Is The Chrysler Plan Of Reorganization Fair??
 

I'm sure if I spent enough time I'd be able to find the precise detail of the proposed Plan of Reorganization to permit Chrysler to quickly escape bankruptcy. But at this point, it seems clear that the secured lenders--those that thought they were pretty much at the top of the heap in the capital structure, right behind the government -- will only be getting 29 cents on the dollar and a kiss goodbye. There's been little detail published, but presumably the unsecured creditors, including the suppliers, leaseholders, suppliers of services, and so forth will take a similar deal or even less.

But what about the other major stakeholder in Chrysler--the UAW? Here's what I've been able to determine from reading the national press...

The UAW threw all new employees under the bus and agreed to substantially lower hourly wage rates and benefits for those yet-to-be-hired. When will that benefit Chrysler? Long after the current UAW officers are retired and the current muckety-mucks in the Fed are long gone, I'd guess...years in the future.

I've read nothing about any substantial wage cuts agreed to by the UAW for existing union members. Certainly nothing that will bring the UAW workers even close to the lower wages and benefits of the non-union people making foreign brands in U.S. plants.

The UAW made a big deal about abandoning the benefit whereby laid off workers get paid a substantial portion of their wages even when laid off. It used to be 95%, as I recall. That sounded good, but recent press coverage says that the workers laid off from virtually all the Chrysler plants closed as the result of the Chapter 11 filing are collecting 80% of their straight-time pay. And they're complaining about it! I saw one UAW member interviewed on TV complaining, "...they cut my layoff benefit to only 80%, but my cost of living stays at 100%. That's not fair." That sounds like a pretty sweet deal to me--and not very much of a "give back" by the UAW at all.

The UAW has agreed to take Chrysler common stock as a portion of the funding of the new VEBA trust, which is supposed to fund retiree health insurance benefits. It turns out that the VEBA, run by the UAW, will own 55% of Chrysler as the result. But then in a Wall Street Journal article today, the plan also includes certain unidentified cash contributions to the VEBA required from the "new" Chrysler.

Have the retiree pensions or health benefits been reduced as a part of the UAW's contribution as a stakeholder? Not at all from any of the articles I've read. Chrysler retirees still count their UAW insurance as "primary" and Medicare as "secondary" even after age 65. If you didn't have to pay any premiums or co-pays and have ridiculously low deductibles, wouldn't you?

So what conclusions can be reached from all the current press coverage of the bankruptcy? It sure seems to me that the secured lenders are being required to do almost all the heavy lifting to make the Chrysler Plan of Reorganization work. The Plan being pushed by the Fed leapfrogs the UAW over the secured lenders, regardless of their credit and security agreements. The Fed-induced Plan abrogates both commercial as well as bankruptcy law.

The UAW has chipped in virtually nothing other than the wages and benefits to be paid to future workers. Of course, those wages and benefits will be subject to upward negotiation the minute Chrysler's chart changes from a flat line to a few occasional bumps of positive cash flow. That applies to the funding plan for the VEBA as well. What is part of the Plan of Reorganization to permit Chrysler to escape Chapter 11 becomes fully negotiable again, once the bankruptcy referee bangs the gavel and puts the kids back out in the schoolyard.

I don't think it's just because I'm a retired banker/lender that this plan doesn't seem very fair to me. Is it "fair" that a UAW retiree who worked all his life with the expectation of promised pension and benefits be required to take a haircut on those benefits even though he had nothing to do with the sad financial condition of his former employer? No, not really. But is it any less fair that a lender who made a secured loan to Chrysler with the expectation that the bankruptcy law protected their position in the pecking order of creditors, only to find that the government made their credit and security agreements not worth the paper they're written on--before the question of their position in the bankruptcy is even presented to a judge?

It makes me wonder how much pressure the Fed put on the banks that lead the secured lending facility to accept the (the Fed's) Plan proposal. Has it escaped anyone's attention that the lenders who were resisting the proposal were all hedge funds or mutual funds and not subject to Fed supervision and regulation? I think I can hear the threats now--"...take the 29 cents on the dollar or get ready for a whole lot of stress on your stress test and a whole lot more regulation from us. If you don't cooperate, we'll own even more of your bank than we do now. Either cooperate or suffer the consequences. Don't complain about the UAW owning Chrysler--if you don't cooperate, you'll be holding your shareholder's meetings at the Treasury building, because we'll own you. Besides, how many voters can you deliver anyway?"

A simple question might be...if you were a bank or a lender of any kind, would you extend large amounts of credit, even if very comfortably secured and documented with rock solid credit and security agreements, to a large company whose employees are heavily unionized and members of a large national union? At least for the next generation of bankers, the answer is likely to be "never again". If the banks won't lend to such companies because of this experience, who does that leave as the lender of last resort to such large companies?

