UAW Prevail Over Main Street and Wall Street in Chrysler Deal

The following comments (My comments are in bold.) are excerpts from an excellent article by Andrew Bary in this week's "Barron's:

President Obama blamed Chrysler's bankruptcy on "speculators," but the real problem was that the government's plan gave too much to the UAW and not enough to creditors. That Mr. President is what killed the deal!

If the secured creditors holding $6.9 billion in claims had been offered anything close to what the administration wants to give the United Auto Workers, there would have been no bankruptcy filing by Chrysler.

In the bizarre pecking order offered by the administration, the unions, which are at the bottom of Chrysler's capital structure, would get nearly full recovery value for their $10.6 billion retiree health-care claims, while the secured creditors at the top of the hierarchy would receive about 30 cents on the dollar.

Credit that to politics and a likely desire by Obama to reward the powerful UAW. After all, who in America really cares about a group of deep-pocketed banks and investment firms holding the $6.9 billion of Chrysler debt? "I don't stand with them," as Obama said of the dissidents who derailed the deal.

Another surprising aspect, which is detrimental to Main Street (American Taxpayer) of the Obama proposal was the willingness of the Treasury to forgive a $4 billion loan to the company made in December in return for an 8% stake in the restructured auto maker. An interest that could be worth only 20 cents on the dollar assuming new Chrysler's equity is valued at $10 billion.

President Obama, meanwhile, asked little sacrifice of Chrysler's unions. The administration proposed giving them a $4.6 billion note yielding 9% due in 2022, and 55% of the equity in a restructured Chrysler. That could mean a nearly full recovery of their $10.6 billion claim.

Let's see if I understand what President Obama tried to do. He gives the UAW, which is a unsecured creditor, 100% on its claim of $10.6 billion. Then, he gives the American taxpayer, which does have a secured position in its claim of $4 billion, $.20 on the dollar. Finally, other secured creditors (401k investors, mutual fund investors, etc.), who have claims of $6.9 billion, were given $.30. In other words, the UAW was offered a "lush deal" even though its claim is junior to the claims of Chrysler's other major creditors, including the American taxpayer.

One more thought. If Chrysler couldn't figure out how to make efficient cars from their partnership with Daimler-Benz, are they now going to become viable through a partnership with the U.S. Federal Government (think U.S. Postal System and Amtrak) and Fiat, which has been on the verge of bankruptcy for the last decade? Really? GM paid $2 billion in penalties to Fiat in 2005 so as to not be forced to buy them. And Fiat gets 20% for no cash? Wow! Where can I buy the stock? I want a piece of this action. (LOL)