Chrysler's Bankruptcy: Too Fast, Too Furious?

With apologies to Vin Diesel and his Fast and Furious franchise, Chrysler's bankruptcy has been moving faster than any of the cars in the box office hit, and it turns out some debtholders are furious enough to get the Supreme Court involved.

The Indiana Pensioners, a coalition of the Indiana State Police Pension Trust, Indiana State Teachers Retirement Trust, and Indiana Major Moves Construction Fund are pursuing an immediate stay, and are challenging the authority and actions of the U.S. Treasury regarding this bankruptcy. If the Supreme Court overturns the Obama administration's fast-track bankruptcy for Chrysler, expect General Motors' (NYSE: GM  ) more complex bankruptcy proceedings to get ugly.

The merger between Chrysler and Fiat, which more than faintly reminds me of JPMorgan Chase's (NYSE: JPM  ) taxpayer-backstopped acquisition of Bear Stearns, conveys the desperation on the part of the U.S. Treasury to get a deal done quickly. Recently released emails have shown the tension between the various parties, with one message from a lawyer on the government side going so far as to call Thomas Lauria, the lawyer filing on behalf of the Indiana Pensioners, "a terrorist."

I'm sure that the Chrysler-estimated $100 million-per-day cost of any delay isn't helping cooler heads prevail.

The Federal government sees itself as the protector of the American consumer, stabilizing the fragile economy by keeping automakers going. But what are the limits of that power in accomplishing those goals? The legal filing (which can be read here) addresses that topic on several fronts.

  • Can the U.S. government, barring specific congressional approval, reorder private property rights through the bankruptcy system?
  • Can TARP funds be used to fund the sale of an automaker, or are they allowed only for financial institutions?
  • Is an alleged "unprecedented shift" in valuation methodologies, which essentially diverts value from first lien lenders to unsecured creditors, permissible?

If a deal is not consummated by June 15 and Fiat walks away, the resulting liquidation of Chrysler would lay off almost 40,000 more American workers. The only potential winner here, besides foreign competitors like Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and Nissan (Nasdaq: NSANY  ) , is Ford (NYSE: F  ) . The longer Chrysler and GM remain in bankruptcy, the more time Ford has to capture market share. As my Foolish colleague Rich Duprey points out, since Ford isn't shedding burdensome debt and less profitable dealers via Chapter 11, the only advantage it may have against "leaner, meaner" domestic competitors is left over goodwill from not taking taxpayer money.

As a lifelong investor, I hate to see other investors get their rights steamrolled, and I am perpetually leery of government intervention. As a taxpayer, I would like to see an eventual sale of Chrysler to recoup some of the billions we have passively contributed. As an American, I don't want to see a legendary brand fail or tens of thousands more people unemployed, including, ironically, many in the state of Indiana. This is truly a no-win situation.

Whether the pensioners' motion is granted later today or not, at some point the Supreme Court is going to have to address the precedents set by Chrysler and potentially reaffirmed by GM's bankruptcy.

For related Foolishness on no-win situations check out:

David Williamson owns no shares or vehicles made by the companies mentioned; although he enjoys renting a Ford Mustang convertible when he travels. You can view his holdings here. Nissan Motor is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy keeps you out of moral bankruptcy.


Read/Post Comments (25) | Recommend This Article (42)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2009, at 3:56 PM, jsextoncol wrote:

    I totally concur with the observations - this bankruptcy has the potential to radically alter the rights and status of creditors. The attempt to sale the "good assets" to Fiat is a classic cram down bankruptcy strategy designed and strong-armed implemented by our very own government. While the end motives may be pure, the means present an awful legal precedent that could impair creditor rights well into the future.

    Moreover, the actions to carry out the means also show the true character of the individuals involved: our bureaucrats actually think they know better! Well maybe they should revisit the evidence - Chrysler made vehicles are among the least efficient, least reliable and have some of the highest true total costs to own. I wouldn't be betting against the millions of consumers most of whom have been avoiding Chrysler products for good reason. We shouldn't be surprised if the Chrysler / Fiat combination fails again in the near future.

