Eric Bradner, writing for the Evansville Courier Press, has an article about how the Chrysler Bankruptcy is playing into the Indiana Treasurer’s race between incumbent Richard Mourdock and challenger Pete Buttigieg.
At issue is Mourdock’s decision to go glory-hound with a legal challenge to the decision of the Chrysler bankruptcy court, costing Hoosiers a pile of money. What I have never seen described – and I have been paying some attention to the issue – is any reasonable scenario in which Mourdock’s legal challenges would have resulted in a net financial gain to Hoosiers.
See here for detailed analysis, but this is the gist:
The nut of Indiana’s objection is that, under the plan, lesser priority claims will receive value while Indiana’s (and other) first-priority claims will not be made whole. Under a liquidation scenario, typically you sell everything off and then, from that pool of money you pay the first class of creditors (e.g. first priority lien holders). Once they are paid in full, you move on to the second class of creditors (e.g. unsecured lenders). When you reach a class of creditors whose claims exceed the remaining pool of money, you pay those creditors a pro rata share of what’s left. Any remaining classes of creditors get nothing. The important point is that you don’t pay the second class creditors anything until the first class creditors have been paid in full.
Here is the problem with Indiana’s analysis: the restructuring plan under which the government and the UAW and other lesser creditors receive value also provides more money to the first lien creditors than they would get from a liquidation.
Under the scenario that happened, the United States Government was willing to fund payments to Chrysler’s creditors and fund the start up of a new, post-bankruptcy Chrysler, including money that went to unions. That second part pissed off ideologues who don’t like money going to anyone before a privileged group of creditors get paid in full and particularly not to unions. But – and here is the catch – a) the United States Government wasn’t willing to fund the bankruptcy transition under other terms; and b) there were no other buyers willing to pay more for the liquidated assets or otherwise in a manner that would net more to secured creditors than the scenario offered by the government.
To my knowledge, Mourdock has never told us something to the effect of “Hoosiers would have gotten more out of the bankruptcy if the U.S. Government had stayed out, because _______. They would have gotten $0.___ per dollar which is more than the $0.29 per dollar received under the existing decision. This justifies the expenditure of $x million in legal fees.”
The challenger, Pete Buttigieg makes no claim to legal expertise for analyzing the particulars of bankruptcy law, but he notes something that doesn’t often get mentioned – this was junk paper that the State was buying for $0.43 on the dollar:
“One of the facts that he rarely mentions is that when he originally bought Chrysler debt, Chrysler bonds were rated junk bonds,” Buttigieg said. “If we had a safer investment policy to begin with, none of this would have happened.”
Wonder if there’s a connection between that and the governor’s editorial in Friday’s Wall Street Journal, Hoosiers versus Crony Capitalism (http://online.wsj.com/article/SB10001424052748703561604575282412364326230.html).
Doug, I don’t doubt your assertion that Indiana may have received more money than if Chrysler was liquidated.
However, my understanding is that Mourdock’s claim is also correct. That the Chrysler bankruptcy has the unprecedented circumstance of paying an unsecured creditor (the union), a higher percentage of their claim than a secured creditor (the state of Indiana).
Sure, Mourdock lost the case. But all it would have taken was for the union to pay off Indiana’s relatively small claim for Mourdock’s decision to be correct Additionally, the Supreme Court (or a lower court) could have determined that any agreed settlement needs to include a payment to the secured creditors in excess of the unsecured creditors.
When you consider the odds of either of those two positive outcomes occurring, compared to the cost of filing a lawsuit. I believe it was in the Indiana Pension Fund’s best interest to pursue the lawsuit.
The union didn’t get paid anything on its unsecured debt. Neither did any other unsecured creditor. The money received by the UAW was in consideration of labor and other concessions to the new Chrysler entity — in other words, value provided post bankruptcy petition. And, despite Mourdock’s assertions, this situation wasn’t unprecedented. The 2nd Circuit and the Bankruptcy Court cited a number of precedents. Finally, Indiana was not the party to bring these challenges. It had signed on to an agreement that made it a (rather insignificant) member of a group of creditors, bound by the decisions of a steering committee. That committee waived the objections Indiana was attempting to make.
Doug:
My understanding from the C&P article is that this is money Chrysler owed to the UAW for pre-petition debt to the UAW’s retirement pension fund. The quote is below:
“Unsecured creditors — United Auto Workers retirees, who in exchange agreed to reduce the amount Chrysler owed a union retiree health care account — got a majority stake in the new company. ”
If the new Chrysler owners are UAW “retirees,” then by definition, there would be no future services performed by these people, yes?
The bankruptcy decision addresses this at page 22:
Doug, I appreciate the information/education. If I can summarize the Court’s information above, it is:
55% ownership of Chrysler to retirees = reasonable compensation for the union to agree to amend the collective bargaining agreement to include a 6 year no-strike clause.
Does this make financial sense to you?
Doug,
Take a look at http://politicsandpucks.blogspot.com/2010/06/todd-rokita-calls-military-service.html
for another Indiana state official.
