Friday, May 01, 2009

Chrysler deal is really about GM

Ezra Klein has an excellent post today taking a look at the Chrysler deal that is really worth a read.

And while the whole post is interesting, I want to call your attention to his final point, which is to view the President's actions yesterday in light of the much bigger GM negotiations.
The other piece of the puzzle is that Chrysler was something of a trial run. The really consequential negotiations are still to come. They'll happen when the administration sits down with GM. One of the apparent miscalculations made by Chrysler's bondholders was that the government desperately wanted to avoid letting Chrysler go into bankruptcy. But by showing its capability to be ruthless in the Chrysler negotiations, the administration might have just improved its bargaining position in the GM negotiations, as it is now harder for various stakeholders to predict exactly how risk averse the government will, or won't, be.
As best I can tell, the hedge funds simply overplayed their hand, thinking if they just held out they could get close to full value from the Treasury rather than let the deal fall apart. After all, 'full value' to the hedge funds is a just a few billion dollars. I've used the hold out approach successfully on behalf of clients on a few occasions and it has worked. But in this case the strategy failed, if for no other reason than this is really about GM. While "full value" to Chrysler's investors may be small change, GM is another matter.

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