  • Report this Comment On June 08, 2009, at 4:19 PM, Jazzenjohn1 wrote:

    I fully expect Fiat/Chrysler to go through. Seeing there is no stock nor any money being paid by Fiat, and that they are insisting American taxpayers put up 4-6 Billion dollars which they then get, I'm at a loss how anyone can call it a "sale" to Fiat. Further, since Fiat is the originator of the Yugo, and is ranked in the bottom 10% of quality in Europe, and Chryslers quality is only slightly better, I don't see a path where they can succeed.

    Fiat/Chrysler and GM seem to be on a path to destroy any goodwill they have left, in the interest of improving their financials, by taking Taxpayer money to pay their debts, crushing the stockholders and bondholders, Shredding contracts with their dealers and by extension the communities.

  • Report this Comment On June 08, 2009, at 4:51 PM, TMFGreenwave wrote:

    The WSJ reports that the Supreme Court "will extend a temporary stay put in place by an appeals court until it has the chance to receive and review routine appeals from groups opposed to the sale."

    So we have our 4pm decision and we just got one step closer to the big rodeo. If the high court decides to rule on this matter we could have a landmark decision and all the makings of a media spectacle on our hands.

  • Report this Comment On June 08, 2009, at 5:35 PM, Deadman18 wrote:

    This article doesn't cover the fact that if there is a recall of a vehicle sold before the bankruptcy,you have no recourse,not even in court,they give them a free pass.This also doesn't cover the fact that should you or one of your loved ones dies in an accident due to defect in vehicle,you have no recourse.The union should not get a retirement trust fund as the federal government guarantees the retirement packages of the U.A.W.I guess the U.A.W. wants both.

  • Report this Comment On June 08, 2009, at 5:36 PM, muskie59 wrote:

    sooner or later Obamanomics is going to be challenged . I'm surprised it took this long...The GM thing will get really ugly . This Chrysler deal is just a warm up.

  • Report this Comment On June 08, 2009, at 5:38 PM, Jazzenjohn1 wrote:

    Without a dark horse bidder, I wouldn't expect this stay to last more than a few days. If they had lined up someone to pay in excess of 2 billion, we'd have heard about it. I can't imagine anyone bothering to try and outbid the American government for Fiat/Chrysler. Frankly, with the bond debt restructured, the new labor agreement, and Retiree healthcare off their backs, I don't see why they don't try to make it on their own. Fiat doesn't bring much of value to the table. They could negotiate for small car technology from someone else, preferably someone with higher quality offerings.

  • Report this Comment On June 08, 2009, at 5:49 PM, marneyandme wrote:

    How can we get more cake, eat our cake and expect there to be enough cake for the thousands of ex-Chrysler workers. We can blame Oboma I suppose. He must be guilty of all the greed, lack of concern for quality and the dangers of buying a Chrysler product in the past. The workers were "proud of their products"?

    I think Oboma and his government should say, sorry fellas we tried to help, you got greedy again, so we are taking our $$$$ and going back to Washington where it is safer than the halls of Corporate America.

    Willy Beaver

  • Report this Comment On June 08, 2009, at 5:50 PM, driller101 wrote:

    What I want to know is who were the money managers for the pension funds that put them in to Chrysler bonds in the first place?

    The law is not cut and dried on this. I guess the Supremes will decide, but there is precedence both ways.

    See http://www.bankruptcylitigationblog.com/archives/bankruptcy-...

  • Report this Comment On June 08, 2009, at 6:15 PM, landman2009 wrote:

    Are we ther yet? there seems to be some reluctance on the part of some investors in Chrysler, which is not a publicly traded Company , but wose it is a privately held conglomerate equity fund called Cerebus Capital, which you cannot buy shares in. So, bottom line is we have bailed out a private equity firm, with public money, with no return to the people of the US, other than some fanciful idea that jobs will be saved. They can pull out anytime, and there are other car manufactureres selling cars(last count about 35 other very profitable companies with strange sounding names. Chrysler, as we all know it has been gone for a long tme

  • Report this Comment On June 08, 2009, at 6:18 PM, landman2009 wrote:

    Further down the road as your money manager tells you he did the best he could, remind him that your money was not in chrysler, and is not going to get bailed out. Cerebus Capital is. Hold one now ..who are the directors of Cerebus Capital?????

