Many observers charge that the US government, in its attempts to clean up the auto industry mess, has used strong-arm tactics to force speedy bankruptcies for Chrysler and General Motors. In doing so, the rule of law and our country's reputation as a safe place to do business may have taken a very bad hit that will resound for years.
The State of Indiana, representing its state retirement plans which hold secured Chrysler bonds, has filed suit in the Chrysler bankruptcy case. Indiana claims laws were broken when the US Government gave the United Auto Workers (UAW) 55% of the ownership of the post bankruptcy company, far in excess of the UAW's secured interests. Indeed, the deal the government struck with the Chrysler assets appears to go against all existing legal precedents and statutes. The secured bondholders were thrown from the train in favor of the mostly unsecured union claims.
The fact that President Obama was widely supported by the UAW brings some clarity to the situation. Political spoils, however, should not extend to rewriting the bankruptcy laws on the run.
I have spoken with many legal authorities in recent weeks. Not one of them could explain how the UAW could have ended up with such big pieces of the post-bankruptcy auto industry. "Politics" was the only consistent answer I received.Here's the problem. Who will ever loan GM or Chrysler money again? Indentures are no good, precedents are no good, and laws are no good. The answer is no one will loan these dinosaurs money again, except perhaps in some form of equipment trust certificate arrangement. That means the United States government will be in the auto business for a very long time. And that means US taxpayers will be asked again and again to ante up to support the UAW.
I do not own any GM or Chrysler securities. This blog is for information purposes only.
3 comments:
Nobody will buy car company bonds again, but the problem is even worse than you outline; who would ever buy corporate bonds again period?
One of the central principles of our financial system is risk vs reward. The Obama administration has shown itself to be very comfortable with giving bond holders higher risk in return for their lower reward.
Yes, the politics of the matter stinks, but as for me I'll find a new financial adviser if my present adviser starts talking about bonds.
I wish I could get on board with your thesis (no will lend them money again), but investors have rushed back to many, many, sovereign bond issues, after complete or partial default.
This will simply be another example of that - if these entities look viable later, investors will put the current "theft" far into the rear view mirror.
Thus has it always been - investors with short memories.
I'd put a full dollar on a bet like that Greg? Got any appetite for it?
Jay Walker
The Confused Capitalist
Jay
I was traveling and did not see you note. You know I can slice and dice the matter of GM selling bonds and get to come our my way or your way. What I'm mainly saying is The new Fiat-GM-UAW will not be able to sell bonds on their own without implicit govt guarantees. You are sure right about sovereign loans. What I was speaking of are regular old corporate loans. Of course that won't happen in this case for many years because US is equity holder. You raise a good point in general. My point is much narrower.
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