Wednesday, May 20, 2009

Chrysler Bankruptcy Deal Chickens Coming Home to Roost

As a consequence of the new administration's treatment of the bondholders in the Chrysler bailout and bankruptcy, will investors now either avoid similar debt of unionized companies, or demand higher interest payments?

According to Rep. Phil ware, an Illinois Democrat:
Wells Fargo, the fourth-largest U.S. lender, is responsible for Hartmarx’s collapse because it refused to extend credit. Wells Fargo said in a statement the bank wants the suit maker, which defaulted on more than $114 million in loans, to 'stay in business.'

Fund Managers Burned by Obama Now Say They Are Wary -

From the same article, hedge fund manager George Schultze: “Lenders will have to figure out how to price this risk ... Don’t lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.”

When you change the rules, or refuse to honor the rules, investors, including lenders, not being fools, will alter their behavior. Bending or breaking the rules has consequences, including some unintended consequences. Unintended consequences have unforseen costs.


Saturday, May 02, 2009

FT: Chrysler saga sets dangerous precedent / Markets / On Wall Street - On Wall Street: Chrysler saga sets dangerous precedent

"...the Chrysler saga sets a dangerous precedent for US capital markets. For once, the law is unambiguous: senior secured creditors should be paid before junior unsecured creditors and employees...."

Is it time to speak truth to the new power now? Here is some truth: Rational investors will be cautious about buying corporate senior secured debt, if it is really to be politically subordinate, and politically unsecured. Such buyers will be particularly cautious when there is a union involved. The Obama administration should tread lightly here: Will we still have the rule of law in America, including our nation's bankruptcy laws, or will the new administration's behavior become perceived to be comparable to the rule by fiat of political strongmen like Hugo Chavez? If our leaders are in fact men who will uphold and defend the Constitution and live under the laws of the land then it is time for them to show that.

If the Constitution is now a "living document" with emanations and penumbras, with no bounds at its four corners of the pages it is written on, and no longer is nothing enshrined therein but the words which appear within those four corners, then what can we say of any of our other laws? Is political expedience and raw power now the trump suit, and not our laws?

It is to be hoped that the attorneys for the dissident bondholders will have the means to compel sworn testimony from the big banks and government officials to enable the court to determine if undue influence has been exerted by administration officials on the banks to coerce them to accede to the government's terms in this matter. Let us hope that such is not the case.

It is not for nothing that many Americans are very incensed over the actions of both the last and the current administrations as they strove to deal with unprecedented catastrophic financial events of the last two years.

It is not impossible that some of these actions could be held one day to have been illegal or unconstitutional, and perhaps even constitute high crimes and misdemeanors. That is how seriously they might be viewed by objective historians of the future.

The message should be: tread more lightly, and more carefully, and above all, with respect for the law.