Speed Bump: Supreme Court Puts Hold on Chrysler/Fiat Merger

It seems the marriage of Fiat and Chrysler has hit a speed bump (NYT):

Justice Ruth Bader Ginsburg, who handles emergency matters arising from the United States Appeals Court for the Second Circuit, issued a stay of the sale, preventing Chrysler and Fiat from completing the transaction immediately.

There’s a slim possibility this could become a serious roadblock to the merger, which was set to conclude at 4 p.m. today after the Second Circuit denied the stay and allowed the expedited path to merger to proceed.  Now, instead, there could be a delay of weeks, as Ginsburg and possibly the full Court decide what to do.

The arguments being made by the pension funds — the Indiana State Teachers’ Retirement Fund, the Indiana State Pension Trust, and the Indiana Major Moves Construction Fund — are pretty interesting and could have wide-ranging consequences, should Ginsburg choose to pass the issue up to the full Court.  The mostly likely argument to get them anywhere, as the Wall Street Journal’s law blog summarizes, is that they’ve had their constitutional rights violated by this deal, because junior creditors were privileged over senior lenders in Treasury’s deal.  The funds might have standing to argue that, but will need to prove existing, specific harm.

The trickier charge, and the one that makes me more uneasy, is this:

The United States Department of the Treasury (“Treasury”), purporting to  utilize powers conferred upon it by the Troubled Asset Relief Program (“TARP”) established under the Emergency Economic Stabilization Act of 2008, 12 U.S.C. 5201 (“EESA”), will have been permitted to structure and finance the reorganization of Chrysler without any judicial review of its authority to do so (the Bankruptcy Court incorrectly disposed of the issues by deciding that Appellants lacked standing);

Full text of the Pensioners’ Application is here, in PDF.  I’m not uneasy because I think that’s a bad charge — rather, it certainly seems like it’s true.  TARP hasn’t undergone any significant judicial review, and it seems like, if challenged, the authority of Treasury and the Fed to intervene in rescuing companies like G.M. and Chrysler, particularly when their decisions have involved the kind of leverage that comes close to outright threats, could crumble.  Beyond that, my faith in the lawyers at Treasury in particular is pretty thin, so I’m not sure I believe that they drew this up in an unassailable way.

I don’t think the Constitution prohibits the government from intervening in business in the U.S.  But I can certainly see how the current methods, which have at times felt slap-dash, might be unraveled by the Court.  Is that for the better?  I don’t know.  I don’t completely buy anymore the argument that Chrysler needs to be turned around in 30 days to survive, though I do believe that its workers will suffer more and harder for each day that the merger is delayed.

I’m actually hoping Eric Holder will have to issue a statement about this.  In fact, I find myself suddenly wishing that Holder was part of that Auto Task Force surrounding the president last week.

G.M., Chrysler Announce Thousands of Dealership Cuts

It hasn’t been a good year for car dealerships.  Gas prices skyrocketed, meaning more people were eyeing the bus and the bike; the economy downshifted, meaning more people were eyeing the electrical tape than the new-car circulars; and now two of the Big Three U.S. automakers have announced plans to cut a combined 3,158 dealerships in the next year or so.

G.M. made its announcement today.  The company plans to cut its network of dealerships by 2,369 (40 percent) by 2010.  These cuts will come from cutting off 1,100 dealerships that underperform, closing 500 dealerships that only sell the Pontiac, Saab, Hummer, and Saturn lines that G.M. is looking to get rid of, and by combining other franchises.  Right now, G.M. says this will happen in late 2010, when contracts expire, but if it files for bankruptcy, the closures might move up significantly — say, to this fall.  They haven’t yet announced which dealerships will close, but have said they’re focusing on underperformers, a logical way to make cuts.

Chrysler made its announcement yesterday, complete with a list of who’s going to close, where.  They’ve asked the court to cut off these contracts on June 9.  You can download the full bankruptcy filing [huge .pdf] and search for your home state, if you’re curious (I was). 

