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Gunfight Looming Between Politicians, Banks and Treasury at the Chrysler Corral

Secured debt might not be so secure if the government forces bankruptcy or politics intrude.

by on Apr.23, 2009

Is Citibank being a piggy bank in its demands for worthless Chrysler bonds?

Are Citibank and others being piggy banks by demanding too much for worthless Chrysler bonds?

Chrysler LLC’s creditors will have to make a judgment soon on whether they accept an offer to exchange their debt for equity in the company for pennies on the dollar or risk a political showdown over whether to force the company into bankruptcy.

Michigan’s Democratic Governor Jennifer Granholm and the state’s Republican Attorney General in a rare agreement have in recent days characterized the battle over debt and bankruptcy as a struggle between Wall Street and Main Street. Cox has accused Steve Rattner, the head of President Obama’s Auto Task Force of favoring a Wall Street-oriented solution at the expense of small businesses, retirees and workers in Michigan.

Rattner has a New York banking and financial services background, and Rattner himself is under investigation for bribing New York politicians to secure lucrative pension fund management contracts for his firm.

Chrysler’s creditors have proposed forgiving a very small part of their stake in return for as much 40% of the equity in a reorganized Chrysler. In addition, the creditors also are asking Fiat, Chrysler’s potential Italian partner, to invest cash in Chrysler. So far, Treasury has countered with far less cash, about $1 billion, and only 5% of the equity in the re-organized company. Expect this to go back and forth right  down to the deadline.

Fiat has agreed to provide Chrysler with small car and small engine technology, but the Italian carmaker has been reluctant to put cash into the Chrysler venture. However, new reports from Italy on Wednesday suggested that Fiat is reconsidering its position.

Granholm and other Michigan’s Democrats have accused Chrysler’s creditors of refusing to bargain in good faith. Chrysler’s list of creditors include four major banks, JP Morgan Chase, Citigroup, Goldman Sachs and Morgan Stanley, that have received $70 billion in taxpayer supplied federal aid since last November.

“This is not a serious counter offer. These debt holders were offered fair market value for their debt [15 cents/dollar for the $6.9 billion of debt], and the banks have responded by asking for a windfall,” said Representative Gary Peters (D-MI), one of the Michigan Democrats who demanded and got a meeting with White House chief of staff Rahm Emanuel and White House economic counselor Larry Summers.

“It is extremely disappointing that while other stakeholders have agreed to work with President Obama to advance Chrysler’s restructuring, financial institutions that have already taken billions of dollars in taxpayer support are refusing to do the same,” noted Peters.

“This offer is an affront to taxpayers and the many thousands of Chrysler employees and retirees whose livelihoods hang in the balance of the outcome of these negotiations,” Peters said.

Michigan’s Congressional delegation and Governor Jennifer Granholm are attempting to use their political influence to keep both Chrysler LLC and General Motors Corporation intact.

Jobs in Michigan have declined every year under Granholm, who endorsed Hillary Clinton early in the presidential primary election cycle, and let a primary ballot with only Clinton’s name on it go forward. It is not clear what influence, if any, she personally has with the President as a result of backing Clinton. The Obama administration did have the active support of the United Auto Workers union in the election.

The Michigan delegation also said they did not favor any action that forced either Chrysler or GM into bankruptcy.

“We spoke frankly about our very serious concerns about bankruptcy for Chrysler and GM, and the administration spoke frankly about their continued efforts to see Chrysler and GM emerge from restructuring through an out-of-court process. 

“The administration is working diligently to help these companies reach agreement with all of their stakeholders, including the secured lenders to Chrysler and GM’s bondholders.

“We all recognize, however, that the administration and the companies must continue to prepare contingency plans to avoid liquidation or a protracted restructuring process should the ongoing negotiations for out-of-court resolution fail,” the statement said.

Chrysler also still has to reach a new agreement with both the United Auto Workers and Canadian Auto Workers ahead of next week’s deadline.

UAW President Ron Gettelfinger said Wednes­day that talks with Chrysler and Fiat are ongoing. “Contrary to some media reports, no agreement has been finalized,” Gettelfinger said.

Earlier today Fiat reported its first quarterly loss since 2004, and some analysts are questioning the wisdom of the proposed Chrysler takeover.

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