2. Quite possibly. If the process had not been overrun by the Obama thugocracy but rather been governed by normal bankruptcy priority rules, then I think DIP financing would have been available. The unions would not have fared well, however, but the companies would have emerged intact.

3. Yes. Bankruptcy judges have a certain amount of discretion in approving restructuring plans. In this case, I think the bankruptcy judge would likely cave, both due to a general preference for saving dying firms as well as from the additional pressure from the Obama thugocracy.

As to your last point… Foreign competitors in the US auto industry aren’t saddled with unwieldy union agreements/contracts and pension plans. Not that this isn’t also the result of poor management. For too many years Big Three management caved to union demands, paving the road to financial distress.

Executives are handsomely rewarded to lead companies, make decisions and deal with difficult issues. While competitors in the auto industry in the US, somehow managed to build strong companies that can withstand the recession, Chrysler and GM, did not do so. Must be a rationale for this as well.

Also, you shouldn’t limit the blame auto execs and bankers, when the unions share more than their fair share.

The current $4.5B loan is not what I’d call DIP financing. No DIP financier would agree to the deal that the UAW extracted. In reality, this is simply a wealth transfer from US taxpayers to UAW members.

This whole agrument seems irrelevant anyway. We have a domestic auto industry heading off a cliff because of years of poor leadership; we have major financial institutions who are insolvent; unemployment at record highs, a global recession….the not vert reassuring good news is “the economy is getting worse more slowly”. In this context, the only institution that can step in and try to mitigate the damage is the government. Its seems ridiculous, to say nothing of disingenuous, for those auto execs and bankers who brought us this mess to now say “let’s us fix it as we know best”!

Corinne Ball, a lawyer for the auto maker, said at a court hearing that Chrysler wouldn’t seek approval to tap the loan Friday, its first day in court since filing for bankruptcy on Thursday. She said the company would file details of the loan with the court later Friday.

According to a term sheet filed with the U.S. Bankruptcy Court in Manhattan, Chrysler will seek approval to tap $1.8 billion of the financing on an interim basis.

The U.S. and Canadian governments are providing the $4.5 billion loan to help carry Chrysler through the bankruptcy case.

In the term sheet outlining the deal, Chrysler will pay its bankruptcy lenders – the U.S. Treasury Department and Export Development Canada – at least 5% interest on the loan.

Treasury is providing 74% of the financing with Export Development Canada putting up the remaining 26%, according to court papers. The two lenders will also receive promissory notes, equal to 6.67% of their loan commitments, when the loan matures.

Perhaps you should actually read the whole thing, but here’s a relevant snippet:

“In today’s economy, the limited number of banks willing to make DIP loans will demand increased interest rates and higher fees, significantly shorter loan terms, and other provisions that will make the DIP financing much less debtor-friendly. Nevertheless, as the risk:reward calculus of DIP loans is more widely understood, it seems likely that alternative sources of capital will step up to provide DIP financing in situations where banks are unwilling to make new loans and/or extend old ones.”

As I said, there’s still DIP financing, just under more stringent terms.

I find it difficult to believe that, in the long run, Chrysler is not an economically viable firm that would normally attract DIP financing. The problem is that no DIP financier was willing to risk the government elevating union claims above senior secured creditors – including those of DIP financiers.

Let’s keep it simple: a contract is a contract, no changing the rules in the middle of the game. Let the losers lose and the winners win.

And there’s nothing contradictory about criticize Obama’s decisions in the auto bailout, even after accepting the decision to step in. (criticize the administration? – shocking I’m sure)

The problem is that Obama doesn’t seem to be making decisions based on what’s best for the future financial viability of the industry – the result that would be obtained in a true free market or if the bankruptcy process were run without administration thuggery. Rather, Obama seems to be rewarding unions that supported him during his campaign. In a pure bankruptcy scenario, unions would have fared much worse than secured creditors who would get the deal that they bargained for, i.e., priority. So the long-term problem is one of incentives. Does it make any sense for future investors to sink money in industries that might be subject to thuggery by the administration?

This all seems really great for Obama. I’m sure industry interest groups are lining up to donate to ensure their own “Obama priority” in any future bankruptcies/bailouts. Sound like a banana republic? It should.

“If Chrysler were going into bankruptcy with available exit financing, the bondholders would have every right to fight for their share of the pie, and to argue that other creditors were getting an unfair share. It has no such financing available, other than from a government with no legal obligation to provide it.
If President Obama is willing to let Chrysler die if creditors do not accept his division of the money provided by the government, then creditors of Chrysler face a relatively simple set of questions.
First, can Chrysler raise the needed cash elsewhere? No.
Second, are bondholders likely to do better forcing a liquidation, and standing in line to collect whatever the assets bring at a bankruptcy auction? (What is the bid for an auto assembly plant in Detroit, with machines built to produce cars that will not be produced anymore?)”……
Why Chrysler s Bondholders Should Stop Whining
By FLOYD NORRIS May 2, 2009

These are clearly unusual circumstances; a financial crisis, a serious recession and the US auto industry at some risk of disappearing. Is there anyone else other then the government who can step in to try and effectively restructure the industry? You can disagree with their decision to step in but once that is done, it is contradictory to then dispute their right to make the decisions they deem appropriate, as would any financial instution in the same position. The ultimate decision will now be up to the bankruptcy judge

http://blogs.abcnews.com/politicalpunch/2009/05/bankruptcy-atto.html

If it’s true that the Obama administration forced certain senior/secured creditors to accept the Chrysler bankruptcy deal, what could possibly do more violence to the current bankruptcy regime? Forget the damage that would be caused by mortgage cramdowns. If you’re a senior secured creditor to a heavily unionized industry, would you feel comfortable with your claim?