Fallout: The Financial Crisis

Weekly Wrap: How Chrysler will emerge

Marketplace Staff May 1, 2009
Fallout: The Financial Crisis

Weekly Wrap: How Chrysler will emerge

Marketplace Staff May 1, 2009


Kai Ryssdal: The president made it through his first hundred days in office. Swine flu grabbed almost as many headlines as that did. Chrysler went bankrupt, we talked to the mayor of Kokomo about that. Other than that though, kind of a slow week. Joining us for our weekly wrap of Wall Street and beyond is Leigh Gallagher from Fortune Magazine and Felix Salmon from Reuters. Hello again you two.

Felix Salmon: Hey, Kai.

Leigh Gallagher: Good to be here.

Ryssdal:So obviously, from the mayor of Kokomo’s perspective, Chrysler going bankrupt is not necessarily the best thing in the world. But Felix, from a pure corporate perspective, just a business model aspect, it’s not terrible, right?

Salmon: It’s actually quite a good thing because the big millstone around Chrysler’s neck, the big problem which they have whenever they try to make big changes, is not so much the union as the dealer network. The dealers have these enormous contracts and have a lot of power in the municipalities in which they’re based. And if Chrysler wants to bring down its dealer network to something commensurate with the size that it’s going to be going forwards, going into bankruptcy is by far the best way to get out of those contracts without having to pay billions of dollars to the dealers.

Ryssdal: All right. But Leigh, will it work? Will we have a new, smaller, braver, better Chrysler?

Gallagher: We invariably will. You know, Chrysler is going to enter into this partnership with Fiat, they’re going to dramatically downsize. And, Felix is right. I mean, this is what a bankruptcy allows you to do — it allows you to take the time, clear everything out. It will be leaner. There’s actually an argument to be made that this should have happened well before now, before the government poured another $4 billion into the company, you know, over the past several months. But, if you think about it, Chrysler had actually really cleaned itself up in recent years, but then things really deteriorated and this is probably the only option.

Ryssdal: Felix, what about these bondholders that the president came down on pretty hard yesterday? I mean, they are, you know, entitled to what they’re owed, no?

Salmon: No, they’re entitled to nothing really, because Chrysler isn’t worth anything right now. That’s the problem. They talk about how much it might be worth in liquidation, but Chrysler isn’t going to be liquidated. They knew that when they bought their bonds because the government has always made it eminently clear that it won’t allow Detroit to just simply be liquidated. It would cost the government too much, for starters, just in terms of unemployment benefits and that kind of thing. So they are being offered $2.25 billion by the government, cash, for their bonds. And that’s a pretty good deal and I think they should take it.

Ryssdal: Leigh, what do you think?

Gallagher: Well, I think there’s an interesting dynamic happening here. I think that this isn’t so much about the money. Of course it’s a lot of money, but I think this is just as much a stand on principle by the bondholders. They firmly believe that they do not need to make sacrifices to save Chrysler, and they’re reverting to the argument that, you know, the bankruptcy code calls for the secured creditors to be first in line. And this plan is not honoring that. And, you know, the argument they’re making is that some of the big banks that are also secured creditors who did agree to these terms, agreed because they’re taking TARP money and they need to be a little more agreeable with the government’s terms. So I think they do have a point.

Ryssdal: Speak now if you believe this is going to be over in 30 to 60 days… OK, moving on.

Gallagher: Silence.

Ryssdal: There we go. Moving on to the next topic today: Gross domestic product at -6.1 percent we learned earlier. And nobody’s really surprised. Any good signs at all, Leigh?

Gallagher: Well, I think there are some signs that things are not getting as bad as fast. But I also think that we still have a lot of headwinds. This unprecedented bankruptcy with Chrysler. Even just the swine flu this week. I mean, this market really seems to be a sort of see-no-evil, hear-no-evil market. And it does seem a little suspicious that this bull market is going to keep going up and up from here.

Ryssdal: Let me throw another one at you, Felix. The stress tests that we were supposed to get on Monday now not coming until Thursday. Good sign or bad sign?

Salmon: Well, it’s actually a mixed signal. I think it means that the government and the banks haven’t come to an agreement on what they’re going to do about the results of these tests. But it also means that they’re being sensible about that fact. And rather than just release the results of the tests in the face of an inability to resolve the issues thrown up by them, they’re sitting down and they’re taking their time and they’re not giving themselves artificial deadlines. And they’re allowing the banks, and the government and the Treasury time to work out exactly how these institutions are going to be recapitalized. So, in that sense it’s a good sign, so long as we do get something constructive when the stress tests are released.

Ryssdal: Leigh Gallagher at Fortune Magazine. Felix Salmon at Reuters. Thanks guys.

Gallagher: Thanks.

Salmon:Cheers, Kai.

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