A Second Hand Conjecture

20 Chrysler lenders or about 30% of the debt Chrysler owes lending institutions are objecting to getting fleeced in the governments planned “surgical bankruptcy” plan. In a normal bankruptcy the senior secured creditors (the lenders) are first in line, while unsecured lenders (UAW) and equity holders are last. This is the basis for the lenders’ complaint:

Creditors object to the way the restructuring benefits the United Auto Workers union, which is an unsecured creditor, for the $10.6bn Chrysler owes to its retiree healthcare fund.

“What’s happening is the senior secured creditors are going to get 29 cents on the dollar and the unsecured creditors are going to get $10bn,” said Mr Lauria.

Now I think the obvious unasked question is, if the lenders are getting such a raw deal, why are only these institution objecting? what about the other lenders making up 70% of the loans? Your indirect answer is present toward the last half of the article.

Chrysler’s four main banks – JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup – had received about $90bn in government bail-out [TARP] cash.

Now we see why these banks are going along with losing all this money. They are scared of the government’s wraith. After Congress almost retroactively changed their contracts with AIG, and Attorney Generals outright threatened AIG executives physical well being, these TARP banks realize that the government is NOT bound by following the rules of law and can punish them for not acting in the government’s best political interest, namely, making sure the UAW is placated.

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I hear repeatedly from our fellow citizens “where is my bailout?” For those who have been wondering the fine journalists at Vanity Fair have found the paperwork so you can begin applying now for, as the application says, “free government cash.” (Click image for Large Version.)

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Larry Summers and Mark Thoma argue that if done right the bailout will mean we can solve this crisis and still have everything we want, tax cuts, health care spending and all kinds of other goodies. Larry argues:

Just as a family that goes on a $500,000 vacation is $500,000 poorer but a family that buys a $500,000 home is only poorer if it overpays, the impact of the $700bn programme on the fiscal position depends on how it is deployed and how the economy performs. The American experience with financial support programmes is somewhat encouraging. The Chrysler bail-out, President Bill Clinton’s emergency loans to Mexico, and the Depression-era support programmes for housing and financial sectors all ultimately made profits for taxpayers…

Maybe, but Alex Tabarrok finds this optimism a bit ironic:

Does this sound familiar? I can hear it now. A vacation sir is consumption but a home, ah a home, that’s investment. Investments pay off. Just look at the American experience. Rising home prices! Never a downturn. Isn’t that encouraging? Hell, at prices like these you can hardly afford not to buy. Yes sir, a home that’s a wise investment. And that makes you sir, a wise investor. And a wise investor, well a wise investor can certainly afford a nice vacation.

How the economy performs isn’t really the issue as much as the housing market. Chrysler was bailed out at a cyclical low, we are not at a cyclical low in housing, we aren’t even at a cyclical average. We aren’t even close.

Nor was Chrysler such a rousing success anyway. The bailout of Detroit only postponed the pain for the American auto industry and kept them from either going out of business or becoming better, if probably somewhat smaller organizations, and the costs to us all will eventually be pretty damn high. That isn’t even factoring in cementing the idea of “too big to fail” in corporate America. That encourages larger organizations rather than more profitable ones to be created.

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