Chrysler files

[germdoc]

Looks like it's inevitable.

http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

Not being an economist, I don't know whether bankruptcy will be better than other alternatives. I was struck by this part of the article:

"While four of Chrysler's major creditors -- J.P. Morgan Chase, Citigroup, Goldman Sachs and Morgan Stanley -- have agreed to the Treasury's plan, other lenders, mainly hedge funds, had held out. The holdouts included Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital, two sources said...The hedge funds likely think they could get a better return in a bankruptcy filing or in a sale of Chrysler's assets. The government offer made yesterday would represent a recovery of about 32 cents on the dollar. A recent Standard & Poor's analysis said the lenders could recover 30 to 50 cents on the dollar."

Didn't hedge funds get us into this current financial mess? I know they want to make money, but if the deal was good enough for Goldman Sachs, why wasn't it good enough for them?

I admit Chrysler management bears the lion's share of the blame for their current situation, but it looks like financial catastrophe could have been avoided if not for a few greedy guys who look to gain more from a dead company than one in rehab. Sound like vultures to me.

[cgallery]

Didn't hedge funds get us into this current financial mess? I know they want to make money, but if the deal was good enough for Goldman Sachs, why wasn't it good enough for them?

IMHO, this is EXCELLENT news. Allow the system to work. The hedge funds have no govt. assurance to cover losses like the big banks have. They think they can do better in bankruptcy, and they should be allowed to exercise their rights. The fact that the government (congress/administration) won't stand in their way speaks VOLUMES to me.

This is a giant step FORWARD.

[JR]

Oh, I dunno if I entirely agree, Jeff. Chrysler is functionally bankrupt already, meaning they don't have the assets or cash flow to meet their obligations. The official filing of bankruptcy means they will hash out the details of who gets what in court, as opposed to accross a table in the board room.

The bondholders are the ones getting screwed, whether they are a hedge fund, a bank, or your grandmother. A return of ~30 cents on the dollar is a royal hiding. (Idle thought - I wonder how many of these investements are insured by AIG?)

Speaking of hedge funds, Cerberus is getting the royal shaft here. They spent $7.1B to acquire 80% of Chrysler just two years ago. They come away with bupkis. I can't imagine they made enough from operations to cover that bet. (I suppose Cerberus is not officially a hedge fund, but they act as one by making acquisitions and invenstments accross a number of industries.)

OTOH, I've been through a privatization of the type when Cerberus bought Chrysler, admittedly on a much smaller scale. When the money boys show up you gotta watch your wallet. To put it charitably, they are very clear thinking about the use of, and expectations for return on, their money.

JR

[dkerfoot]

My understanding is that the Govt is trying to push through a plan that gives a much sweeter deal to the banks and the UAW than to the "Hedge Funds" (i.e. actual stock holders like you and I)

To me the craziest thing of all is the the UAW may end up owning 50% or more of the company. Uh... What is the point of having a Union if the Owner is one? Seems to defy logic - kinda like electing William Ford the president of the UAW...

[dbhost]

Looks like it's inevitable.

http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

Not being an economist, I don't know whether bankruptcy will be better than other alternatives. I was struck by this part of the article:

"While four of Chrysler's major creditors -- J.P. Morgan Chase, Citigroup, Goldman Sachs and Morgan Stanley -- have agreed to the Treasury's plan, other lenders, mainly hedge funds, had held out. The holdouts included Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital, two sources said...The hedge funds likely think they could get a better return in a bankruptcy filing or in a sale of Chrysler's assets. The government offer made yesterday would represent a recovery of about 32 cents on the dollar. A recent Standard & Poor's analysis said the lenders could recover 30 to 50 cents on the dollar."

Didn't hedge funds get us into this current financial mess? I know they want to make money, but if the deal was good enough for Goldman Sachs, why wasn't it good enough for them?

I admit Chrysler management bears the lion's share of the blame for their current situation, but it looks like financial catastrophe could have been avoided if not for a few greedy guys who look to gain more from a dead company than one in rehab. Sound like vultures to me.

The current batch of Chyrsler mangement is not all that long into the company. It is no longer DAIMLER Chyrsler... Daimler screwed it all up and dumped it off...

[stocktr8er]

The deal the hedge funds were offered was to convert bonds to stock which puts them at the bottom of the bankruptcy list. If they hold the bonds then they are in a much better position to regain some value.

Also, by rolling over and giving in, they allow control to flow to the Union which is a big part of the problem. At least going to bankruptcy court allows a chance to really renegotiate contracts. They need to be able to start with a clean slate.

I am also against giving away the company to Fiat. They are getting 20% just for coming to the table. And even more if they agree to build certain type cars in the US.

I say hold out and fight for the capitalist system that built this nation.

[Kristofor]

On NPR this morning they were also talking about the fact that the hedge funds also own interest in competitors to Chrysler and some also have their Chrysler debt covered with <drum roll> credit default swaps.

So, in their mind even if it's a wash in what they get from the bankruptcy court, they may be giving a competitive advantage (we'll see...) to another company they care about, and whomever is on the hook for the credit default swaps (JR might be right, AIG loved that stuff) would add to the haul from the bankruptcy court but may not need to on a negotiated settlement.

Again, that's per the folks on NPR I have no idea if they actually know what the hedge companies are thinking...

[germdoc]

Like I said, I'm not an economist and can't defend Chrysler one bit, least of all Cerberus. However, I am questioning the role of hedge funds here. It seems to me everyone is taking a haircut, including the taxpayers (!), and so I find it *interesting* that the hedge funds expect to be first in line when Chrysler is split up, sold off, etc., to get their money.

