That's bankruptcy for ya!

The senior credits had their claims reduced more than half.

You are wrong, however, to say that the 8% stake isn't worth anything because Chrysler is in bankruptcy. The 8% stake is a post bankruptcy stake, which means the company has significantly less debt (which obviously increases the value of the company). The government has taken a pretty big write off on its claim though. Assuming the 8% is an equal trade for its 7B claim (which it isn't), that would mean the company has a valuation of around 87.5B. The UAW, on the other hand, received in exchange for their 10B unfunded pension claim a 55% post-bankruptcy state, which puts their valuation at 18.2B. If the UAW's valuation is more accurate (which is likely), the 8% government stake is only worth 1.45B, a 5.55B loss for the government. Canada took a similar loss on their CAD 2.2B loan to the company. Fiat is the real winner in this deal. They are receiving a 20% upfront stake for promises to update manufacturing plants and licensing power train use to the company. Using the UAW valuation of 18.2B, Fiat's services and licensing would be worth 3.63B, which seems a little on the high side considering an entire car company, i.e., volvo, was being valued by market players at around $3B.

Jesus, you could buy Volvo for $3b and you can't even get shitty Chrysler for that?

Why would anyone look at Chrysler given the options?

I have a sinking feeling that Fiat is spreading themselves too thin by going after Chrysler and Open/Vauxhall. One or the other, sure. But I'm skeptical they can pull both off.

Sadly, I'm not too surprised either that this has come to light. I can't really seeing the whole thing last and either Canadian or US government be able to recover their "investment" (and I use that term loosely...it's looking more like money down the hole)

___________________
Paul

quote:

Originally posted by pmoisse Jesus, you could buy Volvo for $3b and you can't even get shitty Chrysler for that? Why would anyone look at Chrysler given the options?

Chrysler's assets must still have significant value. Using a DCF valuation I doubt the company is worth much (unless they have an overly optimistic forecast), but the asset valued must be pretty significant. Also, the company likely has some valuable Net operating losses that could be used to offset future income tax liability. Depending on whether there is a limitation on the use of those losses, they would be worth 35% of prior year losses (i.e., 10B in losses from prior years is worth 3.5B in offsets against future tax liability). Since they are in bankruptcy, those losses generally are not limited.

^ so what you're saying is, is that by continuing to prop up this failed company, the US Gov't is depriving itself of future tax revenues because of Chrysler's previous operating losses?

I think the dealer network is the big prize for Fiat. I can't see them using too many Chrysler designs for too long until they get the Fiat based cars certified and rolling off the assembly lines. I can see them closing a few of the more useless plants as well.

I wish Fiat all the best. They make some fantastic small cars over here that aren't just little rusty shitboxes. Their whole lineup is great.

___________________
Paul

On a different but related note, looks like the bailouts aren't over yet. I'm sure the fed will step in and print a few more green paper rectangles to help their buddies in the banking industry..

Bank of America & Citigroup need billions more as stress tests loom

quote:

WASHINGTON/NEW YORK (Reuters) - Regulators have told Bank of America Corp it needs $34 billion of capital to withstand a deep economic downturn, an industry source familiar with results of a government stress test said late on Tuesday. Citigroup Inc may need as much as $10 billion, a person familiar with the matter said this week. About 10 of the 19 big U.S. banks being stress-tested may need more capital, a person familiar with the official talks has said. The sources were not authorized to speak because the stress test results have not yet been made public. Results are due late Thursday. Early results of the tests may unnerve investors who had hoped they might show the industry was in less dire condition than feared. Bank of America's test results are also certain to increase pressure on Chief Executive Kenneth Lewis, who was ousted as chairman last week in a shareholder vote. That ouster could also lay the groundwork for his departure from the company he has served for 40 years, including the last eight as CEO. Analysts believe other banks that may need capital include Wells Fargo & Co, Fifth Third Bancorp, GMAC LLC, KeyCorp, PNC Financial Services Group Inc Regions Financial Corp and SunTrust Banks Inc. BANK OF AMERICA SURPRISE The government has spent three months conducting stress tests on the 19 largest U.S. banks to determine their capital needs should economic conditions worsen more than many economists now expect. It is unclear how Bank of America might raise capital, whether by selling assets, issuing more common stock or other steps. The largest U.S. bank has already received $45 billion of government help.

quote:

Originally posted by pmoisse ^ so what you're saying is, is that by continuing to prop up this failed company, the US Gov't is depriving itself of future tax revenues because of Chrysler's previous operating losses?

that's not the intent, but it is the result. But, that is only the case for future profits of the chrysler company. Also, if Chrysler goes out of business, it wouldn't collect anything from the company anyway. If 30K employees lose their jobs the government would also loss a huge amount of personal income tax revenue. Personal income tax revenue is a much larger contribution to the tax pool than corporate income taxes. In addition, each job create more jobs to service those employees (at a diminishing pace).

quote:

Originally posted by jerZ07002 If 30K employees lose their jobs the government would also loss a huge amount of personal income tax revenue. Personal income tax revenue is a much larger contribution to the tax pool than corporate income taxes. In addition, each job create more jobs to service those employees (at a diminishing pace).

Lets do some math. $7 billion bailout ($7,000,000,000.00) / 30,000 employees = $233,333 per employee.

I highly doubt the missing tax revenue from those lost jobs will ever approach this amount.

The odds say that a fair portion of those people will be out of work and relying on social security anyways so it looks even more like a lose/lose for the government

___________________
Paul

quote:

Originally posted by pmoisse The odds say that a fair portion of those people will be out of work and relying on social security anyways so it looks even more like a lose/lose for the taxpayer

fixed

quote:

Originally posted by Capitalizt Lets do some math. $7 billion bailout ($7,000,000,000.00) / 30,000 employees = $233,333 per employee. I highly doubt the missing tax revenue from those lost jobs will ever approach this amount.

Let's revise your math and make it a little more developed:

Government loan written off: 7B bailout - 1.45B equity stake = 5.55B lost

Rough estimate of wages: 30K employees @ 50K a year = 1.5B
Rough Estaimte of yearly tax revenue on wages: 1.5B * 20% (very low guess of fed ETR on wages) = 300M.

aggregate after tax income: 1.5B - 300M = 1.2B
estimate of wages used in consumption: 1.2B * 90% (1 - 10% generous savings rate) = 1.08B
estimate of profit margin on consumption: 1.08B * 15% (estimated profits made by 3rd parties on consumption) = 162M
estimate of taxes on profits: 162M * 35% = 57M

estimate of wages component of consumption costs: 1.08B * 30% = 324M
estimate of taxes on those wages: 324M * 20% (same estimate from above) = 65M

sum of estimate of taxes resulting from one year: 300M + 57M + 65M = 422M.

Take the 422M and divide it by a 6% discount rate results in a value of the income stream at 7.033B dollars. Add to that the 1.4M equity stake, and the result is 8.433B. Additionally, the costs incurred by chrysler would also be profits for another company that would be subject to tax as well as pay wages to employees who would pay taxes.

Obviously, I use some pretty unreliable guesses, but the point should be obvious.

Last edited by jerZ07002 on May-06-2009 at 18:48

quote:

Originally posted by Capitalizt fixed

Thanks! More accurate anyways since taxpayers can't just print more money lol

___________________
Paul