Enron manipulated energy prices that lead to brownouts in California. That price manipulation was rational for the company seeking to make a buck. That however did not make it a good thing as a practice.
I remain amazed at the mantra implied here and elsewhere that the market knows all, let it do its thing unhindered and all will work out for the best when that provably is not the case. Look at the current economic crisis. Leaving the markets to themselves failed miserably as people gamed the system. Hell, even Ayn Rand devotee Alan Greenspan admitted that much.
Just because it is in someone’s (very rational) interest to do a thing does not make that thing the best choice overall.
The problem with this is that this is not what happened and not what is happening now. All these creditors are actually saying is that the government should mix out entirely and let the normal BK procedures run their course.
You could have made a lot money shorting it or buying put options back then. Perhaps you did and didn’t mention it. Regardless, from an objective standpoint, the only way to put a value on something is based on market supply-demand forces. So it’s reasonable to assume that the value of the CDR contracts reflected the aggregate market-base probability of default at the time they were issued.
I think it’s worth pointing out that Enron broke the law. The non-TARP lenders to Chrysler are yearning for the law to be upheld in court. IMHO, comparing this to Enron is very weak.
From my ground-level vantage point, the government has been unbelievably inconsistent in their treatment of bondholders of bailed out companies. No other company that I’m aware of has been forced to make their bondholders take even a haircut -not AIG, nor Wells Fargo. Even Bear Stearns bondholders were made whole!
On what grounds should the auto companies’ bondholders be treated differently?
I still have not heard an explanation why, at a minimum, unsecured debt holders didn’t take a hit prior to the first penny of government money being handed out.
This is absurd. The $3.2 billion loan was DIP financing which should prime all other loans made to Chrysler. I don’t understand this at all. The priority should be the $3.2 billion DIP, then the $6.9 billion senior secured loans, then any other claims. The government should not be forgiving the DIP loan. I agree that the $4 billion bridge loan should not be repaid.
Because the general public is under the impression that the argument is between a few Gordon Gecko types who may have to go for another year without getting a new leased beemers, and tens of thousands of salt-of-the-Earth factory workers losing their jobs and getting the pickup and ranchhouse repo’ed; the American Public will weep and moan and rend their garments and want to throw rocks at a leader who allows the latter to happen. Regardless of the justice of it or more accurately because they have a notion of “justice” that means not what’s legal but what feel nice and right.
The non-intervened bondholders are entirely within their rights and acting properly, YET AT THE SAME TIME it would have been a nice and good and noble thing to do to pitch in, be a team player, eat a loss for the sake of saving the industry; but it was not their duty or obligation to do so. And I must reluctantly admit that saving Chrysler may have been a lost cause anyway. But again, who would have been willing to take the political hit of being the one “heartless” member of the family to say “Enough: pull Uncle Bob’s feeding tube”? MacCain or Mitt or Hillary all would have been doing the *“Look, y’all I am really, really trying to do the righteous thing but those other meanies wouldn’t go along with my wisdom” *dance, too.
Y’know, I actually heard pundits and commentators back when the bailouts were being passed, bemoaning that “the government is saving the banks but not GM/Chrysler”… well, be careful what you ask for, you may get it, goes the adage. People were crying for the government to step in and “do something, anything”? Well, this IS something. Enjoy.
The thing is, this is not correct. At all. Period.
The big-box financiers have a fiduciary duty to thousands, or maybe millions of investors, and by lending Chrysler money gave it a shot to fix itself. Anyone wanting this idiocy to go through would have no moral standing if, say, down the line their retirement account was cleaned out for some perceived “social good”.
Really? The only purpose of issuing distressed debt (from an investor’s perspective) is to have a bigger share of the pie out of bankruptcy (if they were just interested in providing capital “critical to innovation”, why don’t they just buy stock?).
I’ll concede where distressed debt might be useful in some circumstances, but it sure brings the suppose noble stand of these balking hedge funds into question. I stand by my statement: I have no sympathy for them in this case.
There is tremendous risk of loss in loaning Chrysler money. The only reason a rational actor in the markets would take on a lot of risk would be the potential for a big reward.
What in what you quoted of my post is in any way contradictory to that?
I said right there, and you quote it, that the bondholders have no duty or obligation to eat a loss because of what Public Opinion would have thought to be “nice”, “noble” or “generous”. The obligation is to protect their investors’ interests and in that they are, as I also said, acting entirely properly.
Jeebus, sometimes it’s really all-or-nothing, don’t even dream of mentioning you see how the other side looks at it, in some of these discussions…
Which again, clearly indicates you have no idea what you’re talking about.
‘Buying Stock’, as you suggest above, is one way to target a point on the risk/reward curve and invest accordingly. Common equity has the most upside potential, but also the most downside potential. Common shareholders get paid last (if at all) in terms of dividends and bankruptcy.