What you might find is that some dealerships aren’t closing outright — they’re just losing the Chrysler side of their business, as the Jeep-Volvo-Volkswagon dealer near me will be.  That’s still a big hit in product supply, of course, but the reports that say unambiguously that 3,000 dealerships are going out of business seem to miss the nuance: 3,000 dealerships will lose supply of brand-new G.M. and Chrysler vehicles, but the industry is so cross-pollinated now that it doesn’t automatically mean 3,000 dealerships will fold.  It will be a huge loss for these businesses, which will also (presumably) lose financing arrangements through GMAC, but it’s not the end of the road for every one.

Yet G.M. in particular seems to be ready to cut off its smallest dealerships, those that sell only a few dozen cars a year and are probably likely to be heavily tied to one brand.  While that makes perfect business sense, I wonder if won’t also contribute to the declining economy in the middle of the country, where, like the slogan says at one my old hometown car-dealerships, “a handshake is still a deal.”  Small dealerships are everywhere in the Midwest, and while they do a fair trade in used cars, there’s still a culture of The Car Dealer, the small town salesman who can talk you into a new Cadillac when you came in for a tire rotation, that seems sure to die.

A Hot Wheels Primer to Chrysler Bankruptcy Day

Remember Hot Wheels?  I used to have a few, many of which I raced and then crashed off the roof of my Barbie dream house.  They were great, simple toys, and they were even better because they were such exact replicas of the real versions that there was a certain satisfaction in playing with them.  It made me feel like I really understood cars.  I didn’t, of course, but it did offer some insight into the basics: for instance, don’t drive a car off the roof.

I think Hot Wheels cars can be useful again for getting a surface understanding of the Chrysler deal.  Specifically, the Dodge Viper:

It glitters!  Ah, the good old days.

Anyway.  As you may remember, today (April 30) is the deadline for Chrysler to return to the government with a viable restructuring plan.  If it does, it gets a cookie — in the form of about $8 billion in additional government financing to see it through.  If the plan is unsatisfactory, Chrysler heads to bankruptcy.

The good news from this week and weekend is that Chrysler managed to get a Treasury-approved deal worked out with the United Auto Workers.  The New York Times reports that members approved on Wednesday “a complex deal that changes work rules, cuts benefits and gives the union a 55 percent stake in Chrysler as partial funding for its retiree health care trust.”  A deal with Fiat is expected to be signed, well, right now, or by tomorrow, that will offer Fiat a 20 percent stake up front, with management control, and a possible expansion to 35 percent equity going forward.  Welcome to the new Chrysler:

But though the UAW has agreed to this deal, and Fiat seems on the verge of agreement, the whole thing is being held up by Chrysler’s lenders.  I wrote about this earlier, when the Wall Street Journal reported that J.P. Morgan Chase was leading the charge not to forgive any of Chrysler’s debt.  Well, now it turns out that JPMC and the other three largest lenders to Chrysler have agreed to take a significant cut in what they’re owed.  Here’s what’s currently outstanding to lenders at Chrysler:

That’s a total of $6.9 billion.  The Treasury Department has worked out a deal where the lenders — all 46 of them — would get $2.25 billion, cash, in exchange for relieving Chrysler of its debt.  That means the four biggest debt-holders would see a $1.5 billion return on their $4.8: a total loss of $3.3 billion.  The other lenders would see $350 million on their owed $1.1 billion — a total loss of $750 million.

And yet it is these smaller lenders that are holding up the process, not the four big banks.  Why?  As the Wall Street Journal and Felix Salmon tell it, the big banks bought Chrysler debt at full price, back in the day (I do not know what day); the smaller lenders, including hedge funds, bought the debt at a huge discount, once it became much riskier that Chrysler wouldn’t be able to pay up.  If Chrysler goes into bankruptcy, they stand at the front of the line to get money back — and they might stand to make a profit, whereas the big banks are going to lose something either way.

It’s these smaller lenders, the hedge fund folks, who are currently torpedoing the talks.  You might wonder, as I did, why this even matters — if the four biggest lenders are on board, isn’t it enough to have their votes?

