Should the Supreme Court kill Fiat's deal to buy Chrysler?
Jun 7th 2009 10:30AM
Updated Dec 4th 2009 1:57PM
Remember Chrysler? It makes Jeeps, minivans, and such and was bailed out by the U.S. in 1979. But in May 2007 a private equity firm, Cerberus Capital, bought an 80.1 percent stake in Chrysler from Daimler for $7.4 billion, installed the CEO who smashed up Home Depot (HD), Bob Nardelli, as Chrysler CEO and he drove it into a wall -- it filed for bankruptcy this April 30.
But the U.S. decided that Chrysler could not simply be liquidated. So it lent $8 billion and negotiated a deal to sell its best assets to Fiat -- which would initially give Fiat 20 percent of the new company, with the option to hike its stake to 51 percent; the UAW health-care trust would initially get a 55 percent stake, while the U.S. and Canada, which are lending Chrysler $4.9 billion during the bankruptcy, would own 8 percent and 2 percent, respectively. Senior lenders owed $6.9 billion would get 29 cents on the dollar.
The bankruptcy court approved the deal last Monday and the 2nd U.S. Circuit Court of Appeals in New York approved it verbally on Friday. But midnight on Saturday a group of Indiana pension funds -- which own about $42 million of the senior debt for which they paid 43 cents on the dollar -- appealed to the Supreme Court to stop the deal -- and if the Supreme Court decides to take the case -- it could delay the deal beyond June 15th -- giving Fiat a chance to pull out.
Justice Ruth Bader Ginsburg, who is handling this emergency request can decide to rule herself; refer the motion to the entire court; reject the appeal outright or request other parties involved in the case file briefs on a tight schedule. Unless Ginsburg decides to delay the deal before 4pm on Monday, the deal will go through. What should she do?
The answer depends on whether there is a flaw in the legal reasoning of the Appeals Court. The argument of the Indiana pension funds is that the sale is unconstitutional because it puts the rights of junior creditors ahead of the rights of senior lenders. The funds also argue the U.S. Treasury Department has overstepped authority given to it by Congress under the TARP by using its funds to finance Chrysler's restructuring.
Since I know next to nothing about the legal issues, I can't really guess what will happen. But the bondholders tried these arguments with the bankruptcy and appeals court and they failed. In the bankruptcy court, Judge Arthur Gonzalez ruled that it was a fair deal for creditors and the best possible result under dire circumstances and that the Indiana plaintiffs have no legal standing to argue on the TARP claim.
Unless there's some flaw in the way the bankruptcy and appeals courts have handled this issue, Judge Ginsburg will most likely have no legal basis to delay this deal and she will opt to reject the appeal outright.
From an economic and political standpoint, that outcome is in the best interests of the most people. The Indiana pension funds have not brought a deal to the table that will minimize the pain to the stakeholders -- they just want to block a plan that would minimize the pain of a Chrysler liquidation so they can cut their losses below the 33 percent that the plan will cost them.
Maybe the managers of the pension fund should have done a better job of analyzing the risks before they bought the senior debt -- the 43 cents on the dollar at which they bought, already reflects a huge amount of default risk.
And I don't think their $13.9 million investment loss will pose a systemic risk to the U.S. economy.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.