I just love surprise endings. Don’t you?
Everyone remembers the saga of the executives from Detroit’s Big Three groveling on Capitol Hill, hats in hand. With all that’s transpired in the past few months, it seems like ancient history.
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They called on Congress to give them $25 billion to stave off the unthinkable – bankruptcy.
G.M. and Chrysler got $17.4 billion. Ford passed, saying it had adequate cash to survive the crunch.
In an ironic plot twist, it’s the federal government that ultimately may force the automakers into bankruptcy.
The money to the two troubled car companies was structured as a loan, not give- away. Apparently, the executives at G.M. and Chrysler were so anxious to get their mitts on the cash; they didn't read the small print.
Under the terms of the loan agreement, the federal government was supposed to jump to the head of line in front of all other creditors for the purposes of repayment. As it currently stands, the U.S. taxpayers are taking a backseat to the automakers other major creditors. including, Citigroup, J.P. Morgan Chase and Goldman Sachs.
A Weird Turn
Lest we forget; all three of these banks were among the biggest beneficiaries of the taxpayer bailout, with Citigroup alone getting more than $25 billion in federal government aid.
Despite having received billions in federal bailout monies, the lenders are not willing to let the government sprint into first position. The car companies are also resisting because they don't want to become even bigger deadbeats by stiffing the banks.
Here's where it gets really weird.
The federal government has hired a private law firm to advise it on how to secure its position in the front of the line.
Under the present situation, the government loans fall below existing debt secured by most assets for Auburn Hills, MI-based Chrysler and Detroit-based G.M. Prior lenders like Chase and Goldman have first position on these assets.
The government, on the other hand, has first position on all other assets not already pledged. Translation; the taxpayers have nothing of actual value securing their loans to the carmakers.
The Iron Fist of Government
The first objective of the government's lawyers will be to obtain a consent agreement that allows the U.S. taxpayers to get paid before banks like Citigroup, Chase and Goldman. If it can't get everyone to agree, then the federal government may have little choice but to force the carmakers into an involuntary bankruptcy.
The automakers have continuously eschewed calls to reorganize under bankruptcy protection, saying a Chapter 11 restructuring would scare away buyers and lead to liquidation. G.M. and Chrysler say they are working toward a Feb. 17 deadline to show progress on a plan put in place as part of the U.S. loans received in December from the Troubled Asset Relief Program. The companies must reduce labor costs and demonstrate how they will repay the money by next month.
If the federal government forces the carmakers into bankruptcy, then the U.S. taxpayers become "debtors in possession." Although this move would put the federal government ahead of the other lenders, it may also force the feds to come up with a plan, if not the money, to repay banks
Just in case you weren't following: If the carmakers are forced into involuntary bankruptcy reorganization by the federal government, then the U.S. taxpayers may be on the hook to repay loans to banks we already own with assets that are already ours.
This may be the ultimate definition of creative financing.
John Cohn is a senior partner in the Globe West Financial Group[ based in West Los Angeles. He may be contacted at www.globewestfinancial.com
