Opinion and Investing Column

SKARBECK: Chrysler deal succeeded thanks to fed intervention

June 15, 2009

In the midst of the U.S. government's plan to fast-track Chrysler through bankruptcy, Indiana Treasurer Richard Mourdock waged a lonely and unpopular battle.

His argument that the government trampled bankruptcy law in its haste to sell Chrysler to Italy's Fiat went to the Supreme Court. The high court took little time in declining to hear the appeal, which cleared the way for the sale to close. While Mourdock was the only representative bondholder (Indiana pension plans hold $42.5 million of Chrysler bonds) willing to wage this fight, you can be sure his argument was watched very closely by the legal profession and Wall Street.

In general, upon exiting from bankruptcy, a company's assets are divided among creditors according to their priority standing in a company's financial structure. Senior secured creditors are paid first and include senior bondholders and those who've provided bank loans. Once senior creditors receive their claims, junior creditors are next in line to be paid, including any subordinated bondholders, account receivables and, in the case of Chrysler benefits owed to employees, this class of claimants often does not receive 100 cents per dollar owed. Finally, shareholders are last in line for any residual value left over, but in most bankruptcy cases, they are wiped out.

However, here the government relied on a section of the bankruptcy law to arrive at a distribution of Chrysler's assets that varies from the typical hierarchy of claims. Under the plan, Chrysler bondholders are to receive about 29 cents on the dollar in cash, while the United Auto Workers as a junior creditor received 55 percent of the "new" Chrysler. Fiat gets 35 percent, and the U.S. and Canadian governments the remaining 10 percent. With more than 90 percent of the bondholders agreeing to the government's plan in advance, the government had the power to force a "cramdown" on claimants and distribute the assets in a way it believed makes more business and legal sense for Chrysler going forward.

The government also claimed that, if Mourdock were successful in his lawsuit, the only option for Chrysler would have been liquidation, and would have devastating economic consequences rippling through to the auto-parts-supplier industry.

Chrysler questioned whether "the Treasurer's actions lead one to wonder whether his motives are financial or political." Mourdock retorted that, as a fiduciary representing Indiana retirees and taxpayers, he was obligated to seek the highest recovery on Indiana pension-fund assets. He also got in his own dig by suggesting that Troubled Asset Relief Program funds paid to financial institutions who held large amounts of Chrysler debt influenced their complicity with the government's plan.

The Indiana pension funds will lose about $2 million on their investment within pension plans worth nearly $10 billion. Whether the legal system was trampled upon in this case will be debated, but the saga epitomizes just another quandary the government is caught in involving major U.S. businesses during this historic period.

Next, the country turns its attention to the plan the government has for GM's hit-and-run bankruptcy. And perhaps even more ominous, waiting in the wings is the vast network of auto suppliers pleading for government assistance.

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@ aldebarancapital.com.

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