Sunday, June 07, 2009

Chrysler Fiat Deal Rips Bond Holders

When the banks and brokerages got Tarp money and then paid out those huge bonuses, it upset a lot of people. Whose money was being paid out? It seemed rather obvious, it was TARP money.

The automotive bankruptcies have a similar problem. In this case, the bond holders are being short sheeted. The government gives 9 billion dollars to Chrysler to keep it alive and then tells the bond holders to shut up and accept the buyout plan. The bond holders can very well contend that any money accepted from Uncle Sam’s bailout gift, was money they were also entitled a share of. Now the government says Fiat gets to buy Chrysler and the bond holders had better accept the deal.

There is a rush to push this bankruptcy through the courts. If the deal doesn’t go through fast, it won’t go through at all. The bond holders have the right to demand that they be paid in full, or sell the company’s assets and get their pound of flesh. These assets might sell for a lot more than the government is willing to admit. Some of this is prime real estate. Either way, the bond holders deserve their day in court. On top of that, these bond holders have already been burned by GM and Chrysler, why would they want paper that is subordinate to the debt they already hold?

What could happen here could become a real mess for the government. The courts could rule in favor of the bond holders. The US government wants to gift money to the car makers, to keep them in business. Haven’t they, by their actions, become a cosigner guaranteeing the car makers debt obligations? Why shouldn’t the bond holders be entitled to bail out money and maybe quite possibly payment in full?

The administration is talking cram down mortgages and now they are going to stiff bond holders. Isn’t it time for the courts to rise to the occasion and take back their power? Government has to be held accountable for trying to change rules of law that define our legal system (ie modifing original loan agreement terms). So far, nobody has dared to get in the way except a few bond holders. Look for a Supreme Court ruling on this litigation. It could be a real eye opener.

Fiat’s going to buy Chrysler? Give me a break! I think that once they explain to the Italians that you can’t put 4 wheels on a Gucci handbag (it's too small), the deal will fall through.


Tyrone said...

"Rule of Law"? What rule of law??

Jim in San Marcos said...

Hi Tyrone

I guess I didn't put all my thoughts down and it needs some clarification.

With banks I'm referring to the rule of law that guarantees the banks final say so over what is done with a home loan, not some bankruptcy judge following state laws that is allowed to modify the agreement.

And with Bond obligations, the holders of those bonds have first call on all funds available to satisfy their claim against assets. You pay extra for first place in line.

Under both items, agreements are entered into using those rules to dictate future risk and profit. To change the rules after the money is loaned is theft.

Bankruptcy is not suppose to be a walk in the park. Plus you don't leave them with enough money to do it again to someone else.

Anonymous said...

Chrysler needs to replace union workers with illegal Mexicans.

That was Chrysler can pay minimum wage, no health beneifts, no workmans comp, no pensions, ect.. and so compete with China.

Tyrone said...

I was just being sarcastic (towards our government) with the question. My message is that there is no law when the government gets involved.


Jim in San Marcos said...

Hi Tyrone

Good point and a rather irritating one to say the least.

Take care

Jim in San Marcos said...

Hi Anon 5:05

Your jest,about employing illegal Mexican labor does point out the unsurmountable problems of our present employment system.

If Chrysler wanted to go the cheap labor route, Cuba seems like the best shot. That country has had its fill of socialism and it has already experienced "The Great Depression" for the last 15 years.

Cuba use to be a gamblers paradise and a honeymoon haven. It has the potential to rise up, maybe Chrysler-Italian could make a difference.

Plus with the Mafia involved in car financing, you don't want to miss a payment, they'll break your legs. The Banks might like this sort of loan guarantee.

dearieme said...

You might at least demand that the Cubans apologise for shooting Kennedy before you send them all your car factories.

Jim in San Marcos said...

Welcome back Dearieme

According to "The Assassins Book of Etiquette," no apology is necessary unless you miss. And in that case you'll be sorry that you missed for many different reasons (mostly lead related).

