Last week, the Supreme Court turned down the last appeal from the creditors objecting to the Chrysler reorganization and the deal closed on the next day. Chrysler has been sold in bankruptcy.
This is a good time to assess Chrysler’s bankruptcy. At one level, it’s reason to be optimistic that bankruptcy reorganizations could move more quickly than the year or two they usually take. As a matter of technical bankruptcy prowess–in moving through chapter 11 so quickly–it’s an admirable accomplishment. As a matter of governance structure, it has the United Auto Worker union retirees as major shareholders of the new Chrysler, mixing up the UAW’s incentives as employees looking for higher wages and as owners looking for more productivity, in a way that hasn’t obtained media attention yet but which may prove to be clever.
At another level, though, the speed of reorganization is a cause for concern: How could the Chrysler deal be done so much more quickly than a typical chapter 11 reorganization? Were corners cut?
Crucially, the government is flooding Chrysler with money on non-commercial terms, inducing enough players to agree to the deal, rather that fight over the scraps. Chrysler, which was in such horrid shape last fall that the government was ready to let it liquidate, gets another chance. The speed of the bankruptcy may not be replicable in a normal chapter 11, without the government flooding troubled companies with money.
While structured in the form of a sale from the “old Chrysler” to a “new Chrysler” that Fiat and the UAW own, with the government having a sliver of an interest in the reorganized firm, the de facto deal was really that the government bought Chrysler from the creditors, giving it to the UAW, flooding Chrysler with cash, and hiring Fiat to manage it. The idea that Fiat is buying Chrysler is greatly exaggerated. All of the money came from the U.S. Treasury; and since government money doesn’t fuel ordinary chapter 11 reorganizations, there’s one reason to think Chrysler was a stand-alone bankruptcy event.
There’s reason for deep concern that the government will continue to prop up poor companies and critics compared the plan to western European industrial policy. It has that flavor, but the extent of the substantial layoffs, plant closings, and dealer closings put the Chrysler plan’s business structure somewhere between a market-driven reorganization and a full bailout. Chrysler was, like General Motors, specially situated as a visibly troubled company in a traditionally important industry, suffering during a severe economic downturn. The psychological potential of failure was hard to assess. Burned by the Lehman failure, government players might not have wanted to see that movie again. And Chrysler was, like GM, politically well-positioned, with an influential union.
As important politically was that the industry’s current problems initially came up shortly after the Fed- and TARP-financed Wall Street rescues. To many blue collar Americans (and not just them), the rescue bailed out highly paid Wall Street executives as much as it preserved fluid lending markets and the integrity of the payments system. The way the AIG bonuses played out made that perception more vivid. The government felt pressure to do something directly for blue collar types to balance this pro-Wall Street perception. Rescuing Chrysler presented that opportunity.
The plan went forward despite capital markets push-back that Chrysler’s creditors were poorly treated and observers thinking many of the banks signed on mostly because they were TARP-money recipients beholden to the Treasury’s good graces. One money manager said his firm would rethink loans to troubled companies. Warren Buffett said that there’ll be “a whole lot of consequences” if priorities are ignored, because “that’s going to disrupt lending practices in the future.”
But the real problem with the reorganization though wasn’t that priorities were surely sharply curtailed. Normally when unsecured creditors do so well compared to secured creditors, there’s a serious priority problem to investigate. But in this reorganization we can’t really tell, because so much government cash is flooding the company on non-commercial terms. In effect, the government is giving the UAW a gift–a gift that a commercial lender would not be giving it–to ease the restructuring, but the plan doesn’t sharply delineate whether the secured creditors (and Chrysler’s old product liability claimants) would be contributing to that present. The government’s numbers say the value to the UAW wasn’t coming from the prior creditors, but capital markets observers weren’t so sure. We do risk a vicious cycle if financiers shy away from troubled firms, and troubled firms’ inability to get finance pushes them into a partnership with the government.
Chrysler without government money was not a prime property and government deal makers believe that Chrysler’s liquidation value, which is what the secured creditors were entitled to, was even less than what they’re getting in the plan. But usually bankruptcy players–even lenders providing new money–do not get to decide whether the deal was fair. The court decides, after hearing both sides’ valuations, or the parties reach an agreement, or the deal is subjected to a true market test. Ostensibly there was a market test here, but in form only, because the bidding was for the proposed plan, with the restructured UAW deal in place.
It’s too early to say whether the Chrysler deal will become a template for future, more ordinary chapter 11 reorganizations. It would be best if the structure were explicitly rejected by bankruptcy courts as somehow special and not to be repeated. In the Delphi bankruptcy, the bankruptcy judge explicitly refused to follow the Chrysler structure of a very limited market test. In another bankruptcy, players are already seeking to use the Chrysler structure as a template.
The setup of GM’s bankruptcy suggests the Treasury took complaints about Chrysler from the capital markets seriously. Secured creditors in GM will be paid in full. The Treasury sweetened the GM deal to bring as many bondholders on board as possible. Yes, GM is stronger, with more value to distribute, but it is plausible that after the Chrysler capital markets pushback, the Treasury sought to make amends. It would, though, have been much better to correct the Chrysler problem and regain market confidence before it set a precedent. From a bankruptcy and a capital markets perspective, it’d be best to put this one behind us.
Mark Roe is a professor at Harvard Law School.