  • Report this Comment On June 08, 2009, at 7:30 PM, xetn wrote:

    You should all be very concerned about the treasury's action to foreclose the claims of the bondholders. You may be more concerned about the potential loss of jobs, and as important as that concern is, it misses the biggest point about the cavalier approach the administration has to private property rights. If the bondholder's rights are not upheld, who, in their right mind will ever trust borrowers again? And, if that concern doesn't worry you, think of how hard the government is trying to spur credit creation. Perhaps the real reason that there is such a huge lack of credit, other than the banks building reserves, is that they are very concerned about private property rights.

    The other concern is that the government has decided that they can just take over private enterprise with a hand-out at the expense of both taxpayers and shareholders.

  • Report this Comment On June 08, 2009, at 8:07 PM, Jazzenjohn1 wrote:

    When Bush gave them the bailout money last December, he told everybody the money was lent with the condition that it was first in line for repayment along with several other demands. The bondholders should have insisted at that time they didn't want it and pressed for liquidation, they won't stand a chance in court since the government holds first position for 4 billion in loans. On top of that, the government is going to supply 3.2 billion more for DIP loans. The time for legitimate complaint was Before Bush lent them the bailout money.

    They are finally admitting the taxpayers will probably never be repaid.

  • Report this Comment On June 08, 2009, at 8:40 PM, hoosierhog wrote:

    I don't know about you but if I was a teacher or policeman or fireman in Indiana and I had my retirement in a secured bond, I would want to be paid my full amount before the UAW union that was not a secured creditor. Why should I loose my retirement so the UAW can keep theirs.

  • Report this Comment On June 08, 2009, at 9:15 PM, johnbhig wrote:

    If I remember correctly these 'complaining' funds bought Chrysler debt for $.43 on the dollar. They took the risk, now they have to absorb it. But they don't want to. TS, that's the downside to "gambling". The 40,000 jobs are a hell of lot more important that these fund managers saving face. They should be bounced!!!

  • Report this Comment On June 08, 2009, at 9:39 PM, JustMee01 wrote:

    johnbhig wrote:

    ...they bought Chrysler debt for $0.43 on the dollar. They took the risk... but they don't want to [absorb it]. TS, that's the downside to 'gambling'".

    These fund managers weren't gambling. They're arbitrageurs. They made their 'bet' based on Chrysler's liabilities, assets, and capital structure. Their point is that the executive branch of the federal gov't stepped in and artifactually altered the legislatively defined priorities of creditors. That's a usurpation of legislative powers. Alteration of law is a legislative function. That's the argument and a liberal justice (Ginsburg) agrees.

    People are of the opinion that the President and his subordinates have unlimited power (i.e. can't break the law). That's false, and it's the proper role of the Supreme Court to resolve these issues and rule whether or not the Treasury has oversteped its bounds as defined by the Constitution. The Court should hear this argument. It's important to clarify (one way or the other) the balance of power between the Legislative and Executive branches on issues of the like, which WILL be encountered again. People grouse that vulture funds are trying to get what's not owed them. It's a bigger issue than a vulture that's holding 1% of secured debt.

  • Report this Comment On June 08, 2009, at 9:51 PM, jesse2159 wrote:

    Remember, Chrysler is a private company, not a publically traded company. We shouldn't be involved in this enterprise in any way whatsoever. This company has no responsibility to the public regardless of the money we lent them to stay solvent. I hope the Indiana funds that sued to stop the sale are able to prevail, but I doubt it.

  • Report this Comment On June 08, 2009, at 10:00 PM, EdsPerky wrote:

    Judge Ginsburg's decision tells me that the fat lady is not going to sing for awhile. Given her ultra liberal position on most matters, I believe we are going to see a full thrashing of this issue by the Supreme Ct. I hope and pray for the good of the country and yes the good of the 40,000 jobs at stake that this matter is fully rviewed within the confines of the law. If this deal goes through with Fiat the way it is right now I will never invest in any corporate bonds or gov't bonds, how about you?? No gov't has the right to use its powers to usurp the rights so flagrantly as we are seeing in this case.

  • Report this Comment On June 08, 2009, at 10:12 PM, redclaymud wrote:

    Chrysler and GM have outlived and exceeded their viability. Who should we blame? Certainly not the rank and file, since all they were trying to achieve was a livable wage for the remainder of their lives.