Kennedy tried to polish off Fidel three different ways and failed.

It kind of looks like I hijacked my own thread. My last comment was an attempt to poke fun at this Italian merger to preserve "American car production," a true oxymoron.

Thank you for your comments and take care

Scott said...

Jim…would love your thoughts on an item that continues to vex me. Why does the media continue to suggest that the government owns the automakers? (Chrysler and GM) My understanding is that the secured debt holders should be first in line for everything the company is worth up to the point at which they are paid off. Assuming the bond holders are owed more than the company is worth not even the bond holders will get their money back. This means that the government’s stake should be around 0% if the rule of law holds up.….why would anyone even consider that the government owns any of the company.



Jim in San Marcos said...

Hi Scott

Your thinking is spot on. If the companies were liquidated, that would be the final outcome (as far as the Chrysler and GM were concerned) but at that point, the government would have to take over payments for the two retirement plans.

The companies are out of funds and the only funds they get are from the government, so I guess you jump when the money tells you to.

It's rather hard to look at this as a money making venture from the car companies point of view, or the governments.

Anonymous said...

Hi Jim,

This will be a true test of our "checks-and-balance" system of government. Constitutionally, I believe the government (executive and legislative) over reached when it came to the TARP handouts.

Shoring up the FDIC during a depression to save depositors could be justified, but adding extra tits to the cow in the case of AIG, GM, Chrystler, etal has got to wake up the judicial clowns over at the supreme court.

Your absolutely right. The decision from the court will be one to watch and if its anything like the decisions we have seen over the last 9 months, cleaning up all the animal droppings from the circus animals will be one for our history books (circus music playing in the background).


Jim in San Marcos said...


Well, it looks like the courts don't agree with us. We can be right and also be wrong at the same time.

I think if the Courts had stopped this fracas, bond holders would have had more faith in the judicial due process of law. It wasn't an issue of right or wrong, rather one of "swift justice" being too swift to be just. The propensity for mistakes increases as you shorten the time span.

I see the net result being higher interest rates demanded by investors for corporate issued bonds.

We are now seeing the effects of the threat of cram down mortgages by the judicial system. The financing for home loans is not there.

The thing to realize is that when the rules change, the organism changes slightly to accommodate the change for its own benefit. We didn't all go out and buy Hummers because we liked them, they were a free tax write off.

The Supreme Court crossed the Rubicon today. Higher interest rates are guaranteed.

The real odd thing that perplexes me, is the idea that in the future, why anyone would buy an Italian Chrysler product? As times get tough, "buy American" will have a patriotic-economic ring to it.

The Court outcome is different than what we anticipated, but the results to follow will happen, we have not evaded paying the pipers bill.

Thank you for your post.

Anonymous said...

Hi Jim,
Don't think people will buy American. They will buy Toyota, Honda and Nissan. Quality, durability and fuel efficiency (and benefitting their own self interest and survival) is what they want and the Asians are way ahead of American car makers on these points. Also, the government running a car company guarantees shoddy quality, poor profits and failure.

The percentage of the masses that is realizing that we don't have any true leaders and that our government, politicians and business leaders are corrupt and incompetent is a growing percentage. Americans are getting screwed and patriotism will continue to wane.

The majority is still caught up in the new president and hope but that will soon disappear as the economy and nation continues to unravel.

Jim in San Marcos said...

Hi Anon 8:07

That's the way I looked at it also. And if you figure that your Congressman can put two brain cells together, he's going to arrive at the same conclusion.

As a part of any economic stimulus package, we have to start producing what we have been importing. At our present wage rates, that isn't about to happen. The only way to accomplish this, is to make imports twice as expensive as American made goods. Can you say "Smoot-Hawley Tarriff?"

We might want a Toyota or Honda, but in the future, they will be too expensive. Plus what American bank is going to finance the loan? Everyone will qualify for a US car loan.

Here's hoping that the handwritting on the wall is wrong, I don't need an American made car.