GM and Chrysler: Goodnight
By now it is clear that both GM and Chrysler are likely done.
Treasury "asked" Chrysler's bondholders to take a huge haircut:
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?
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
All material herein Copyright ©2007-2011 Karl Denninger. All Rights Reserved.
Disclaimer: The content of this article is provided without any warranty, expressed or implied. All opinions expressed in this article are those of the author and may contain errors or omissions.
No material here constitutes "investment advice" nor is it a recommendation to buy or sell any financial instrument, including but not limited to stocks, options, bonds or futures.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis or opinion in this article are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.