I’ve been over this a lot, but with Richard Mourdock challenging Richard Lugar, I keep seeing references to Mourdock’s quixotic decision to challenge the Chrysler bankruptcy decision as something other than ill-conceived, so I’ll mention the central point once again. There was no path to Mourdock’s challenge that resulted in Indiana getting more money.
As we might recall, Chrysler was dying on the vine. There was nobody willing to step in and pay much money for the company, so they filed bankruptcy. As part of the bankruptcy, a third-party was willing to step in and pay more money for the company than it would get through liquidation. That third-party in this case was the United States of America.
What really seemed to piss off Mourdock and his supporters is that the third party was willing to give the unions something. But, let me repeat, secured creditors got more under this deal than they would have under any other offer on the table or liquidation. Seems that, what Mourdock’s complaint boiled down to in essence, is that he wished the third-party’s offer gave secured creditors more. But there was never any showing that an outside purchaser had any obligation to pay secured creditors more than they would get from liquidation. If some other third-party wanted to offer them a better deal, they could do so, but there wasn’t any such entity.
That’s getting at the substance of Mourdock’s complaint; pretending that he had any right to drive this particular litigation. Procedurally, he was out of line. Indiana’s share of the debt was tiny, and it had agreed to let the majority holders of secured debt run the show. In that sense, it was doomed bringing the litigation in the first place, even if the state had had a plausible claim.
Then there is the fact that Mourdock had purchased Chrysler shares at distressed prices in the first place; those discounted prices reflected the risk inherent in the transaction.
And, there is the impact on Indiana’s manufacturing sector. The U.S. participation in Chrysler’s restructuring allowed Hoosiers to keep their jobs instead of suffering the fall out from liquidation.
And, I’ve been hearing that Gov. Daniels is spouting some nonsense about how Mourdock’s Chrysler litigation produced some kind of momentous Supreme Court decision. It wasn’t momentous, but a fairly routine Munsingwear order.
Why don’t you e-mail Mourdock with your questions. I guarantee you that he will reply with a thoughtful answer.
Mourdock is very accessible, you could probably find a fundraiser at the home of one of his supporters in your area as well. I’ve been to a couple of those, he has given me maybe 10 minutes total of face time, which is extraordinary for a man running for that office.
Wasn’t the problem that the normal bankruptcy rules weren’t followed regarding protecting preferred creditors?
I don’t think so. Certainly not according to the courts that reviewed the bankruptcy procedure. Basically what you had was this. I wrote up the numbers somewhere else, but I’m just pulling them out of the air at the moment to illustrate the point:
Overall debt = $200 (secured creditors $100; unsecured $100)
Liquidation value: $10.
-Secured creditors get $10 or 10% of their $100.
-Unsecured creditors get $0.
Third party (USA) restructuring offer: $20 for creditors + $20 for funding of restructured company, total offer = $40.
-Secured creditors get $20 or 20% of their $100.
-Debtors technically get $0 for their debt but get $20 for “new value” (e.g., agreeing to supply experienced work force for restructured company – that $20 goes to pension creditors).
So, it looks a lot like secured creditors get $20 and unsecured creditors get $20. So secured creditors, like Mourdock, say, “hey, we want the whole $40!” The third party (USA) says, “tough, we’re not willing to pay $40 to you; without us, you only get $10, so take the $20 we’re offering and be happy about it.”
Mourdock answer a question? Funny! I have sent several questions to Dianne Hubbard in his office with no answers on policy. I then asked on his facebook page and was kicked off the site.
1) You do know a horse can’t feel you beating it when it is dead, yes?
2) My memory fades, but doesn’t your position assume that the unions wouldn’t have accepted a bankruptcy petition where they get slightly less and the secured creditors get more? In game theory terms, your position assumes that the Obama administration is so absolutely amazing that they happened to achieve the single pareto optimal outcome.
I wouldn’t have brought it up again except that Gov. Daniels seems to have praised the move in his recent book.
As to your other point, the Obama administration – like any other outside investor – has no obligation, under the bankruptcy laws, to optimize returns for secured creditors. If it offers a deal to the secured creditors that exceeds any other offers on the table or the liquidation value, I think the rest of the deal it proposes is essentially irrelevant in terms of the bankruptcy court’s duty to those secured creditors.
You do know a horse can’t feel you beating it when it is dead, yes?
Do not taunt Happy Fun Doug.
If only he could work the Civil War into this topic somehow.
Agreed, the Obama Administration owes nothing to the secured creditors. That is sort of my point. How do we know that if the Supreme Court had ruled Indiana’s way, that a settlement more to Indiana’s liking would not have been reached?
Buzz: When it comes to this stale topic (that I post on anyway), I prefer the first two rules of Fight Club.
http://www.diggingforfire.net/FightClub/
Quiet you two or I swear by all that’s holy that I will begin a frenzy of Daylight Saving Time posts.
Don’t forget to add in the Eastern Standard Time vs. Central Standard Time, that’s the real issue.
Doug, don’t let Buzz and Ogden annoy you. As one who has done a heck of a lot of work in Bankruptcy Court, nearly all for secured creditors, you are 100% on the mark, and Mourdock and his followers are totally wrong. More than totally wrong in fact. What was Mourdock thinking in investing state pension funds in junk bonds, then wasting taxpayer dollars in a hopeless chase for more money? Or perhaps it was a political stunt to obscure his reckless investment.
Looking at some of the comments, there might be a misunderstanding of the process. Could the future of Chrysler have been held hostage to get someone (the U.S.) to pay out a deal that was more beneficial to secured creditors?
That’s not how the process works. Secured creditors don’t get to veto restructuring in order to maximize their return from someone who doesn’t want to see a company simply blown up. Instead, the burden is on the objecting secured creditors to show that they would get a better deal either from liquidation or through a different, available, restructuring plan.
I’m reminded of the scene in Superman II:
Secured creditors don’t get to be like Zod and leverage the fact that the U.S. government cared about the future of Chrysler to get more money for them in order to prevent the secured creditors from forcing a liquidation where everybody got less than the offer actually on the table.
What your missing here is that the state made large pension investments in Chrysler which was controlled by Mitch’s friends Dan Quayle & John Snow at Cerberus Capital Management losing taxpayers hundreds of millions in direct and indirect investments in distressed Chrysler stock and Cerberus investment private equity & derivatives.
Cerberus Capital Management was the one screwed by unions getting compensated for Mitch’s friends idea to over-leverage the company and underfund employee pensions in hopes of shifting that expense to the taxpayers Pension Benefit Guarantee Corporation in bankruptcy like Wilbur Ross did to our states steel companies.
Also don’t forget the millions of losses for locals and the state on the new Getrag factory in Tipton that went sour by Cerberus backing out of a transmission joint venture at the last minute.
They were trying to cover their butts and also protect Cerberus Capital Management plan to turn a large profit by abandoning commitments to company retirees and shifting expenses to the federal government.
Taxpayers were an after thought.
“More than totally wrong in fact”
Well, my speakers go up to 11. So there.
The federal governments Pension Benefit Guarantee Corporation just stepped into the bankruptcy and declared themselves a secured party and demanded a portion of the reissued stock from the Debtor in Possession in return the the massive amount of the federal bailout money invested to save the company.
This is not unusual except the white knight in court was not a corporation or investment firm.
Just the fact that someone has mentioned Dan Quayle in relation to this has my hackles up. No, even more. I cannot figure out how to express my sentiments on this situation.