This is a very quick initial response to the extraordinary announcement of the Chrysler LLC bankruptcy filing. We don't have all the answers, but that's partly because we don't even have all the questions. Something very new and different is happening here.
It's very far from clear to me that this is a Chapter 11 bankruptcy in any normal sense. For one thing, why is it being announced by the President of the United States rather than by Bob Nardelli?
In reading the news reports, there's a tremendous number of moving parts here, and no one is being very clear about it. I have at least two very big questions, one of which is public and the other isn't.
The public question relates to Fiat. Marchionne has been very emphatic that he will put no cash into Chrysler in return for Fiat's stake, which starts at 20% and could go as high as 51% by 2016. Fiat is giving nothing but access to small-car technology. That can only mean that the government intends to dictate Chrysler's production mix. That in turn means that the government has chosen to enter the auto business in a forthright and unprecedented way.
The private question relates to the current owner of Chrysler, which is Cerberus Capital Management, one of the most powerful, most wealthy, and most feared private equity groups in the world. They easily have access to billions of dollars they could invest in Chrysler. The fact that they simply don't want to, tells you that this company isn't worth investing in, and ipso facto the taxpayers are flushing money down the toilet.
But I want to know much more than that. I want to know exactly what consideration will be paid to Cerberus in return for the common stock that will be ceded to Fiat, to the government, and to the UAW. Are we bailing out a bunch of politically-connected billionaires?
And you can't say you haven't noticed how effectively they've kept their name out of the news. Whenever you get a chance, ask anyone who will listen: WHY HAS OBAMA NOT TOLD US WHAT HE INTENDS TO GIVE CERBERUS IN RETURN FOR CHRYSLER?
I suspect that the objective of the 11 filing is to give a bankruptcy judge the opportunity to tell all of Chrysler's unsecured creditors, including debtholders and trade creditors, to go to hell. Among much else, I want to know if the holders of unsecured debt are, first and foremost, the bankers who provided the leverage for Cerberus to purchase Chrysler from Daimler-Benz in the first place.
If so, then how many of those banks are TARP recipients, and therefore in no position whatsoever to tell the US President that they don't like the deal he's offered them?
And then there about 40 hedge funds who are said to own much of the outstanding debt. Are they principal lenders to Cerberus and/or to Chrysler? Or are they vultures who purchased Chrysler debt from banks at a heavy discount?
Either way, Obama's public remarks included a most remarkable statement in regard to those hedge funds: "I don't stand with them." Please excuse me if you think this is overheated, but if I'm one of those hedge funds, I'm thinking that Darth Vader just declared war on me.
The question has been asked, whether the US President can tell the bankruptcy judge how to proceed. I'd say that the President, having put $4 billion in bridge loans into this company, with the promise of another $8 billion, can do whatever he wants, including installing a judge that he knows will be compliant with his wishes. After all, who's going to say no to the President? The media? The voters?
I have to say that the bottom line is probably this: Obama has two objectives in mind. First, he doesn't want to see massive layoffs at Chrysler and its network of suppliers and dealers. That's just basic political cowardice and very easy to understand. But second, he's seeing an opportunity to change the auto industry in his own image and likeness.
And we really need to be asking whether that should be the job of the US President. Nothing could be more important, because this is a fundamental expansion of the scope of government that no one seems prepared to challenge.
Chrysler is small fry. If this is how GM and the largest banks are going to go, we've got some very interesting times ahead.