No Runny Eggs

(H/T – DrewM., and I highly recommend reading the comments, at least if you are able to handle AoSHQ-standard NSFW language)

Bloomberg reports that the United Auto Workers are poised to accept a new contract that gives them a 55% stake in Chrysler, LLC. It also reports that Italy’s Fiat will initially get a 20% stake, which may increase to 35% if certain performance goals are hit, and that the Treasury Department will retain the other 10%.

The story, and others on the web, don’t mention where the 15% that may go to Fiat will be held initially, but I presume it will be the Treasury. Somehow, I doubt the Ram and Dakota pickups or most of the Jeep lineup surviving will be part of the conditions set by the Obama administration.

The UAW portion is a bit complicated. Chrysler is obligated to put $10.6 billion into VEBA, the union-run retiree health care plan. In exchange for $8.8 billion, Chrysler will give UAW said 55% stake, valued at $4.2 billion, and put in a $4.59 billion promissory note, to be paid off in installments until 2023 at a 9% annual interest rate.

That brings up the same question that I had yesterday with General Government Motors – what happens when it’s time to convert that 55% stake into cash? With most of the VEBA funding to be paid later, I expect that to happen sooner rather than later, sooner even than at GM. The Bloomberg story notes that, if the UAW manages to get more than $4.2 billion for its full 55% stake, the Treasury will get the difference. That begs the question of what happens in the likelier eventuality that the UAW doesn’t get $4.2 billion. Will the Treasury we the taxpayers pony up that difference?

Related to that, the Washington Post notes at the end of its story that one of the key players in the Obama auto task force that has come up with both the union-owned Chrysler and government-owned GM is Ron Bloom. Bloom was instrumental in creating the employee-owned United Airlines. The Post notes that didn’t exactly work.

One more item – The News Organization That Cannot Be Quoted™ (that would be the Associated Press for those just tuning in) reports that the biggest of Chrysler’s secured creditors, representing 70% of the secured debt, including JPMorgan, Citibank Chase, Goldman Sachs and Morgan Stanley, have reached a deal with the Treasury to, if all 46 secured creditors sign on, take $2 billion in cash to retire the $6.9 billion in secured debt they hold. I note that those 4 banks are among the 19 undergoing the TARP “stress tests”, and I wonder if the hold the Obama administration has on them had anything to do with them swallowing the 71% haircut the Treasury is demanding. After all, as secured creditors, they get paid first in the event of Chrysler’s liquidation, and it is likely that they would do far better than $2 billion.

Revisions/extensions (8:13 pm 4/29/2009, involves a major ReWrite™ of the first R&E after reviewing the WaPo item) – The Washington Post reports (H/T – Dad29) that, in the now-likely event of a bankruptcy, the final US Treasury stake would be only 8%, with the Canadian government owning 2%. The hedge funds which own Chrysler secured debt are resisting the cramdown because a recent Standard&Poor’s analysis of it reveals that what the Treasury is offering is at the bottom end of what they could recover in a bankruptcy.

That is a risky proposition because a bankruptcy judge could force the cramdown down the funds’ throats. I’m sure that the Treasury knows precisely which judge will get the case, and how that judge will act.

In case you missed all the news about General Government Motors yesterday, let’s recap (courtesy Investor’s Business Daily):

• GM will drop Pontiac as a brand, 8,000 jobs, and 2,600 dealerships by next year. I suppose the good news is the performance division won’t be stuck trying to sell the Pelosi GTxi SS/Rt Sport Edition (© Iowahawk)
• GM is asking bondholders who hold $27 billion in GM debt to swap their notes for stock to the tune of 225 shares per $1,000 owed, or $4.44 per share. That is just over twice what the stock is trading at now, which represents something less than 50 cents on the dollar for the bondholders, and if math I’ve seen elsewhere is right, would represent roughly 10% of the stock.
• GM wants the United States Treasury to take a majority of common stock in exchange for forgiving $10 billion in debt. Also, they want the UAW to take 39% of the common stock in lieu of cash for $10 billion in retiree health care payments.