Depends whose perspective I’m supposed to be looking from.
UAW: yes. Trade those concessions for future jobs. Without the concessions, they don’t work. Also, it’s a “union” – they probably have a duty above individual self-interest to members even if they are no longer working.
U.S. Government: yes. They keep current workers working and off the unemployment rolls, they keep retirees out of programs like Medicaid, and they keep the economy from plunging that much further into a hole.
Secured creditors: marginal. They don’t get much out of funds that go to workers or retirees, but absent this part of the deal, the U.S. Government isn’t funding the deal, and they don’t get $0.29 per dollar. They get liquidation value as paid by whatever private parties were willing and able to buy the pieces last summer – which would have netted less than $0.29 per dollar. So, while they might not be happy about it, they don’t have a financial basis for complaining.
I know little of bankruptcy law, and will not pretend to know — but I am fairly familiar with unemployment laws. I do not know if what I have here fits in completely with the Chrysler bankruptcy, but I figure it is interesting information nonetheless (and is really an addendum to what I posted a week or two ago about DWD).
As Chrysler was falling into major trouble last year and their workers were being laid-off with severance packages, some of these employees were told by a Department of Workforce Development “director”, in Kokomo and with a PowerPoint presentation, that they could file for unemployment. Many did file, and many were paid. The problem was, DWD had struck a deal with Chrysler that if claimants were allowed to have wages applicable towards unemployment to file and establish a claim (that may have otherwise not have been), and if they took the severance buyout, they were considered to have “voluntarily quit”. The heads of DWD then ordered some claims adjudicators to disqualify the claimants (causing massive overpayments) without even bothering to contact the claimants (which is contrary to federal standards, but most of what they do is also).
Rafael Sanchez brought the news to light late last year, as many of those claimants filed appeals (and were outraged, saying DWD had told them they would get unemployment — which DWD did). DWD lumped 200 of the claimants to have an appeals hearing together (it was a sort of class-action unemployment appeal, which is certainly weird).
I never did see/read what the outcome of the two-day hearing (unheard of) was — I do not think Sanchez did a follow-up story. What I do know is that DWD’s “spokesperson” (and former Mitch Daniels lackey who apparently needed a $75,000 job) Marc Lotter said “The state doesn’t make any deals with any corporations along those lines.” He was lying because they did make a deal.
The deal they made tried to ensure that the claimants would not receive unemployment, thereby calming Chrysler’s unemployment liability. Sure, Chrysler paid severance pay to satisfy union contracts (severance pay in Chrysler employees’ cases is no longer deducted from unemployment under fairly recent Indiana law), but their unemployment rate will steady-out and maybe even be reduced because Chrysler will not being paying for benefits as much.
Unfortunately for the workers who took the severance and DWD’s terrible advice, they were temporarily screwed-over by being told they could get both severance pay and unemployment. They still did all right, but DWD and Chrysler both embarassed themselves. Luckily, they both blamed the workers/claimants which worked very well for them.
Overall, the deal between Chrysler and DWD was a pretty good deal for Chrysler; I am not wholly sure why DWD would care so much to make the deal, though, but I would imagine (as with most things they do) the reason is somewhat nefarious.
Again, thanks for the reply Doug.
I don’t think it is reasonable to impute the non-Chrysler costs to the deal from the Govt. perspective. These are external costs that are supported by other areas of the govt.. If the govt. really did this, they wouldn’t tax cigarettes, as Social Security gets a significant windfall from the reduced life expectancy. Also, the increased burdens you discuss (unemployment and Medicaid) are mostly state, not federal.
Regarding the U.S. Govt. perspective, I just don’t see the union leverage. As you pointed out, UAW employees had two choices: (1) retirement/unemployment line or (2) accept a deal. Considering that the average UAW worker made $73 an hour (including benefits) in 2008 (about $116k annually), the govt. could have struck a better deal that protected the secured creditors/investors more (and been more fair).
I will also predict that the $4.9 million spent by the UAW PAC to elect Obama was a larger amount than any of the secured creditors provided.
I understand what you’re saying, but from the perspective of whether it’s permitted under bankruptcy law, I don’t think you get to look at whether it’s a good deal for the U.S. Government or whether it’s the best deal the U.S. Government could have had.
I think the courts are going to treat the U.S. Government just like any other prospective buyer. So, instead of the U.S., pretend it’s just Sugardaddy Corp. making the offer. Sugardaddy says “I’ll pay secured creditors $0.29 on the dollar, but only if New Chrysler is set up in a particular way.” Now, Sugardaddy maybe wants it that particular way because it helps out some particular business partners who happen to also have unsecured debts with Old Chrysler.
Sugardaddy might have to answer to its investors, but the bankruptcy judge pretty much doesn’t care if the other scenarios only net secured creditors $0.20 on the dollar.
Secured creditors’ big bitch, near as I can tell, is that the U.S. Government didn’t offer to fork over more money for secured creditors. But, the fact is that the U.S. Government, a/k/a Sugardaddy, was the only game in town and it was paying more than liquidation prices; so it didn’t have to.