Supreme Court has put the sale of Chyrsler assets to Fiat on indefinite hold as it examines the issues raised by the Indiana pension funds. Stay tuned....
Updated Tuesday at 4:58 p.m.: The Supreme Court declined to hear the Indiana appeal, clearing the way for the Fiat purchase.
-- Jon Healey