Well, apparently the proceedings here are more like the Senate than the House: Rhode Island gets the same number of votes as California.  The guy who holds $1 million in Chrysler debt has the same say as the guy holding $1 billion.  That’s not just some weird fairness decision — it’s apparently because the Obama administration is worried about legal challenges to the deal if everyone doesn’t agree.

So, where does that put Chrysler today?  I’m guessing it puts Steve Rattner, the Car Czar, locked into a small room with crappy coffee and at least eight very unhappy bankers, until midnight eastern time.  And if they can’t work out a deal, what will Chrysler look like?

Oh, OK, nothing quite so dramatic, probably.  Strangely, the Obama administration is of two minds on this one.  At his press conference, the president said he’s “hopeful” that Chrysler could go through a “very quick type of bankruptcy.”  But The Wall Street Journal reports Treasury is singing a different tune:

Treasury officials remain concerned that a Chapter 11 filing could lead to a loss of control of the car maker’s future. Some Chrysler creditors could argue in court that the company is worth more to them in liquidation than they are granted in the Treasury’s deal, which offers the creditors about 29 cents on the dollar in cash. Some of the creditors have signaled they are prepared to fight the matter in court.

Whether this is going to end that badly or not, we might not know for a while.  But whether that direction is likely… well, that we should hear within the next twenty hours.

Beep, beep.

Fiat’s Chrysler Buy: Just the Ideas, Ma’am

Here’s the question that matters this week: If you had $14,000, would you buy this car?

It’s the Fiat 500, and the concept most likely to be coming soon to a Chrysler plant near you, should the Fiat/Chrysler merger come together.  Sergio Marchionne, Fiat’s CEO, has been saying since last year that he’d like to bring the 500 to the American market.  And Chrysler’s been encouraged by the government to produce smaller, more fuel-efficient cars pronto.  The 500, which would fit in my car’s trunk, gets 46 miles to the gallon on its base model (a more eco-friendly version gets 67 mpg, with carbon emissions nearly equal to a Smart car).  Did I mention it currently goes for 10,500 euro ($14,000)?

The 500 and its Fiat brethren (The Fiat Panda seems a likely companion, but only for people who never listen to Top Gear’s Jeremy Clarkson) are the future of Chrysler.  They are, in fact, what Fiat is “buying” into Chrysler with — the company is offering no money at all to take a 20 percent stake in the company.  Instead, they’re offering concepts and techonology — $10 billion worth.

It’s probably a good deal.  The government viability report [.pdf] on Chrysler mentioned again and again that the company was, basically, out of ideas.  It spent everything it had to keep pace with its larger competitors, putting everything it had into production, so that it had cut back sadly and deeply on research and development.  The merger will offer Chrysler a way back into the new-car market, putting its plants to work on constructing cars based on Fiat-researched models.  What we’ll get won’t be the 500 — Ford took that name already — but a twist on it, a Fiat with the familiar Chrysler wings on front.  Sounds like a happy ending, right?

Except what we’ve come to is that an Italian company is going to buy an American car-maker not on the strength of its money, but on the value of its ideas.  In that respect, it’s hard to think of Fiat as the savior of the American manufacturing industry.  If innovation is the problem, well, it’s hard to think of a way to save the industry at all.

WSJ: Chrysler Heads to Bankruptcy, Or Fiat, Or Not, Or…?

The Wall Street Journal has a rambling piece about the possible future of Chrysler that starts with this:

Chrysler LLC is preparing to file for Chapter 11 bankruptcy protection as soon as next week, whether or not it reaches a deal with its lenders or forges an alliance with Fiat SpA, said several people familiar with the matter.

This sentence kicks off an 1,100 word article in which only three words — “in its totality,” in the last line — are attributed to anyone by name.  The rest of the article quotes:

• “these people” (x4)
• “people familiar with the matters”
• “people familiar with the matter” (again)
• “Fiat” (no clarification on whether that’s the whole company, the signage out front, or someone’s talking car)
• “The Obama administration” (again, no clarification on whether they spoke united)
• “an administration official”
• “one person”
• “people familiar with the situation” (x2)
• “Obama advisers”
• “Officials with President Barack Obama’s auto task force”
• “people familiar with the talks”

That final quote from Fiat CEO Sergio Marchionne came from a conference call.

