Home Front

A blog about the economy and the Sacramento-area real estate market.

April 30, 2009
The Chrysler bankruptcy, and an old Sacramento story

    It sounds more than a little counter-intuitive. President Obama today said the imminent bankruptcy filing by Chrysler LLC, with government support, was a step toward self-sufficiency. The head of Chrysler, Bob Nardelli, just told CNBC the whole thing can be wrapped in a tidy package in a couple of months.

     But there is precedent for this, right here in Sacramento. Back in 2003, Tower Records had a deal in place with the vast majority of its bondholders to keep the struggling music retailer going. The creditors were going to forgive much of Tower's debt in exchange for a big ownership stake.

    But a few bondholders didn't like the deal. So Tower in 2004 filed a "pre-packaged" Chapter 11 bankruptcy. The company was able to use the bankruptcy laws to cram the deal down the throats of the dissident bondholders. The case lasted barely a month.

    That's similar to what's happening with Chrysler: The plan is that the holdouts among the bondholders will be forced in bankruptcy court to accept Chrysler's terms.

    Of course, the parallels aren't exact. Along with an alliance with Fiat, Chrysler is getting about $8 billion in government aid. Tower was left pretty much to struggle on its own.

    For Chrysler's sake, hopefully the automaker will meet a better fate than Tower. Two years after emerging from the first bankruptcy, Tower fell on hard times again and had to file a second time. It wound up being liquidated.

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