The haggling over Chrysler's future is going right down to the wire. After numerous offers and counteroffers between Chrysler's bondholders and the U.S. government, the Treasury made one last offer late Wednesday afternoon, raising from $2 billion to $2.25 billion the amount of cash that it hoped would persuade debtholders to relinquish their claims on $6.9 billion in secured debt. As of 7 p.m. EDT Wednesday, the Wall Street Journal was still reporting that Treasury had set a 6 p.m. deadline for the lenders to agree or disagree, but there was no word of any resolution. Previously, President Barack Obama had set a May 1 cutoff for Chrysler to come to an arrangement with its creditors or be forced to file for bankruptcy.
The holdouts are no longer the big four banks (and TARP recipients) that together own 70 percent of Chrysler's debt. Both the Journal and the Washington Post have fingered three hedge funds -- Oppenheimer Funds, Perella Weinberg Partners' Xerion Capital Fund and Stairway Cap Management -- as the sticklers. The government is faced with the unenviable prospect of getting unanimous consent from all the bondholders to make a deal, which gives the hedge funds extraordinary leverage. In the parlance of Wall Street, taking a hit on what you are owed is known as a "haircut." The hedge funds seem to be allergic to the barbershop.
The Washington Post also reports that the Obama administration is fully prepared for a failure to reach a settlement. "Detailed" bankruptcy plans have been drawn up, and Chrysler CEO Robert Nardelli is supposed to be due for a quick exit. Obama even has drafts of two different speeches ready at hand for Thursday morning, when he is scheduled to give an address announcing Chrysler's future.
From the Post:
Some hedge funds likely believe they could get a better return in a bankruptcy filing or in a sale of Chrysler's assets, said Sheldon Stone, a turnaround expert at Amherst Partners.
"These rogue hedge funds are not coming in line because they feel like the government is attempting a cramdown, which is essentially a take it or leave it deal," he said.
The New York Times published a detailed story Wednesday recounting how the Obama administration got to this stage of the game in deciding Detroit's future (and makes a pretty clear case that Obama himself is in total charge of the policy decisions), but it is the endgame that matters. If three hedge funds can sabotage the U.S. government on a Chrysler deal, what happens when push comes to shove on General Motors? Or Citigroup? Or Bank of America?
David Leonhardt's Economic Scene column on Thursday, "Time for Bank Creditors to Feel the Pain," summarizes economist Raghuram Rajan as saying that "the government should study whether it can sensibly impose any losses on creditors, rather than unquestioningly accepting Wall Street's self-interested view that haircuts would be bad for the economy."
But if the Chrysler negotiations are any guide, bank creditors aren't going to simply agree to take whatever haircut the White House suggests. Cutting a deal with Citigroup's lenders will be several orders of magnitude more gnarly than coming to a settlement on the debt of a car company that, for all its legendary name-brand renown, really isn't much of a player in the auto industry anymore.
Chrysler's for practice. Then it gets serious.
UPDATE: At midnight EDT, the Wall Street Journal is reporting that talks have broken down, and Chapter 11 bankruptcy is imminent.
The question: Do the hedge funds win or lose by refusing to budge?