From this combination, it’s hard to figure out whether there’s any original reporting at all in this story.  It’s also hard to tell what qualifies one to be a person familiar with the situation — let’s hope it requires more than just reading WSJ coverage every day.

The point the story starts out making — that Chrysler is going into bankruptcy even if it cuts a deal with its lenders — is seriously undercut by anonymous quotes within.  We start with the above lede, then travel to someone in the administration and an unnamed Fiat negotiator saying that bankruptcy won’t be necessary, travel to a Chrysler source saying to lenders (via some third party source) that yes, they’re going into bankruptcy so Fiat can pick and choose pieces of Chryster, then finally land on Marchionne’s quote that Fiat is “interested in Chrysler ‘in its totality.'”  In the middle, there’s a side-show story about Fiat seeking a possible merger with G.M. — and the story says both that this will be only a takeover of G.M. European Opel division and a way for Fiat to spread into the American market.

I should not be more confused at the end of the story than I am at the beginning — unless the point of the story is to show the chaos that’s currently reigning within automaker negotiations.  What I get a sense of here instead is the chaos in the newsroom of a paper that sees itself as the premiere source of business news in the country.  Really, it took five reporters to write this?

A friend on OS asked a while back why there aren’t any embeds in the financial crisis — people on the ground, covering the story from within, sending reports back from the front lines.  I spent some time trying to answer this, and kept coming back to the same problem: Embedding a reporter in a bank — in any private enterprise — would seem to be a breach of privacy.  At best, even assuming a reporter did get internal access to the major goings-on, I figured we’d end up with some Bob Woodward-like book on the financial crisis a year after things are concluded, revealing who made who do what and for how much (read that in any way you want — I assume it’s all very messy in the banking industry right now).

But while real-time insider reporting might not be feasible, actual reporting is necessary.  As I rarely spend a day making any calls myself, I’m lecturing from a glass podium on a stage made of very thin crystal — but I’m an unpaid opinion writer, whereas the five reporters who contributed to this Wall Street Journal article about what could be one of the more important financial incidents in a year that hasn’t yet been boring get paid to go out and report the news.  That means not just talking to sources, but getting them to go on the record — and when they won’t go on the record, it means finding more sources who will.  It means telling a story that makes sense, and that’s credible, and that can be tracked and proven.

It also means reporting without a pre-set agenda.  Consider these three paragraphs:

Reorganizing three auto makers on three continents could move the world-wide car industry a big step toward the kind of large-scale consolidation that long has been overdue. For years, auto makers have struggled with excess capacity that has fostered intense price competition and squeezed profits.

The problem has festered because stronger car makers have steadily added plants while governments often have stepped in to prop up ailing car companies to preserve jobs.

Any bid to restructure three auto makers is likely to prove highly complex and risky for the companies involved and the Obama administration. Chrysler is in such bad shape precisely because its cross-border merger with Daimler AG ended in failure after eight years.

That may all be true, but I have no idea who’s claiming it.  Who says consolidation is long overdue?  The reporters?  Half of the reporters?  An unnamed source?  The Wall Street Journal itself?

Hundreds of experts exist in the U.S. who would have been willing to assist in this story, even on a Thursday when there’s good new T.V. to watch.  Likewise, though perhaps no one directly involved with the ongoing negotiations might be willing to go on the record, official sources at all of the companies involved get paid to answer media inquiries, and I bet even their non-denial denials of the statements above would have told us something.

Beyond even that, every time the government thinks about making a deal, a tree dies.  There’s paper out there.  Someone must have been willing to hand over a report or a sketch of where things could be headed.  Someone must be already working on the court filing for Chrysler.

I agree whole-heartedly with Glenn Greenwald that anonymity is being granted all too often these days, and I think we’re in more danger of being complacent about it when it appears in an article full of numbers and semi-familiar economic arguments.  The more complex the argument, the more carefully it should be explained.  The more controversial the event, the higher the bar for granting anonymity.

The more I read of the Wall Street Journal, the more frustrated I get.