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.