    It's better that we blame Norway! Yes, let's blame Norway! Thirty and Out? Blame Norway. Full benefits at retirement? Blame Norway. We should invade Norway and give it to the unions. That would be a better deal than any amount of ownership in the companies they helped go bankrupt.

  • Report this Comment On June 08, 2009, at 11:01 PM, jomueller1 wrote:

    driller101 has it right. Who were the money managers getting their clients into Chrysler. When Daimler pulled out that signaled Chrysler was a lost cause. Nobody should have touched them anymore.

    Besides, where is the good old US tradition of capitalism? What was Mr. Bush's motivation to through good money after bad and delay the burial? So that his friends can party a little longer?

    As a taxpayer I feel I am being robbed at gunpoint. I wish someone would bail me out. But in the eyes of politicians I have endless resources and they keep on raising taxes and fees like there is no tomorrow.

    The last one please turn the lights off!

  • Report this Comment On June 08, 2009, at 11:33 PM, 55500 wrote:

    My understanding is that there was one line in the 1000+ pages of the TARP bill that gave the government the right to own private companies. If that is true then it opens up the door for the gov to seize any business that gets behind in its taxes or other debt and keep it (rather than force a sale). They can then keep the bus. and take the cash flow until it is driven into the ground. This is really scary with all the gov debt and their need to pay soc sec and medicare about to go geometric. It probably would fail a legitimate constitutional challenge if the Supreme Court isn't stacked against property rights before it could be completed. This isn't the case with Chrysler but it is with GM.

    The gov shouldn't be able to simply crush due process any time it feels like it. We are really in trouble as a society.

  • Report this Comment On June 09, 2009, at 9:34 AM, jwkovlanks wrote:

    Bush started this ball rolling, Chrysler should have

    been allowed to fail. Can't blame the pols for trying to

    save the jobs. One in 12 Americans get their $ from the auto industry. Indiana Attorney Gen is a Republican who will cost his own state millions in

    taxes and jobs. More loser politics.I bet none of these

    writers above ever owned a Chrysler. My last one ran 180,000 with no major repairs. Americans have

    no brand loyalty. Go to France or Germany or Tokyo,

    NO American cars there at all. We are such fools.

  • Report this Comment On June 09, 2009, at 2:29 PM, jpanspac wrote:

    From a purely business standpoint, I don't think it matters whether the deal goes through or Chrysler goes bankrupt. A Fiat-Chrysler combination would be even worse than the Daimler-Chrysler combination. Fiat pulled out of the U.S. market years ago for good reason -- they built odd, poor-quality cars that only Americans who liked quirky went for.

  • Report this Comment On June 09, 2009, at 2:39 PM, mas113m wrote:

    Chrysler and GM have to be bailed out for the sake of the auto workers.

    Who would EVER hire an ex-UAW employee? they would not have the slightest idea how to survive in a competitive workplace.

  • Report this Comment On June 09, 2009, at 6:56 PM, robertf36009 wrote:

    Contract law is a corner stone of our economic/legal foundation in this country. The pension funds refered to did not buy up Chrysler debt at $.43 on the dollar they held long term debt and didn't sell off at that rate. That is because as senior debt holders of secured debt they were first in line for repayment in the event of bankruptcy. Team Obama changed that through various unsavory tactics and finaly with the stroke of a pen. Should this sale stand and the bond holders get fleeced the price of money will go up as more risk is priced into the bond market. Some businesses in at risk sectors (Health Care?) won't be able to find lenders at any price. That will cost jobs too. Team Obama dosn't care about the jobs here they are willing to throw defense contractors under the bus because they aren't friends of Barak. Make no mistake this is pure political pay back for the UAW. If the Indiana coalition wins don't be surprised if uncle sugar pays the debt to keep the Government owned auto companies and the UAW afloat.

  • Report this Comment On June 15, 2009, at 7:03 PM, plange01 wrote:

    the american people need to speak and keep both GM and chrysler closed by simply not buying what they are selling...the disgraceful way both of these companys cheated investors and crediters out of their money yet made sure they paid venders off that they thought they would need in the future is a disgrace and to make it worse they did it with the governments help!peoples retirement savings and college money was lost.people with serious injurys from car accidents wont be paid to name a few..the list is endless and its a terrible.the bankruptcy of GM a national icon made the entire country look like fools to the whole world.no other country has allowed one of their companys to fail like this....

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