More On Chrysler

If you haven't already heard, the Supreme Court has lifted the stay which had put the Fiat sale on hold. Earlier today, Fiat CEO Sergio Marchionne stated that they would not walk away from the deal. That did not matter however as the high court's decision was unanimous. You can review the actions of the court at SCOTUS blog.

I've heard a little bit today both from the local media and the MSM regarding the issue before the court both before and after the decision was rendered. I have to say that either I'm totally missing something or the media is either dumb or dishonest (I won't rule out both). However, a couple of people I have some respect for as commentators (Abdul Hakim-Shabbaz and Judge Andrew Napolitano) are on the list, so maybe I just don't get it.

I did a good deal of research on the Chrysler bankruptcy (read here), and while I don't necessarily like the outcome, the government-supported-pro-UAW-Fiat-Sale looks to be legal. I'm not surprised that the Supreme Court has dismissed the grievances - especially based on the legal merit of the case.

The 363 sale, as I understand it, has become more common in bankruptcy and occurs outside of the restructuring or liquidation which happens in Chapters 11 and 7 respectively. I'd best describe it as a hybrid of restructuring and liquidation where an outside bidder submits a "super bid" for most of the bankrupt company. As long as a) it is the best available bid, b) the bankrupt company and debtors-in-possession agree to the sale, and c) the value of the assets could decline substantially in the absence of a sale. (Note: Judge Gonzalez's ruling provides a more detailed and accurate explanation and can be read in full if desired - I've linked to it in my previous article linked above. Alternatively, you can Google "criteria for a 363 sale" or something of that sort.) The Fiat transaction meets these criteria.

It is unfortunate that the U.S. government is playing such a heavy hand by financing the Old Chrysler, helping fund Fiat in creating the New Chrysler, and putting pressure on the big name creditors who have received TARP money. But, this is where the Indiana Funds probably lack standing. The notion of standing is one which is bothersome to me in general. I understand why standing is required so that we avoid clogging up the courts with frivolous lawsuits, but it seems that some fundamental Constitutional questions remain unchallenged since no one has standing.

Ok. Anyways... I'd love it if some bankruptcy and constitutional experts happen to come across this post and can chime in. But, as I see it, the senior secured creditors may be losing out in this deal, but it appears to be both legal and their best available option. And, yes, the UAW VEBA is making out quite nicely (on a relative basis), but this is due to an independent deal struck with "New Chrysler" (supported by both Fiat and the U.S. and Canadian governments) and outside of the purview of the bankruptcy itself. The proceeds from liquidating the assets which will remain with the Old Chrysler as well as the $2B paid by the New Chrysler will be paid to the secured creditors under "normal" bankruptcy law (i.e. they are paid before the unsecured creditors or equity holders).

By the way, I do agree that this whole mess will have implications of sort on the desirability of investing in the bond market. However, the 363 sale is legal, has been widely used in other cases, and can "screw" secured creditors. This highly publicized case may place pressure on the future use of 363 sales and/or introduce higher interest rates (and more risk) on corporate bonds.

If you want to read even more details on the ins and outs of bankruptcy, Credit Slips is a very good site. Incidentally, Elizabeth Warren, the chair of the Congressional Oversight Panel for TARP, is a contributor.