Chrysler’s bankruptcy was expected, and it’s actually good news.
It was hoped by Chrysler and the Obama administration that Chrysler and its creditors could arrive at an out-of-court settlement on clearing 6.9 billion dollars on unsecured debt. The labor union, the treasury department, the White House, and four major banks had agreed to settle the debt for $2 billion in cash, but wouldn’t you know it, the hedge funds—which account for about 30 percent of the debt—say no way. (If you’re looking for irony here, it isn’t hard. Hedge funds are almost single-handedly responsible for the current Wall Street crisis by their involvement with bundled mortgage securities.)
Now the good news. The intransigence of the hedge fund managers matters not. They think by pushing away from the table that they can get even more than the 28 cents on the dollar they’ve been offered. With bankruptcies at an all-time high, that isn’t going to happen. Still, it’s a big game of chicken to a group of folks (the hedge fund managers) who are addicted to the adrenaline rush of big-stakes poker. And they’re going to lose once this gets to court.
With a lighter debt load, Chrysler can get back to making cars, and with the backing of the government, those cars will be warrantied irrespective of the economic situation or Chrysler’s solvency. Fiat’s experienced leadership will also have a positive impact on a revitalized Chrysler. And another good piece of news: in the process of hammering out the debt restructuring, the auto workers union made some hefty concessions, which has always been the elephant in the living room. Excessive long-term legacy costs and cushy benefits for semi-skilled workers has been the albatross around Detroit’s neck for decades, and this development opens the door for returned profitability to all of Detroit’s big three.