Bailed Out Bank, JP Morgan, Dooming Chrysler

[Elidor]

By: emptywheel Saturday April 4, 2009 8:14 am

The WSJ confirms what we've all probably suspected: the creditors that are forcing Chrysler into bankruptcy are the same banks that have been surviving only with the help of the federal government. And of course, they are refusing to offer the same generosity to Chrysler.

Banks that loaned Chrysler LLC $6.8 billion are resisting government pressure to swap more than $5 billion of that for stock to slash the car maker's debt, according to people familiar with the matter, hindering Chrysler's effort to restructure outside of bankruptcy court.

<snip>

The lenders, which include J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley, hold great influence in moving the process along. As holders of secured debt, they have the right to take control of Chrysler plants, brands and other assets, which were pledged as collateral for the loans, if the company files for bankruptcy protection.

As a result, Chrysler may be worth more to the lenders in a bankruptcy liquidation than if they agree to restructure the debt, and the government has less leverage to force the banks to make concessions.

The negotiations show how the government's involvement in both banks and industrial companies is creating uncomfortable circumstances: The U.S. has given aid to some of the very banks that are demanding tough terms from Chrysler, also a recipient of government loans.

JP Morgan has been the recipient of bailout love in many forms: direct receipt of TARP funds, the Fed's honoring of huge loans JP Morgan made, AIG counter-party funds, and low-risk sweet-heart deals for JP Morgan to "rescue" other banksters--for a total of somewhere between $27 billion and $300 billion. And of course, JP Morgan has already been using its TARP funds for acquisitions, not loans.

<snip>

There's a lot that needs to be said about this: that if Treasury can't get JP Morgan to cooperate here, then it must write off JP Morgan as a good faith partner going forward. That this just shot to the top of the list of most loathesome actions among the banksters.

http://emptywheel.firedoglake.com/2009/04/04/bailed-out-bank-jp-morgan-dooming-chrysler/

[FreakinDJ]

1. Pres Obama is all over this already

The Obama administration is now ordering General Motors Corp.'s creditors to make sacrifices to save the ailing automaker. Yet bondholders of financial companies such as Citigroup Inc. and Bank of America Corp. so far have been mostly left off the hook, even though the government has given the banks billions of dollars in bailout money.

Many those bondholders, in fact, are still profiting from their investments so long as they haven't had to sell, while the rest of us deal with vanishing wealth.

Hussman is among critics who say bank bondholders shouldn't be shielded from all that has gone wrong in the past two years. "When one lends money to a financial institution, one also assumes the risk and responsibility of bearing the losses," Hussman observed.

The White House has been sending out the same message as it turns up the heat on GM's creditors. In addition to forcing CEO Rick Wagoner to resign, Obama administration officials told GM bondholders over the last week they must make concessions or else the automaker will be headed for a bankruptcy reorganization that likely would diminish the value of their holdings.



http://finance.yahoo.com/news/ALL-BUSINESS-Bank-creditors-apf-14850712.html

[RB TexLa]

2. GM's bondholders aren't going to move. They are being offered 16 cents on the dollar when in BK the

bonds will be worth some where over 30 cents on the dollar.

[FreakinDJ]

3. Not sure what you are talking about

Too bad bank creditors aren't under the same pressure. They're still living in a financial world of the past, where corporate bond investors -- whether they be individuals, pension plans or hedge funds -- loan companies money and get regular interest payments. If they keep the investment until it matures, they reclaim their principal.

For example, investors who took part in a $1 billion 30-year bond offering by Citigroup in 2002 are still being paid a 6.625 percent yearly return on each $1,000 invested and are scheduled to be paid back in full when the bonds mature in 2032. If they sold now, they would get about half that value since bonds of that vintage are currently trading at around 56 cents on the dollar.

http://finance.yahoo.com/news/ALL-BUSINESS-Bank-creditors-apf-14850712.html

So if they sell out now its worth $.30 cents on the dollar of the $.56 cents the writter of the article claims, or 100% plus interest as the bond was originally structured.

