Bankruptcy

by Larry Levin

It finally happened today; the government actually allowed a company to file bankruptcy. But is it a "normal" bankruptcy? I think you can bet the farm that it is not. The company has been a corpse for some time now, yet the government insisted on life-support via your tax dollars. This extra time allowed the government, management, and the UAW to arrange special deals that will occur outside of bankruptcy. You can bet on that too. It's sort of like a rich but terminally ill Uncle who's family insists on life-support so that they can iron out how to split up the loot before he kicks the bucket; maybe they can keep him alive long enough to sign new paperwork once they agree on a new deal.

Now that the corpse has been laid to rest (RIP), where is the spillover sickness? Where is the spreading disease? A few months ago we were all told, "EMERGENCY -EMERGENCY - IT'S AN EMERGENCY - GM & CHRYSLER MUST BE GIVEN TENS OF BILLIONS OF DOLLARS...OR ELSE!" Or else, we were told, the entire economy would fall to its knees.

Nevertheless, the stock market heard the filing loud and clear, then reacted to it as it has to all other bad news: aint no thang.

The man who covers the auto industry on CBNC would nearly lose his mind at the very notion of allowing the car companies to file Chapter 11 (reorganization) bankruptcy. Since it was mentioned often he went bananas often, with shouts and amazingly dire predictions of utter chaos if even one firm went under. Mr. Lebeau, me thinks doth protest too much.

This outcome was inevitable. Chrysler should have been laid to rest months ago without a dime of taxpayer money and allowed to go through the bankruptcy process like the politically unconnected must do. When the government gets involved, it gets expensive. Chrysler has already received approximately $4 billion. The US taxpayer will shovel out another $3.5 billion for debtor-in-possession financing to see Chrysler through the bankruptcy, and another $4.5 billion as a parting gift when exiting The Bankruptcy Game ends.

This process is being called "Surgical Bankruptcy" since the Administration expects it to take just 30 to 60 days. Most bankruptcy experts I have heard from said there is almost no chance this will happen so quickly. Under normal circumstances it would take 6 months to a year. As discussed above, the billions of dollars already given to Chrysler has bought the government time to "prepackage" a deal that it wants. However, there will be lawsuits; both the bondholders and dealers are complaining. In fact, the bondholders forced the bankruptcy filing.

The dealers will file lawsuits because many will be forced to close, which is said to break State laws protecting auto dealers. I would think the bankruptcy procedure supersedes State law, however, it doesn't sound that way.

The bondholders are ticked off for many reasons, as I would be. The bondholders said in a statement today that they refused the "deal" put forward by the Administration for many reasons; the entire process was POLITICAL (nothing else), they are getting less than unsecured lenders, and now the President is demonizing them.

The latter will help explain the former. This morning the President said the government's political deal fell apart because a few hedge funds decided to play rough, but that's bullsh*t. Oh sure, a hedge fund or two surely hold bonds, but all of the bondholders are ticked. They are not demons or unscrupulous speculators...they FUNDED THE COMPANY ferchrisssakes! The bondholders are regular people; fireman, teachers, widows, orphans, and pensioners...they are NOT speculators.

Demonizing bondholders as unscrupulous opportunists showed how President Obama can act like a petulant child when he doesn't get what he wants. The honeymoon is over Mr. President, you can't have everything.

Some politically connected unsecured lenders are receiving 100-cents on the dollar. The UAW is making out like a bandit compared to those that FUNDED the firm. The President wants the bondholders to shut up and take just 5 cents on the dollar.

Instead of being demonized, they should be praised for forcing the bankruptcy. They should be praised for standing against political grandstanding. They should be praised for demanding that contracts are upheld and for taking their chances LEGALLY in court. The bondholders knew their investment wasn't guaranteed and know they will lose a lot more than the politically connected, but they at least want it done by the law and not by political fiat (pun intended).

How much equity will all of the money mentioned earlier get the Treasury (US taxpayer) once the "Surgical Bankruptcy" ends?

? The US taxpayer gets 8%.

? The Canadian government gets 2%.

? Fiat gets 20%.

? Bondholders get 15%.

? The union gets...55%.

As I said before, it's called a "surgical bankruptcy." The problem is, not all surgery is successful. However, they are finally on the right track. The same should apply to GM and the banks. Attempts to prevent bankruptcies are irrational. Trillions of dollars of taxpayer money were wasted on numerous bailouts for no good reason. Chrysler proves life goes on, and indeed goes on better after bankruptcy than workarounds that leave debt and other inefficiencies on the books. (As long as there weren't ridiculous side-deals that we don't know about).



Previous Day's Trading Room Results:

Trade Date: 4/30/09

E-Mini S&P Trades*
(before fees and commissions):

1) OTF buy @ 1:00pm at 872.75 = b/e (1 lot)

2) VA sell @ 1:50pm at 873.50 = b/e (1 lot)

3) Algorithm positions (2)...combined Secret's and Algo total...-2.00


Electronic (YM) Mini-Dow:

1) None today



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