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Once more unto the breach, dear friends, once more

posted by Stephen Lubben

My thoughts on the automotive chapter 11 cases, on Forbes.com.

UPDATE:  The materials for today's TARP Congressional Oversight Panel hearing on the automotive bankruptcies, including my full remarks, can be found here.


Out of curiosity, did you read the Chrysler loan agreement? I believe it had the standard "sacred rights" typical of bank loans where compromise of principal or interest required 100% consent. The lenders did not sign up for "majority rules" which, instead, is a provision of bankruptcy laws allowing cram down of dissenting minority creditors.

As for whether the TARP banks may have felt any pressure to roll over for the government, were you out of the country without access to the internet during the BofA/Merrill hearings???


In response to anonymous, assuming you are right that compromise of principal and interest required 100% consent, I don't know that that would much matter, for two reasons.

The first is technical -- the "consent" was not to a compromise of principal and interest as such, but rather to the sale of the collateral free and clear of liens (that is, with the understanding that the lien on the secured debt would attach to the proceeds). That is rather like agreeing to a deed in lieu of foreclosure. Is that the same as a compromise of principal and interest? This gets into word parsing, I know, but I think that the "no compromise" language would refer to a rewriting of the obligation, rather than to an agreement regarding the remedy. The "consent" given to the sale certainly did not operate to waive the debtor's obligation to pay the debt (not legally anyway). Nor did the consent prevent the lender from credit bidding, in order to assure that a higher amount was paid for the value of the assets. So I don't agree that "consent" to the 363(f) was legally the same as "compromise of principal and interest. It would take a much closer look at the indenture (if that's what its properly called) to see to what circumstances less than 100% vote applied.

The second reason is a practical one. Suppose that a holdout meant that there was no consent to the sale. And suppose the court then ruled that no sale could be accomplished free of lien under 363(f), due to lack of consent. Now what? The case would have turned into a very expensive game of chicken.

I think the real point of the posting by anonymous is that the U.S. Government, by electing to function as both buyer and DIP financer, placed itself in the same ultra powerful position that secured lenders traditionally enjoy in most bankruptcy cases -- a position in which they can, as holders of the money, effectively dictate the outcome. The buyer can favor whomever it wants, buy what it wants, leave behind what it wants. That's what the US did here. Some are simply offended that, in making its decision about what to keep and what to leave behind, it decided to keep the workers, and leave behind the speculators that bought distressed bond debt. They don't like unions, so they don't like the US taking the side of unions.

All of that is fine public policy debate. But its not a bankruptcy issue. In bankruptcy, them that has the gold generally get to make the rules. In this case, it was the US that had the gold.

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