That leaves the current stockholders with 1% of the company. If you’re confused, join the club headed by Larry Kudlow.

Jimmie over at The Sundries Shack explains that it is all payback. He pulled a post from QandO from the memory vault that unspun a Los Angeles Times article attempting to pin the Congressional failure of the Big 3 UAW bailout on those eeeeeeeeeeevil Republicans. Not only have contributions from the UAW dwarfed those from the Big Three over the last 4 election cycles, and not only have those UAW contributions gone to the Democrats by a 99-1 ratio over each of those 4 cycles, but the Big Three donated mostly to Democrats last time around.

One more thing; the editorial gang at IBD noted that the UAW Jobs Bank, unlike the power of current GM stockholders and the value of the debt held by GM’s creditors, is going nowhere.

Revisions/extensions (7:51 am 4/28/2009) – Let’s do some math, using the assumption that the $10 billion-for-39%-of-the-common-stock the UAW is getting is a pure 1-1 deal. Of course, it is a very dangerous assumption because the market capitalization of GM is only $1.25 billion. That would put the new “market capitalization” at a tick below $25.65 billion. Assuming things don’t crater at the “new” GM (do remember, however, that assumption is the mother of all fuck-ups), we can use that to determine how badly the bondholders and stockholders get the shaft here:

– Ignoring the effect of the remainder of the loans, the $10 billion the government will spend to run General Government Motors would be worth $12.82 billion. Of course, there’s the “slight” matter of paying back the other $17 billion that GM is borowing/wants to borrow.
– The $27 billion the bondholders would pay to get 10% of GM would turn into a $2.56 billion “investment”. That’s a haircut of over 90%.
– The $1.25 billion the market has invested in GM suddenly turns into $256 million, or a haircut of just under 80%.

If I were one of the bondholders, I’d hold out for bankruptcy. That notes-for-stock plan won’t happen unless almost all of the bondholders agree.

R&E part 2 (10:12 am 4/28/2009) – Ed Morrissey has more on this effect.

There’s also a couple questions I don’t really want to consider because they are just too ugly:

– Who is going to buy the UAW 39% to convert those shares into cash? Do remember that the 39% is taking the place of $10 billion that was supposed to go into the retiree health fund, and I doubt that the dividends will make up for that lost cash.
– What happens when (not if) the market decides that Government Motors isn’t worth $25.65 billion?

R&E part 3 (10:38 am 4/28/2009) – The Washington Post has a few more details:

– The Obama administration is claiming they won’t use their majority position to run the company. Of course, when they had but 35% of the debt, they demanded the firing of former CEO Rick Wagoner and a reconstituting of the board of directors. As Jim Geraghty says, “All of Barack Obama’s statements come with an expiration date. All of them.”

– Related to that control, it was the Treasury that formally limited the bondholders to 10% in the new company.

– While GM bonds are currently trading in the $0.08-$0.13 on the dollar range, financial experts are expecting a return of 0%-5% for bondholders who take shares of common stock. That goes to the questions I had earlier, because that would represent a halving of the nominal “market cap” based on the UAW obligation-for-stock deal.

Those of us who at a minimum had severe reservations about TARP and at a maximum opposed it are being proven right about our concerns. Where, oh where to begin.

I’ll start with the news that I first heard Saturday and posted through the Emergency Blogging System now that I found a link – Bloomberg reports that the Treasury will be hanging onto their stock warrants after the TARP loans are repaid and the prefered stock the Treasury received as part of the package is bought back, only releasing the warrants after a further negotiated settlement.

Item #2 – Fox Business reports that Treasury officials are considering converting the the aforementioned prefered stock into common stock, complete with voting rights. In several instances, that would make the government the largest voting shareholder.

Item #3 (H/T – Legal Insurrection) – The Financial Times reports that repayment would be accepted only if it were in the “national economic interest”. That’s right; banks that have the money to pay back the loans and pass the “stress test” may not be allowed to pay back the government.

I’m just waiting for the booming voice that is in the Grand Finale of Rush’s “2112” to announce, “Attention all banks of the United States of America. We have assumed control. We have assumed control. We have assumed control.”