Debt has less upside than stock, but has a more senior claim on the company’s assets in terms of bankruptcy. Hence, less downside.
At least, it did until the Obama administration started playing around with the law by giving the UAW more recovery than senior debtholders.
Clearly the sarcasm of my rhetorical question wasn’t apparent. Anyone arguing that these hedge funds were investing money “critical to innovation” doesn’t know what their talking about.
Hedge funds issue distressed debt in the hope that the business goes into bankruptcy, since debt gets paid before equity in the BK court (from an earlier post, it appears the distressed debt funds in question did NOT have CDFs on the bankruptcy, so I retract that insinuation). Now, many businesses go into bankruptcy, reorganize, and come out all the better for it; I am not against seeing businesses go into bankruptcy. The problem is that distressed debt only prolongs the inevitable for the sole purpose of allowing an investor to cut in line; that’s why they are rightly called vultures.
But hey, that’s just the way the free market works, right?
Hedge funds issue distressed debt in the hope that the business goes into bankruptcy, since debt gets paid before equity in the BK court (from an earlier post, it appears the distressed debt funds in question did NOT have CDFs on the bankruptcy, so I retract that insinuation).
But hey, that’s just the way the free market works, right?[/QUOTE]
No, distressed debt fund investors also invest in the hope that the company’s fortunes will rebound, turning a 30 cent bond into a 100 cent bond. That’s a far easier way to make money than having the bond go to zero, and then scrap for recovery in bankruptcy court.
Another possible area to play in-between is when a bondholder holds enough sway that they can have ‘more of say’ in bankruptcy court, perhaps by lining up additional DIP financing to support a turnaround. Again, a more preferable outcome than letting the value of your debt drop to zero first, and then banking on recovery.
Face it dude. You don’t know what you’re talking about and you’re a sucker for Obama’s populist crap. The free market would have let Chrysler go into bankruptcy months ago, and saved you and me billions of our tax dollars in the process.
It will be interesting to see how badly capital markets lock up and deny financing to deserving companies if/when this becomes standard operating procedure…that is, re-jiggering the normal seniority of liens to satisfy favored political constituencies such as the UAW. Worst of all, he’s doing it with your money and not even giving you anything in return.
Here’s the issue. Without the certainty of legal priority, why would any investor provide financing to a company that the Obama administration might someday become interested in “saving”? Other automakers? Airlines? Newspaper publishers? Forget it. If you want to really lock up the capital markets, creating uncertainty about private contract enforceability, Article 9 priority and legal precedent is precisely the way to do it.
And you say that knowing (1) the effect that the liquidation of Sherson-Lehman had on the economy, and (2) that no automaker has ever emerged from bankruptcy. If anything, these two facts should give us pause, as laying off some 25,000 auto workers who have negotiated in good faith to avoid bankruptcy might make them a wee bit angry. Not to mention the hundreds of auto-parts suppliers who depend on filling contracts with Chrysler. But I’m sure your reasoned arguments about the fairness of an unbiased market–which suprisingly seems to always favor the rich–would convince them to put down their pitchforks.
I for one am quite happy to see a government finally step up and not allow the wizards who got us into this mess continue to profit from it. Meanwhile the rich creditors continue to whine as the bankruptcy court fails to bend to their will:
Wow, anonymous death threats on a newspaper website; these guys sure have it tough.
My guess is the captial market threats are all hot air. And yes, if the result is a slightly more populist financial system, I’ll be quite happy with the return.
Ah, OK. There’s so mch sarcasm being thrown around in this thread (I think) that it’s fouled up my radar. I understood you saying that, but I thought you then went on to claim it actually was “nice”. Of course, it would be horribly dishonest and probably illegal* for the financial managers to blithely accept the proffered deal, which was in any case highly insulting.
*I am not kidding. Not even remotely.
I certainly can see how they see it.The problem is that they are simply wrong, and not considering either the greater picture or even the real problems of the smaller picture. Instead, the concepts are being boiled down to a simple and incorrect bad/good dichotomy.
It’s truly a nitpick, but that does not represent the full number of firms that blocked the deal:
So, some grew a sense of shame since the 30th. I am not sure what changed their minds, but it was all just speculation that I was foolishly repeating in the first place. Again, I have nothing but hearsay and conjecture, but the article does not fully refute it.
Well, it at least shows the funds that are publicly facing the administration aren’t gaming anything. Still it seems to me a simple thing for the bankruptcy court to demand to know the parties’ CDS exposure and hedges before making any ruling.
Not that the last administration, or most of the GOP presidential aspirants, or both of the Dem aspirants, seemed more willing to let the market act in the face of populist demands… Someone else may have used a little less of our money but they would still have made a big froofraw about “saving the carmakers”.