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.

Small Wonder: A Terrible Day for Tim Geithner

Felix Salmon had a nice post today suggesting that major U.S. banks holding Chrysler’s debt are willing to let the company go into bankruptcy instead of taking a haircut on their debt in part because there’s no real way the public could think less of them.  Being the automatic villain gives one a certain freedom to be horrible, and J.P. Morgan Chase and friends certainly find themselves there.

What this made me wonder is, at what point will Tim Geithner hit the so-hated-he-can-do-whatever stage?

I mean, this has been a totally sucky week to be Geithner.  Consider he went into the weekend with Paul Krugman’s “it’s gonna get so much worse” column and Rachel Maddow having invited the “Hey Paul Krugman” singer onto her show (for the 5 people who hadn’t already heard him sing, “Timothy Geithner, he’s like some little weasel,” via the Internet).  Yesterday, he had the hey-guys, cut-your-budgets Cabinet meeting (check out the body language here, too — that’s Geithner slumped next to Biden).  At this point, I’m not sure the man could buy friends (though I have no doubt at least one commenter will say he’s tried).  Just take the last 24 hours:

• The Special Inspector General issued his report, which initially made news for saying that, contrary to the Secretary’s earlier assertions, firms who wanted to participate on either side of the Public-Private Investment Partnerships would be subject to compensation limits.
• Then it made news because, at The Economist, that sounds like the end of the PPIP.
• Then it made news because there are already 20 fraud cases being investigated.
• Then Felix Salmon pointed out that, within the report, there’s open speculation that it could encourage out-right criminal organization money-laundering schemes.
• The IMF also released its Global Financial Stability Report today, and said that bank losses are over $4 trillion, with more than half of that originating in the U.S.  Oh, and we’re going to need substantial additional investment to recapitalize banks, and may need to nationalize some at least temporarily.  And soon.
• All of this before the real fun started: Geithner testified before Elizabeth Warren’s Congressional Oversight Panel.  You may remember her as the woman who made Jon Stewart feel better last week, or the one who released the highly critical — and commendable, at that — report on the Treasury’s plans so far.  Wanna guess how that meeting went down?  Let Andrew Leonard summarize:

The pattern is now sufficiently well established to be definitive. The treasury secretary appears before a congressional committee, and is asked tough, detailed questions by members of both parties. He invariably compliments and thanks the questioner for a “thoughtful” and “important” question, and then proceeds to answer in vague generalities, rarely committing himself to specifics.

I’ve watched or pored over the transcripts of almost all of Geithner’s testimony before Congress, and it’s getting harder and harder to make a case in defense of his brief tenure. Tuesday’s hearing, before the Congressional Oversight Panel empowered by Congress to watch over the TARP program, ranks as one of his least satisfying performances so far. 

(I would say it was sort of like watching the robot from Small Wonder face off with Minerva McGonagall from Harry Potter — you start off rooting for both sides, but by the end, you just want McGonagall to put the robot out of her repetitve, wide-eyed misery).

• The stock market did rally a bit over Geithner’s assertion that “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”  That sounds like great news, until you realize he never said that (he skipped those pages, somewhat dramatically, in his testimony).
• Also, even if he had said that, it was meaningless and earned, again, bafflement and concern (and use of the word “ominous” in the first paragraph) from Paul Krugman.
• Finally, The Wall Street Journal ran an interview with Geithner (“Geithner Weighs Bank Repayments“) where he said he’s considering whether to let banks repay their TARP debt early or not.
• Finance blogger Nemo and a reader point out that, no, he can’t do that — he has to let banks pay the money back whenever they want to.  Strike… what? 56 or so? for Geithner.

It’s those last two points that bring us to the importance of the villain question.  The two banks currently talking about repayment are Goldman Sachs and J.P. Morgan Chase.  Paying back TARP funds would free these two from compensation limits — present and looming — and also make them look strong and solvent.  JPMC CEO Jamie Dimon has called TARP assistance a “scarlet letter,” and he’s looking to shed it as quickly as possible.  This would possibly inspire further investment in these banks and certainly encourage concentration of power into their hands.

Which is partly why the Treasury Department isn’t keen on just letting them repay so quickly.  Banks shedding TARP funds could make other banks want to jump ship — banks whose life-vests aren’t properly inflated.  So you could see Bank of America trying to pay back TARP, and either failing after payback, or failing to payback at all — and either way looking so weak as to inspire (who thought it was possible) less confidence than even now.  Which would, of course, benefit those who do survive the leap — probably a big part of the JPMC/Goldman dream right now.

In fact, the only reason that a firm wouldn’t leave TARP right now is a desire NOT to piss off the U.S. Treasury Department.  It’s in their individual interests to run, even while it might be in the interest of the entire system for them to stay a while.  So let me ask you this: Is Tim Geithner someone you’d want mad at you?  Does a real villain lurk somewhere within the Small Wonder facade, just waiting for the day when it no longer matters what Wall Street thinks — and if so, was today that day?  Does he have enough power, inside or out of the Treasury, to make things more uncomfortable for these banks than they already are?

My guess?  If there’s pressure to be brought to bear, it will have to be done by the President — and if that’s the case, Geithner’s days at the grown-up table are going to be limited.