Hedge funds are not typical stockholders like you or me; they are big-time investors engaging in speculation on a large scale. That's why they're called "hedge funds"--they make money by short-selling, as well as through typical company profits.

http://en.wikipedia.org/wiki/Hedge_fund

From Wiki article: "Hedge funds came under heightened scrutiny as a result of the failure of Long-Term Capital Management (LTCM) in 1998, which necessitated a bailout coordinated (but not financed) by the U.S. Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster. The excessive leverage (through derivatives) that can be used by hedge funds to achieve their return is outlined as one of the main factors of the hedge funds' contribution to systemic risk.

The ECB (European Central Bank) issued a warning in June 2006 on hedge fund risk for financial stability and systemic risk: "... the increasingly similar positioning of individual hedge funds within broad hedge fund investment strategies is another major risk for financial stability which warrants close monitoring despite the essential lack of any possible remedies. This risk is further magnified by evidence that broad hedge fund investment strategies have also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades."

So my take on it is the vultures are circling the carcass...

[JR]

... and so I find it *interesting* that the hedge funds expect to be first in line when Chrysler is split up, sold off, etc., to get their money.

Hedge funds are not typical stockholders like you or me; they are big-time investors engaging in speculation on a large scale. ...

Except in this case they are not stockholders at all. They are bond holders, trying to keep Chrysler from cramming stock down their throats. It's likely their investment in Chrysler would part of their hedging strategy - ie make a "safe" investment in Chrysler corporate bonds to offset the risk of stock ownership elsewhere.

As your Wiki article points out, hedge funds have had insufficient controls. But that does not mean they are inherently evil. The money they manage comes from individual investors. Screwing the hedge fund screws the individuals.

JR

[cgallery]

As far as the mess we're in now, I think hedge funds deserve little of the blame. Yes, they absolutely did spot the problem before anyone else. And yes, they were doubling-down as the government and banks were cheering the loans to people that couldn't/wouldn't repay them. But the hedge funds didn't hold a gun to anybody's head.

Furthermore, their actions are transparent to regulators. There is nothing that a hedge fund can do that is invisible to regulators. The failure came on the part of government agencies that ignored all the warning signs.

[ragswl4]

Well its about time. Bankruptcy should have happened long ago for this company. Isn't that what capitalism is all about? You build a company, you sell stock and bonds in that company and when profitable everyone makes money. When you don't make a profit and that continues long enough, caused by making a product that you can't sell enough of or at a low enough price or at acceptable quality, then the company goes belly up. That's the way it works. There are literally hundreds of businesses going under every day and hundreds of new ones start up.

As for the banks, hedge funds and stock holders well that's the risk of investment. No tears from me for them. I've lost and gained in the market and no one ever covered my losses and I never gave back the gains. That's the way it works. Its not perfect but its a heck of a lot better than the government owning the business or bailing it out. Government involvement will just prolong the agony and probably increase the losses. GM should be next. A bit draconion, I know, but as the old saying goes, "you pays your money and you take your chances."

[LinuxRandal]

Like I said, I'm not an economist and can't defend Chrysler one bit, least of all Cerberus. However, I am questioning the role of hedge funds here. It seems to me everyone is taking a haircut, including the taxpayers (!), and so I find it *interesting* that the hedge funds expect to be first in line when Chrysler is split up, sold off, etc., to get their money.

Hedge funds are not typical stockholders like you or me; they are big-time investors engaging in speculation on a large scale. That's why they're called "hedge funds"--they make money by short-selling, as well as through typical company profits.


So my take on it is the vultures are circling the carcass...

While the vultures may be circling, it has been mentioned above that they are Bond holders, not stock holders. The Bond holder position, is the one the federal government is in in the GM bailout, and it puts them toward the top of the line in any bankruptcy case. Cerberus is being asked to give up this strong position, for one of stockholders, which falls toward the bottom of the bankruptcy list.

[sparkeyjames]

The current batch of Chyrsler mangement is not all that long into the company. It is no longer DAIMLER Chyrsler... Daimler screwed it all up and dumped it off...

Don't forget the ROBBED it blind part first. Chrysler before Daimler... $20 billion in liquid assets and making net operating profits. Chrysler after Daimler only worth $7 billion and can no longer make a dime.

[vaking]

Banks are the ones who accepted money from the government TARP funds. That means now their hands are tied and they are not in a position to contradict the government. Hedge funds did not accept government money and they speak their mind. An offer to accept 30c on a dollar is a choice nobody likes. If you default on your mortgage the bank will not agree to take 30c on a dollar on your mortgage, it will take your home and try to recoupe more. Why should somebody who lend money to chrysler accept such offer?

[germdoc]

Just a few more thoughts, then I'm done.

About hedge funds: they are for the financial elite and ARE NOT available to every Tom, Dick and Harry. They are not transparent about their dealings and are not regulated like other investment funds. This has been a cause for concern among many, many people.

They alone didn't get us into this severe recession, but they helped--their practice of overleveraged investments with little oversight became the norm. Recently even they have not done so well, and such luminaries as Warren Buffett and George Soros have lost a lot of money.

Interesting article written before current market collapse that highlights these issues: http://nymag.com/news/features/2007/hedgefunds/30341/

Whether Chrysler should or shouldn't go into Chapter 11 is an unanswered question, but my point is that everybody except these minority hedge fund guys were willing to agree on a deal that arguably would have left the company and the industry and maybe the region and country better off. In their public statement about the issue these groups insist that they are first in line to be paid as "senior investors", so it will be a big battle in bankruptcy court.

I guess I just don't have too much sympathy for their position as opposed to the other interests involved.