30 April 2009

The Weight Of The (Chrysler) World

Story from the Wall Street Journal

Geoffrey Gwin is wrestling with the knowledge that the retirement plans of some 80,000 Americans may rest in his hands.

"I am in turmoil," says Mr. Gwin, principal of the Group G Capital Partners LLC hedge funds in New York.

One of 46 secured creditors to Chrysler LLC, Mr. Gwin was debating Wednesday whether to accept about 33 cents on the dollar for his debt. With some debtholders refusing to budge late Wednesday night, Chrysler moved closer to filing for bankruptcy protection, a step that would complicate its reorganization and put at risk the pensions of employees and retirees. In a bankruptcy scenario, a majority of lenders could still block Chrysler's restructuring if they don't agree to a deal.

President Barack Obama targeted these debtholders specifically in remarks at a Missouri town-hall meeting. "Are the bondholders -- the lenders, the money people -- are they willing to make sacrifices as well? We don't know yet," he said.

As of late Wednesday afternoon, neither did Mr. Gwin, who says he didn't consent to the Treasury's sweetened offer to lenders.

At the heart of his angst, Mr. Gwin says, lies his own family's experience. His father, a 30-year veteran of Delta Air Lines, lost most of his pension and health-care benefits after the airline filed for bankruptcy protection in 2005. Julius Gwin, now 70 years old, started his career with Ford Motor Co. before joining Delta in Atlanta in 1967, working in its finance and corporate-planning departments until he retired in 1997.

While he may swallow hard and vote to help salvage parts of the company, Mr. Gwin says his father's treatment makes him loath to pave an easy road for Chrysler.

"It's very hard for me to deal with this," says the younger Mr. Gwin, a 41-year-old father of three. "As horrible as the situation looks for Chrysler's employees, I keep thinking about how horrible my own family felt when Delta was going to file for bankruptcy and my father's pension was going to take a hit. No task force or the federal government came to his aid then."

Even before this decision, Mr. Gwin hasn't lived and worked like many Wall Street hedge-fund managers. He lives in a two-bedroom apartment in Manhattan's Upper West Side. His kids share a bedroom. Mr. Gwin drives a 10-year-old Audi.

Mr. Gwin says he sat at the dinner table with his wife earlier this week and went over the pros and cons of his choices. Voting against the government-led restructuring would likely increase his chances of recovering more money in bankruptcy court.

It also would be a stand against what Mr. Gwin views as government strong-arm tactics. Usually secured lenders are paid back in full before other unsecured creditors, which includes employees. This time, he says, the government is brokering a plan that he says goes against decades of bankruptcy law.

He also talked it through with his father and brother.

"When I think about the vast number of people that could be affected, it's incredibly sobering," Mr. Gwin says. "I've been asking my family whether it's right to stand on principle, or whether my feelings are based in bitterness because of what happened to my father, or a desire that the government doesn't head down the wrong path and cause more pain later."

Group G's funds, like several other private investors, invested in Chrysler's loans in February 2008 when banks such as Goldman Sachs Group Inc. were syndicating, or selling, the debt to other institutions. The funds paid about 76 cents on the dollar for the loans, which today trade below 30 cents. The past year was the worst on record for high-yield debt funds that invest in junk bonds and leveraged loans. Group G's two funds were down 23% and 10%.

"Like many others I made the mistake of buying what I believed was 'value,'" Mr. Gwin says, adding that investors who bought at the time believed the loans were worth more than their market price. "We did not contemplate having our first liens invalidated by a sitting president," he adds.

Whether Chrysler averts a messy, protracted bankruptcy reorganization will largely depend on secured lenders like Mr. Gwin, who are being asked to exchange $6.9 billion in loans for a fraction of that sum.

Large banks that have received capital infusions from the government hold much of the debt, including Goldman, J.P. Morgan Chase & Co. and Morgan Stanley, and they are leaning toward an agreement that would see holders being paid $2.25 billion in cash. The government is hoping they will release their claims over Chrysler's assets, allowing a restructuring to proceed.

Mr. Gwin says he worries that if he votes against the agreement, it is unlikely that Chrysler will be able to reach a deal with lenders. "I could be the lone vote to push thousands of families into the uncertain and very dangerous waters of our bankruptcy system," Mr. Gwin lamented.

Speaking from his home in Peachtree City, Ga., Julius Gwin says he has refrained from advising his son on the Chrysler situation. While the Delta bankruptcy was "a very difficult and emotional time" for him, he acknowledges that there were laws and rules that had to be followed. Fortunately, he had built up a pool of savings over the years because he wanted to become a missionary, and is now living off that.

"The outcome of the Delta bankruptcy was a huge disappointment," says the elder Mr. Gwin, "but I didn't feel singled out when it happened.

"But now, I feel personally threatened because of what the government is doing at Chrysler and General Motors and how they are changing the rules of the game, instead of allowing bankruptcy laws to be carried out the way they are written."

Says the younger Mr. Gwin: "I have regret and bitterness about this process but may still swallow it and vote yes,"adding facetiously, "but if we want to talk about fairness here, give my dad's pension back and I will gladly forgive Chrysler's loan."

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