Wait! I just looked in the mirror and I think its ME! (And as another taxpayer, YOU as well!)

Comments?

One of the talking heads on CNBC last week(not sure who) made the statement that "Secured does not mean guaranteed."
I think the Hedge Funds were aware of the risk.

Pardon Me, But...
 

...the talking heads on CNBC have a lot of talent. But knowledge and experience with the laws governing lending, the pledging of collateral as security, and bankruptcy are NOT among them.

They were correct in saying that a "secured" loan does not necessarily mean that its repayment is "guaranteed". I'll give them that much.

But they confused their viewers, including Kayaker apparently. Let me amplify what legal rights the secured lenders have (had) and what is actually happening in this bankruptcy.

• A syndicate of lenders made a $6.9 billion loan to Chrysler.
• Chrysler pledged all of their assets (plants, equipment, inventories and intellectual property) as collateral for the loan.
• Filings documenting the pledge of the security were filed in each state where the property existed.
• As the result, the senior secured lenders placed themselves in a position senior to all other unsecured lenders, including suppliers, lessors and any of the expenses accruing to payments to their employees or obligations under the UAW contract.

The bottom line is that the senior secured lenders had every right to anticipate that under both state and federal commercial law, and under the laws of bankruptcy, their loans would be repaid before any of the other obligations due unsecured creditors.

Realistically, that's not the way it always works. If a debtor company files for protection from it's creditors under the bankruptcy laws, the company is not obligated to pay either principal or interest on those debts until ordered to do so by the bankruptcy judge. Typically such orders are issued based on negotiations between the creditors, or at the very least filings with the judge for him to make a decision on payment or partial payment.

I should mention that there can be one creditor that can trump even a senior secured creditor. That is the lender(s) who provide debtor-in-possession (DIP) financing. The DIP lender provides what is essentially working capital loans to the company so it can continue to operate while it is reorganized in bankruptcy. While I don't think that the federal government legally placed itself in the position, it is essentially providing DIP financing by providing the auto companies and banks with money. But in the case of Chrysler, GM, some auto suppliers, all the banks and insurance companies, etc., the position that the government took was as the purchaser of preferred stock. In bankruptcy, that means that the preferred stockholders would be paid after both the secured and unsecured debtholders, but before the common stockholders. Typically, after the debtholders are repaid, even a portion of their loans, there is nothing left for distribution to the preferred and common stockholders.

What happened with regard to Chrysler seems pretty straightforward. Once the administration made the political decision that they would not permit the auto companies to fail, then the last place they wanted the Plan of Reorganization determined was in the bankruptcy court. There is a perfectly reasonable expectation that the creditors would never reach agreement within and among themselves, leaving the government to continue to pour money into Chrysler to keep it afloat. What was needed was a "pre-packaged" bankruptcy, where the company and the creditors had signed off on a plan before actually filing for bankruptcy protection.

To accomplish that would take all the influence that could be provided by the government--and that can be significant. I am quite certain that the administration leaned on Chrysler to agree to what they did (reduce the value of the equity to -0-, sell to Fiat, get rid of the CEO, dump hundreds of dealers, reduce car lines, etc.) Similar pressure was clearly applied to the secured and unsecured lenders.

What pressure you might ask? My short list would include increased regulation and a witholding of more bailout money to the banks, the threat of unsavory new regulations, the threat of tax audits on the companies and their management, actually firing the bank management, you name it. Take note that the only secured lenders who resisted were hedge funds and money funds which had not taken any TARP money from the government. The syndicate's lead banks had taken a collective $90 billion from the Fed in TARP distributions. They were almost certain to do precisely what the Fed wanted them to do, including accepting a far lower repayment of their loans than might ultimately result if Chrysler were liquidated. The last of the secured lenders to cave in said, ""Being such a small group trying to fight the force of the government made us very uncomfortable." That pretty much says it all.

The government can be an overwhelming opponent if it so chooses. In the case of Chrysler--and GM in the near furure--the last thing the administration wants is a bankruptcy filing before a plan of reorganization is agreed to and documented. That simplifies the role of the bankruptcy judge and limits the risk of calls for more and more money from the government. If you closely read the statements of the last few secured lenders who succumbed to government pressure, it was quite clear that they abandoned their solid legal position under the threat of political pressure.

Now back to my "fairness" question. The government didn't ask much, if anything, from the UAW. Those folks were both big political contributors and they are voters!

So my question remains--was the "settlement" fair?

Actually, there's another couple of questions. Will the Chrysler and GM bankruptcies cast a permanent shadow over the rights of lenders under our rule of law? WIll lenders continue to lend to these kinds of companies if it's demonstrated that they cannot rely on our commercial laws to protect their positions. It's pretty clear that these bankruptcies will result in the political administration stomping all over the legal rights of parties to commercial transactions. Will they do it again? Can lenders rely on their contracts? The fallout of this will be a whole lot more important than whether the UAW survives or whether we can continue to by Dodge trucks.

