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Tuesday, June 09, 2009

Courts - More takes on the Chryler situation [Updated]

Indianapolis Star business columnist John Ketzenberger has a front-page story today headed "Treasurer bucks critics, crowd: 'I'm not doing this for attabogs'". It begins:

You might call Indiana Treasurer Richard Mourdock the $6 million man.

That's the amount of money Indiana is haggling over in the billion-dollar Chrysler bankruptcy. It is money that Mourdock said should go to the pensions of cops and teachers, but the legal wrangling has already cost $2 million and thrown doubt on the government-brokered bankruptcy.
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Mourdock's case was strengthened Monday when the U.S. Supreme Court called a timeout, but the first-term treasurer can't outrun the pointed criticism coming from autoworkers, Chrysler and the federal government, who fear delay will kill a sale to Fiat.

"I'm not doing this for attaboys. I'm not doing this for criticism," said Mourdock, a Republican from Evansville. "I'm doing this because I took an oath of office."

Indiana got into the fight because last summer the Indiana State Police Pension Fund, the Teachers Retirement Fund and the Major Moves Construction Fund bought $42.5 million worth of secured Chrysler bonds. The state paid 43 cents on the dollar for the bonds, a hefty discount that reflected how risky the bonds were, but it was a show of support for a company important to the state.

"I'm getting e-mails from people in Kokomo and at Chrysler now that say that I'm trying to cover up a bad investment," Mourdock said. "Wait a minute -- we invested in you."

Chrysler sold about $6.9 billion worth of the bonds, most of it held by major investment banks and hedge funds. By law, the bond buyers would be first in line to receive compensation if Chrysler declared bankruptcy. Even last summer that was unthinkable.

But the unthinkable happened last month, and when the federal government dictated terms, the secured bondholders were told they'd get 29 cents on the dollar, or $6 million less than Indiana paid for the bonds it bought in July.

Indiana's loss is miniscule compared with the major banks and funds that stood to lose billions, yet the state was the only bondholder to object. Why?

Daniel Howes' of the Detroit News has a column today headed "In Supreme Court, Chrysler bankruptcy paves new legal road." It begins:
It doesn't take a law degree to understand why the fate of Chrysler LLC and its ostensibly life-saving deal with Fiat SpA of Italy now rests with the U.S. Supreme Court.

We're making new law here, this Obama administration-driven attempt to speed insolvent automakers through bankruptcy court and, at the same time, to unilaterally rearrange the order of creditors, their status and what -- if anything -- they stand to recoup from the process.

The relevant facts: Chrysler's bankruptcy, barely five weeks old, hinges on delivering more value and more of the company to such unsecured creditors as the United Auto Workers at the expense of secured creditors like three Indiana pension funds and similar bondholders.

Whatever the wisdom of investing public pension money in the dodgy future of Chrysler, the Indiana funds' managers invested in bonds secured by the assets of the company -- meaning they would be at the front of the line for repayment should Chrysler go bankrupt. But they aren't in the Obama workout, which is why they're suing despite enormous political pressure to swallow their losses gladly and shut up.

"By refusing to make the relatively small sacrifices that would avert a calamity," Rep. John Dingell, D-Dearborn, said in a statement, "the pension funds will instead create a great catastrophe, which is the same kind of short-sighted thinking that got us into the Great Depression."

From later in the column:
Team Obama should welcome a review by the Supreme Court. Otherwise, its heavy-handed auto bailouts risk being de-legitimized by the taint of potential illegality and "crony capitalism" that rewards friends (the UAW) at the expense of the political undesirables (the investor class, post-global financial meltdown).

But that's not all. The auto task force's pressure tactics with Chrysler's secured bondholders and the unsecured bondholders in bankrupt General Motors Corp. send a chilling message to the capital markets -- namely, the rules governing investments don't apply if they clash with political goals.

How, exactly, would these emerged-from-bankruptcy companies raise private capital in the months and years ahead? Who would invest in a "new GM" and Chrysler-Fiat, given the pounding suffered by the Indiana funds, creditor Perella Weinberg and others who resisted the government cram-down?

Successful automakers consume large amounts of capital every year to finance operations, develop product and do advanced research. If the likes of the Indiana pension funds or private equity players won't plump for GM and Chrysler, they'll once again become cash-starved and remain dependents of the federal government.

[Updated at 9:26 am] Via SCOTUSBlog.com, in an entry headed "Context for the temporary stay order," Troy D. Cahill, counsel in Akin Gump’s Supreme Court and appellate practice, provides an explanation of the temporary stay order.

Posted by Marcia Oddi on June 9, 2009 08:13 AM
Posted to Courts in general | Indiana Government