Saturday, May 2, 2009


I don't know Floyd Norris who writes on business and economics for the NY Times. I usually read his work and find it worthwhile. However, his entry today on the "bondholders of Chrysler" may not be his best work.

First of all, and this is somewhat significant, Chrysler doesn't have bondholders. The term bondholders generally refers to holders of unsecured debt in the form of bonds issued by a company such as Chrysler. And generally, bondholders, such as those at GM, would have the same rank and priority in a bankruptcy as the unsecured claims of the UAW's pensions and retiree benefits.

Chrysler has secured debt lent to it by a group of banks. Chrysler pledged certain of its assets to these lenders as collateral. So these bank debt holders (not bondholders) rank ahead of the UAW's pension and retiree health claims to the extent of the value of their collateral. The portion of their debt not covered by the value of the collateral then ranks at the same level of as the UAW claims. So by definition and simple math, the bank debt holders should recover more not less than the UAW.

Floyd also jumped on the "speculators" bandwagon. The facts, he points out, include that all these holdouts bought the loans at a discount. Damn speculators. I didn't know it was against the law or immoral to buy debt at a discount. I didn't know if you bought debt at a discount your legal rights didn't count. Who knew? Further, some of these speculators bought the debt directly from some of the arrangers of the debt, such as Goldman Sachs. It is kind of how the capital markets work. Damn speculators.

Floyd said, "no one thought a hedge fund investment was risk-free". I say, "no one expected that the government would not give their investments the rights provided in their legal contracts and then force them to turn their investment into an involuntary charitable contribution." But hey, that's just me and my readership is slightly less in number than Floyd's.

At least he admits that "it is disquieting that ... the Government is making these decisions." It is even more disquieting when the Government is going against the established laws and rules. If the Government wants to be charitable (with the taxpayers money) to the retirees, maybe it should have just put the money directly into the affected plans rather than continue to fund the losing operations of Chrysler. How many more billions will Chrysler lose before it can get to break even? Who knows? I don't have enough facts on the operations of Chrysler or its proposed arrangement with FIAT to have an educated view on the future viability of Chrysler. I hope it works. We will see.

Cheers, Mike

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