The CNBC reporters haven't mentioned it...yet. But the Chrysler and GM bankruptcies will have a permanent and negative effect on U.S. commercial law.

And Steve, if the financial community concludes that it cannot rely on our rule of law, there won't be anyone except the government to finance those companies making the horse carts and merry-go-rounds. The good news is--that's a business the government could easily enter--they certainly own enough banks.

All of the plans so far have yet to address the key issue - getting people to buy Chrysler products instead of obviously better products in the marketplace.

Until the sale-of-product problem is solved, all that these other plans do is just relocate the horses and the carts on the merry-go-round, but never add any paying riders.

"The UAW made a big deal about abandoning the benefit whereby laid off workers get paid a substantial portion of their wages even when laid off. It used to be 95%, as I recall. That sounded good, but recent press coverage says that the workers laid off from virtually all the Chrysler plants closed as the result of the Chapter 11 filing are collecting 80% of their straight-time pay. And they're complaining about it! I saw one UAW member interviewed on TV complaining, "...they cut my layoff benefit to only 80%, but my cost of living stays at 100%. That's not fair." That sounds like a pretty sweet deal to me--and not very much of a "give back" by the UAW at all."


VK...this is the part that really galls me ! It is inconceivable to go bankrupt and pay laid off workers to any degree !

My question is this.....are these "laid off workers" collecting 80/95% of their wages which are high, also able to collect any government funds ?

Secondly, are these "laid off" workers counted as unemployed in any government statistics ?

wouldn't it be nice
 

I just wish I could get the same benefits if my company ever went under.
I'll bet most of America would like the same option for sure.:cus::cus:

No To Both Questions, Bucco
 

No, when the laid off UAW members are collecting 80% of their pay, they are not eligible for any unemployment benefits. Because they are not permitted to file for unemployment, that would suggest that they are not counted in the Bureau of Labor Statistics unemployment data.

What's kind of amazing about this UAW benefit is that almost every single UAW worker being paid this benefit are earning more on an hourly basis for doing nothing than virtually every worker being paid by the hour that we encounter in The Villages. Plus, the UAW members get free and extensive hospitalization insurance. I'd bet that less than half of the people we encounter in TV on a daily basis have any health insurance at all. Those that do are paying a fairly substantial part of the premiums, I'd guess.

On the "fairness" question--is it fair that the taxes paid by workers in Florida be used to bail out the auto companies whose UAW workers enjoy such pay and benefits? The answer is obvious, but who can do anything about it?

Chrysler will not survive no matter what happens unless they continue to get "free" money every year. The math does not work. We live in a global market place. It takes a quality product at a competitive price to generate sales. Chrysler has neither. Unless the UAW takes significant wage cuts and their workers provide quality work and their designers start to enhance the product the will go out of business.

I travel a lot for work and have a different rental car every week. I would prefer any brand to a Chrysler. They are poor quality, ergonomics are poor, and handling and performance are not great. They have to change to survive. Cost and quality. And if the UAW can't understand that they can't compete when wages are so high, GM will be next and Ford not to far behind. Although both of those do have a better product.

Believe me, I do not want them to fail, but the math just does not work when your paying an hourly wage twice what your competition is paying. No matter what your business is, you will fail. And unless you make a quality product you will fail unless your selling it at a much lower price. Chrysler fails both tests.

It al boils down to this: Why wasn't your last car purchase a Chrysler product, and will your next car purchase be a Chrysler product?

All of the employee compensation plan changes, and executive pay changes, and factory consolidation plans and so on ad infinitum ignores the obvious. No customers means no company - period! Companies provide products and/or services that customers want. If there are no customers, companies shrivel an die. It's been that way since the first fisherman sold his first fish.

Government intervention with Chrysler - without resolving the no customers issue - is WELFARE. The scope of the Chrysler welfare plan is enormous, but it is indeed welfare, as there is no good business sense to it.

So, we stumble along, throwing taxpayer money to insure union contracts are fulfilled by a dead company. I guess the UAW vote must be worth it......

Bankers?
 

VK...
Just reading that the average bank teller makes a whooping $9.93 an hour!
God Bless the UAW and Chrysler...Trust me we are coming back and we will pay you back just like we did in 1984!
By the way ....what kind of car do you drive???...


Sorry....Autoworkers are what made this country great....before Henry Ford...who paid their employees fair wages...answer: Nobody.

Steve....
 

Welfare???

I Have To Admit...
 

...that starving Chrysler for cash--no taxpayer funded bailouts--and just letting it be liquidated--was probably the right solution in the beginning. The company currently has 54,000 employees. Probably 20,000 of them are going to lose their jobs as the result of the bankruptcy anyway, so the actual direct increase in unemployment might have only 34,000 jobs. Of course, there would be the indirect loss of jobs--suppliers, dealers, transporters, local government in the towns where there were plants or offices, etc. Let's say those job losses amounted to another 100,000 jobs. The total job losses for letting Chrysler flatline would have been in the range of 150,000 jobs.

