Monday, June 8, 2009

SCOTUS Stays Chrysler Sale, Sizing Up the VA & NJ Elections, Stimulus Under Fire

Chrysler Sale on Hold For Now
In a move that surprised many observers (including this one), the Supreme Court has temporarily halted the proposed Chapter 11 bankruptcy reorganization plan for Chrysler, which had called for ownership by the UAW Pension Fund, Fiat and the U.S. Government of a "new" Chrysler, which would be unsaddled from the burdens of its massive secured debt.

This issue is a thorny legal maze, but I'll attempt to make it as simple as possible. When a company enters Chapter 11 Bankruptcy, it is essentially admitting that it lacks the cash to meet its debt obligations. A chapter 11 filing seeks to dissolve the existing corporation and form a new corporation with the old corporation's assets. The process is designed with a pecking order of who gets what. So-called "secured" debt holders, those who hold debt guaranteed by the corporations assets are the first to get their money back. "Unsecured" debt holders, those who hold debt to the company that is NOT secured by the company's assets are next in line. Existing share holders are last in line and typically don't get anything (if the company had enough to cover its debt, it wouldn't need to file bankruptcy after all.) A reorganization is typically only approved by a court if it is believed to be preferable to debt holders to a liquidation (that is, it is believed they will get more of their money back by reorganizing the company.) Essentially the Chapter 11 process is about existing owner's getting bumped from a broke company and the debt holders taking ownership of the company in exchange for not getting their bonds repaid.

The legal issue at play in the Chrysler bankruptcy pertains to the pecking order that I just described above. The UAW Pension Fund is an unsecured debt holder (Chrysler owes payments to a pension fund, but they were not guaranteed by company assets), whereas a myriad of bond holders are secured debt holders. The proposed reorganization gives a large stake of the company to the UAW Pension Fund, while paying back secured debt holders only about 27 cents on the dollar.

This would ordinarily provoke a fight on the part of the major secured debt holders. The unique situation here, is that the Federal government brokered the deal and the major bond holders are financial institutions that owe billions in TARP money back to the government. They are clearly in no position to protest the deal.

The legal challenge came from a small group of minority bond holders, led by an Indiana State Workers pension fund. The challenge was rejected by the bankruptcy judge and rejected by a federal appeals court. The conventional wisdom was that the Supreme Court would leave the decision alone without comment. Apparently not so.

Justice Ruth Bader Ginsberg (who is the justice with jurisdiction to handle emergency requests from the 2nd Circuit where the appeal is coming from) has granted a temporary injunction while the Supreme Court considers whether to take up the case. The temporary injunction does not have a time limit, although the Supreme Court is expected to decide whether to hear the case or not. To hear the appeal, at least 4 of the 9 Supreme Court Justices would have to vote to grant cert in this case.

This has the potential to be a real mess. Fiat has threatened to walk away from the deal if it is not closed by June 15th and it would be nearly impossible to get a Supreme Court decision prior to that if the court agrees to hear the case. As I've documented previously in this space, every day that Chrysler is essentially closed down is a day further that R&D is getting behind for 2010 model year cars and another day that paint is drying in production lines.

A delay is bad for everyone. The scary thing is that the plantiffs seems to have a legal case. The proposed reorganization clearly puts unsecured debt holders ahead of their legally entitled place in line. But 27 cents on the dollar may be the best deal the plantiffs are offered. If they win and delay the reorganization, Chrysler will likely face liquidation and their cut will be substantially less.

That the Supreme Court might take this up is a shocker. That it was one of the courts most liberal justices who granted the stay is a double-shocker. This is a case where the court may make the technically correct legal decision that may wind up being bad for all involved.

Let's hope GM fares better in its proposed reorganization.

VA and NJ Governor Races
In 48 states, 2009 is more or less an off year for elections. Not so in the State of New Jersey and the Commonwealth of Virginia.

Virginians vote tomorrow in their Democratic gubanatorial primary. Former State Attorney General Bob McDonnell is running unopposed on the Republican side. Democrats face a fiercely contested 3-way contest between State Senator Creigh Deeds, former DNC Chairman Terry McAullife and former State Delegate Brian Moran. Polls are extremely close, although Moran appears to narrowly trail the other two. The polling data appears to show a pure toss-up between Deeds and McAullife.

Outside of Virginia, McAullife is the only figure that is well known, having been the face of the Democratic party for several years. Virginia primaries are extremely tough to call, especially in cases where one party is uncontested, as Virginia primaries are open. Republicans may vote for either the candidate that they find least offensive or the candidate that they think they can most easily beat. In either case, conventional wisdom would indicate that they would tend to oppose McAullife, who has been a thorn in the side of the GOP and possess an amazing fundraising rolodex.

The statistics tells us this one is a dead heat. My personal prediction, based on the intangibles mentioned above, is that Deeds edges out McAullife to win, but I wouldn't rule out any of the 3. If you live in Virginia, make sure you get out and vote tomorrow, as this one could be a nail-biter.

Looking ahead to the general, I would expect a very close race. Virginia is pretty much a pure swing-state at this point. Although it does have 2 Democratic Senators, a Democratic Governor and went for Obama this past November, it still has strong conservative support in rural areas. Its brand of Democrats tend to be the pro-gun, low tax variety and Obama won it much more narrowly than he did nationally. I look for a hard-fought general.

In New Jersey, it has already been decided that Chris Christie (R) will face incumbent Gov. John Corzine (D). 2009 is an awful year to be an incumbent governor with high unemployment and massive budget deficits that have led to either higher taxes, lower services or both. Corzine is unpopular and Cristie is ahead in the polls. Christie is a moderate and New Jersey, despite its strong blue-streak nationally of late, has a history of electing moderate Republicans. This will be a fun one to watch. Christie seems to have the edge at this point, but the GOP can sometimes fade late in New Jersey. I live in New Jersey and have not yet reached a decision, but will let you know when I do.

Stimulus Under Fire
Pressure is intensifying on the Obama administration to show results from the massive stimulus packaged passed this year. Conservatives and the media are calling into question the effectiveness of the program, given that unemployment has risen to 9.4% (up 1.5% since the package was signed.) As I've documented before, employment tends to be a lagging statistic in economics and I have always anticipated that it would reach around 10% by year end. The stimulus never could have immediately halted rising unemployment, but I believe was necessary to prevent utter collapse. Fair metrics to look at are how fast the money is being spent (as we will continue to document in this space) and whether the fundamental metrics of the economy are beginning to stabilize. I believe the improvements in housing and in leading employment indicators as well as the surge in consumer confidence indicate that the preliminary verdict is that the stimulus is having a positive effect. But that is a nuanced and difficult to explain position. 9.4% grabs headlines. The Obama Administration needs to work on its messaging.

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