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GM and Chrysler: Goodnight

Karl Denninger
Market Ticker
Apr 24, 2009

By now it is clear that both GM and Chrysler are likely done.

Treasury "asked" Chrysler's bondholders to take a huge haircut:

April 23 (Bloomberg) -- The U.S. Treasury asked Chrysler LLC's secured lenders to reduce their debt to $1.5 billion from $6.9 billion in exchange for a 5 percent equity stake in the automaker, a person familiar with the negotiations said.

The offer followed by a day a proposal by the lenders to reduce the debt to about $4.5 billion and take 40 percent equity. The person describing the Treasury offer asked not to be identified discussing the private talks.

That's not only too far apart, if I was a bondholder I think I'd take my chances in a bankruptcy court.

We are talking about a 75% whack here, which implies recovery of 25 on secured debt.

I wouldn't do it if I were them. I'd go see the judge; in a crack-up of Chrysler I bet there's more than a quarter in recovery value, and at that point you may as well have a roll of the bones.

But who's negotiating here? Gee, who d'ya think?

The lender group is composed of New York-based JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley and the investment funds.

Big surprise. Not. [Editor's note: The Usual Suspects]

But in this case I have to defend the banks' position. I don't know exactly where Chrysler is in terms of "how bankrupt are you" but it is unlikely that they've destroyed 75% or more of the bondholder value.

This interchange, however, tells us quite a bit. It is, in fact, a model for the banking system - it's called a cramdown (no matter what you might want to call it) and it is what happens in bankruptcy.

GM, for its part, is saying it will idle virtually all of its assembly plants in the US for at least a week (and probably more like a month or two) between May and July, and in addition yesterday said it will not make a scheduled June 1st debt payment.

Anyone care to bet on whether GM files before the end of May? That's where my money would be - but I refuse to short a $1.69 stock!

In any event if GM and Chrysler are put through a prepackaged bankruptcy this will prove an instructive example for the banking system - and what must happen to clear excess debt from the system across the board.

While nobody wants to see GM and Chrysler go through a bankruptcy, the fact remains that the debt levels these firms are carrying cannot be sustained. That's clear from their operating results and inability to meet debt service and operating cash requirements from sales - ergo, it's time to get on with it.

Apr 23, 2009
Karl Denninger

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