That sounds like a lot, but 150,000 jobs would have only increased the reported April job losses by 27%--from 539,000 to 689,000. Those job losses wouldn't have all happened in a single month, so the lost jobs would have been quite manageable.

The flip side of permitting Chrysler's liquidation would have included...

• The secured lenders would have been repaid far more than the 29% they were pressured to accept--probably more like 50 cents on the dollar. Remember, to the extent the banks incur huge loan losses, we taxpayers have been pumping money back in to retain reasonable capital ratios. In reality, we paid for the loan losses, not the bank's shareholders.
• The taxpayers would have avoided pumping close to $15 billion into Chrysler.
• The Pension Guarantee Corporation would have significasnt calls on it to pay for Chrysler retiree pension benefits, but no where near the amount it cost to keep the company alive. Of course, we taxpayers fund the PGBC, as well.
• The rule of law for lenders wouldn't have been trampled. It would have become clear that their loan agreements are enforceable, unlike the way it is now where the government stepped in before the courts took over and simply pressured the lenders to accept far less than called for by their contracts.

There were probably other positive results, as well. But we are where we are. Chrysler employees will still be paid about $20 an hour more than their counterparts assembling foreign cars, and they will retain their rich fringe benefits and loose work rules. In the meantime KIA Motors is opening a new non-union plant in western Alabama which will create 20,000 jobs. The locals there are ecstatic that KIA chose Alabama over Michigan to build a new plant and will work like the devil to produce high quality cars at a profit.

Fair? No...it's an egregious gift to the UAW that carries significant costs and sets terrible precedents that will impact lending decisions by banks for a long time. Our government's actions have created serious questions regarding how reliant lenders can be on our rule of law. Legislation and our judicial system won't be able to overcome the damage that was done to keep Chrysler and GM alive anytime soon.

All funded by you and me.

I choose not to reply....

Campbell...
 

I have absolutely no problem with how much a UAW member gets paid per hour, what kind of benefits they have, how tight or loose the work rules are...none of that. The UAW should negotiate the best deal they can get from the car companies.

But when what has been negotiated makes the car companies unprofitable and the only way to save them is with huge taxpayer bailouts...the deal should change.

If the taxpayers are asked to fund these companies to keep them alive, it's only reasonable that the UAW members be asked to sacrifice, as well. In this case, all the stakeholders except the UAW have been forced to sacrifice. Forced to abandon their legal contractual rights by the government using the full weight of it's influence. Our government made a political decision, first to save two almost dead companies, and then to fund the bailout with direct and indirect injections of taxpayer money thru the banks.

In my opinion, the UAW should have been asked...no, forced...to share the pain in order to justify the expenditure of billions of taxpayer dollars. The administration didn't ask or force them to do so, and I find that offensive...and very unfair.

The result is that the tax dollars of workers all over the country who earn less and have substantially less benefits will be used to fund the elevated wages and rich benefits of the UAW. That's unfair!

By the way, do the numbers. There is absolutely no possible way that Chrysler or GM will ever be able to repay the loans made by the federal government to keep them alive. The amount of bailout money given to Chrysler isn't even in the same ballpark as the loan guarantees of the early 1980's. If you look at the numbers, even if Chrysler returned to the profitability it enjoyed in it's best years and stayed there, they couldn't pay bank the bailout loans for many decades in the future. If the government charged even a nominal rate of interest on those "loans", they could never repay the government...or I guess I should say us taxpayers!

You're right. You''re better served choosing not to reply. There's no way that welfare payments to already well-off workers should be funded by others who are paid less and have substantially fewer benefits. It's simply unjustifiable. The UAW should be laughing up their sleeves, having duped our elected government into funding their elevated wages, benefits and loose work rules.

Unfair...and disgusting!

P.S. One of my sons works for Ford and I own three Ford products. And, by the way, early in my working career, I worked for five years as the Plant Superintendent of one of Chrysler's engine plants. Later, I spent over 20 years as a corporate banker, at one time being responsible for the banking relationships with all auto and truck manufacturers as well as suppliers. I'm not coming at this situation from an uninformed past.

wel·fare (wlfâr) n.
1. a. Health, happiness, and good fortune; well-being. b. Prosperity.
2. Welfare work.
3. a. Financial or other aid provided, especially by the government, to people in need. b. Corporate welfare.

#3 appears to be what happened. Both parties were apparently concerned (for reasons obviously political)that Chrysler executives and UAW workers qualified as "people in need," because there was no good business reason to dump money into a company which couldn't sell its product, and none of the money made the product more marketable.