Thursday, April 30, 2009

Chrysler and Uncle Sam

Today we are informed that the Government has added "Creditor Negotiator" to its rapidly expanding area of expertise. Accounts of the events surrounding the impending Chrysler bankruptcy would have been rejected by us as farcical, as recently as eighteen months ago. However, as discouraging as it is to admit, we were not surprised to learn that the Government had attempted to restructure Chrysler's debt via a broad brushed offer to all lenders, whether secured or not, of 29 cents on the dollar. With the Auto Maker's two biggest lenders, JP Morgan and Citi, currently on the Government till, it is likely that Uncle Sam thought he could compel the acceptance of these draconian terms in BOA/Merrill like fashion. Unfortunately for the "Auto Task Force", a sizable chunk of Chrysler debt is also held by a consortium of hedge funds that decided, possibly on principle alone, to reject USA's offer. Aside from the bit of satisfaction that can be derived from such an openly defiant measure against the US Government, nothing positive whatsoever can come from Government intervention taken to this extreme.

As we have attempted, to the best of our ability, to espouse on these pages, the deepest and most permanent damage that has been inflicted upon the United States during the current Recession is not financial loss itself, but rather the invalidation of previously sacred Rules of the Game. In order to effectuate the proper functioning of a free market society, the Government must set and enforce specific and unmalleable parameters, specifically with regards to the capital structure. With Chrysler, the Government has entered the fray as an unsecured creditor, and proceeded to dictate to other, Secured Debt holders, the terms by which they might avoid a bankruptcy.

Apart from these theory-based objections to the Government's actions, we would propose that they have single handily managed to ensure that Chrysler's stay in Chapter 11 will be longer than previously necessary, and wrought with competing legal actions and claims-the only beneficiary of which will be the hordes of attorneys that will descend upon the proceedings. We see this as the most likely outcome.
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