Question being - "Do we allow the bond holders to determin if the entity stands or fails? Geez that would be one for the courts since they entered into the agreement of the bond - as long as they make their interest payments

[RB TexLa]

5. Citi is not trying to get their bondholders to restructure the debt

GM is because they believe that everyone, the government, bondholders, unions, retires, suppliers, etc, etc have to pay so they don't have any bad PR and their plan can include them remaining larger than their domestic rivals.

Basically their plan is "give us the God damn money now!"

[FreakinDJ]

6. The article is about Chrysler

Creditors of GM, which has received $13.4 billion in federal loans, had been balking at restructuring their debt, betting the government wouldn't dare force the giant automaker into bankruptcy. But White House economic adviser Austan Goolsbee called their bluff: "They're going to have to make some sacrifices," he said in an interview on CNBC.

Citi also recieved TARP funds - Just how do you think Washington would call their bluff. Probably the same way they are attempting to presure Chrysler - call in the notes or devalue your worth

snip from above linked article:

[Statistical]

13. Yes.

Bondholders are give the right to force a company into bankruptcy for non payment.

If you as a CEO don't want that risk then....... don't issue bonds.

Also your math seems to indicate a lack of knowledge on how bonds work.

Bonds are issued at a face value of $1000. A bondholder gave $1000 up front (or more likely a large multiple of that) to Chrysler in exchange for a promise.

The promise was $66.25 (6.625%) per year in interest (on each $1000 issued) in 2002.
They will receive that $66.25 for 30 years (2002 to 2032).
In 2032 Chrysler will pay back the $1000.

Nobody has made 100%.

Because of the risk of BK the bond is trading at $0.56 on the $1.00.

A $1000 bond can only be sold today for $560 (a substantial LOSS not gain).

Bondholders shouldn't be forced to accept (potentially worthless) equity in exchange for higher protection.

Bankruptcy law is already clear. Bondholder can force restructuring or liquidation IF company fails to pay bondholders. So if/when Chrysler fails to make interest payment it is in default.

Until that time some bondholders can CHOOSE worthless stock in exchange for their bond but can't be forced to do so.

What is someone forced you to accept worthless Fannie Mae stock in exchange for the equity in your home?

[TahitiNut]

4. I have to wonder whether JP Morgan collected from AIG on a CDS covering a Chrysler loan.

It'd be VERY interesting if they're BOTH refusing to convert that debt to stock AND collectnig as a counterparty on a CDS.

[Kolesar]

8. "credit default swaps"

That was very insightful.

[On the Road]

7. I Don't Understand the Scandal

of not wanting to swap debt for equity in a troubled firm.

It would be nice for Chrysler, of course, but it may not be responsible for the lenders. There's a good chance the $5B of equity will become worthless as opposed to simply taking a haircut in bankruptcy proceedings.

[MindMatter]

9. I think it is just the irony of the situation

Chrysler is bankrupt and should go through bankruptcy. Three really isn't any good argument against that.

But the same is true for all these banks. They should be liquidated. They aren't doing America any good as they currently exist.

[Statistical]

12. Exactly if I had a Chrysler bond right now I would ....

take my chances in BK.

At best the swap to equity will be horribly dilluted (number of shares increase massively as all of the swaps are new additional shares.

Most likely the equity will return no dividend for 5-7 years and a bond holder is interested in INCOME= interest or dividend.

Worst case scenario is that despite all that Chrysler goes into BK except OOPS the bondholder is now a shareholder and is in last place. So that equity stakes becomes $0.00.

[On the Road]

14. Exactly --

If bondholders are forced to exchange for stock that becomes worthless in Chapter 11 proceedings, I'm sure they will argue it amounts to an unconstitutional taking.

[lonestarnot]

10. Son's of fuckers!

[TWiley]

11. interesting thought, but not very limiting in scope .....

[The Straight Story]

15. I am SOOO glad I don't work there anymore (nt)