Bill Manzi.com

Chrysler Corp filed for bankruptcy yesterday, with the Administration unable to close a deal that would have averted the filing. And while the Administration is hopeful that the legal filing will expedite the emergence of a new Chrysler, shorn of the debts that have destroyed the company it will now have to take its chances in bankruptcy court. But despite applying some tremendous pressure agreement could not be reached with all of Chrysler’s debt holders, and I have a sense that the legal wrangling is just begining, and this bankruptcy will be a much longer process than the President is looking for. The Administration envisions a new Chrysler emerging with the UAW holding a 55 percent stake, Fiat up to a 35% stake, and the U.S. Government with 8%, and the Canadian government at 2%. The UAW would earn their majority ownership by forgiving $6 billion in debt owed to the retirees health care fund. The new Chrysler will give a promissary note for the remaining balance of $4.6 billion to the UAW pension health care fund, to be repaid over 13 years. But others in the Chrysler credit line will also be foregoing owed debt, including the US taxpayer, who agrees under this scenario to forego $4 billion in debt. Additionally the US will provide bridge bankruptcy finance worth billions, and promises additional financing once the new Chrysler emerges from bankruptcy. For those billions the taxpayer gets 8%. The lenders that agreed to the terms offered by the Government will receive $2 billion of the over $6 billion owed as part of the bankruptcy. But those pesky “non tarp” lenders have refused to buckle under, and have in law some pretty compelling claims, including liens against Chrysler assets, and a higher ranked debt than other non-secured lenders. The Administration felt that despite their superior legal standing they could get these lenders to accept terms that subordinated their claims to other debt holders. They have refused, and they will make some pretty powerful legal arguments in bankruptcy that have the potential to hold this deal up, or destroy it. Their designation of themselves as the “non-tarp lenders” is a kick to the other creditors who buckled under, but who have received government money and are by implication are subject to “government influence”. It is a gambit by the Administration to save jobs, and the saving of manufacturing jobs in the U.S. is critical, in my opinion. Despite that feeling I do not see this deal as saving the company because I do not think the numbers will add up in the end. This bankruptcy, and whether the Administration can get its way in bankruptcy court, should tell us plenty about what will happen over at G.M. The White House fact sheet is attached, and below is the statement of the “non-tarp” lenders.

As of last night’s deadline, we were part of a group of approximately 20 relatively small organizations; we represent many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler. Combined, these loans total about $1 billion. None of us have taken a dime in TARP money.

As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help. Indeed, we have made significant concessions toward this end — although we have been systematically precluded from engaging in direct discussions or negotiations with the government; instead, we have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.

What created this much-publicized impasse? Under long recognized legal and business principles, junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full. Nevertheless, to facilitate Chrysler’s rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100% recoveries, while even GM’s unsecured bondholders are receiving a far better recovery than we are as Chrysler’s first lien secured lenders.

Our offer has been flatly rejected or ignored. The fact is, in this process and in its earnest effort to ensure the survival of Chrysler and the well being of the company’s employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades.

We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests. Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well established legal framework and cannot be rationalized as being commercially reasonable.

We are continuing to discuss our position with the United States Treasury. We have made a proposal which we earnestly believe is fair and would appropriately recognize our legal position.

As President Obama implied yesterday, it is likely that Chrysler will have to file Chapter 11 whether or not all lenders agree to any particular proposal. Chapter 11 is often used to help implement an agreed deal and dispose of unwanted legacy liabilities. We are hopeful and optimistic that we will reach a positive resolution of our issues so that all stakeholders will move forward together to implement Chrysler’s “quick trip” restructuring in an un-contested proceeding. Our Group will never initiate a bankruptcy filing on Chrysler — that is a decision for the Company and the Administration to make.

As we all appreciate, laws are the foundation of our economy and society. Despite recent travails, our country remains the economic envy of the world and the United States remains a vital engine of global growth. The rule of law made it that way. We urge that people remember this and not succumb to unproductive and unwarranted finger pointing.

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