Obama worse than Kissinger?

[KrazyHorse]

bankruptcies for uncompetitive businesses.

JM

It should be up to LENDERS to decide which businesses are likely to succeed and thus deserve rescue. Not up to the government to lean on the scales and say that as soon as any company demonstrates any weakness it should be broken up for pieces.

[Jon Miller]

I actually think that regulation would be better... probably. And just allow a normal bankruptcy for Chrysler.

But making an example out of Chrysler isn't terrible and hopefully will change behavior in the future.

JM

[Jon Miller]

It should be up to LENDERS to decide which businesses are likely to succeed and thus deserve rescue. Not up to the government to lean on the scales and say that as soon as any company demonstrates any weakness it should be broken up for pieces.

The current rules support lending to big corporations more than they should.

They do this by this preferred debter bit, which allows corporations with a large amount of assets to borrow more than they could otherwise. Additionally, due to politics (which are hard to control with laws), big corporations are likely to get bailouts/subsidies/etc and so get an easier access to money beyond that which they deserve due to their competitiveness. This also creates a second order boost to lending.

I think some of these companies haven't been in the black for 20 years.

JM

[Jon Miller]

Lenders aren't some force that always works for the best of welfare or the market. Rather, they just lend so that they get a good rate of return on their money.

This means that in their lending practices that they take into account things like subsidies/bailouts and a failing corporation paying them rather then what would normally be the corporations other commitments.

JM

[KrazyHorse]

Propping up a failed corporation, which doesn't allow it's death and the growth of new and competitive corporations, is future welfare destroying.

JM

I have no idea what this is supposed to mean, Jon. Some corporations which are in financial difficulty have (risk-adjusted) positive expected future value over and above the present break-up value of their assets. If a corporation is allowed to credibly borrow against the break-up value of its assets (issue secured debt) then lenders in the marketplace will lend to those corporations which, according to their judgment, have such positive value (these are the corps which can be expected to pay back their debts)

By weakening secured debtholder rights the government introduces a wedge between borrowers and lenders. In a certain sense, you can see this as reducing the amount of secured debt a corp can credibly issue from (present breakup value) to (some fraction of this smaller than 1). Those companies which have POSITIVE FUTURE EXPECTED VALUE, but also have cashflow problems will still be able to solve their problems (they need less cash than this smaller fraction of present breakup value). Some companies which also have POSITIVE FUTURE EXPECTED VALUE and higher cashflow needs WILL NOT, and will thus be broken up for parts (welfare destroying) simply due to implicit possibility of government expropriation.

[KrazyHorse]

Lenders aren't some force that always works for the best of welfare or the market. Rather, they just lend so that they get a good rate of return on their money.

They preferentially lend money to companies which will be ABLE TO REPAY THEM.

Duh. That's what I just ****ing said.

This means that in their lending practices that they take into account things like subsidies/bailouts and a failing corporation paying them rather then what would normally be the corporations other commitments.

Two wrongs definitely do not make a right, Jon (I'm not talking morality).

The gov ****ing up by handing Chrysler a bunch of cash was bad. Now you're going to compound the error by ****ing with property rights, a step which has negative effects FAR BEYOND CHRYSLER?

[Jon Miller]

Not with this preferred situation. It is basically making, to new lenders, old debt be worth less. This allows a corporation to borrow more then it's future expected value because it borrows againts it's future expected value, and then borrows again with it's old liabilities not counted fully.

New lenders can not include the old liabilities in their consideration as full liabilities due to being paid off first (before the old liabilities).

This also favors corporations with lots of assets. Because even if the corporation is a complete failure, the old liabilities don't get paid, while the new debt gets paid out of the assets.

JM

[KrazyHorse]

The current rules support lending to big corporations more than they should.

Why the **** do you think this is the case?

[Jon Miller]

Because big corporations get bailouts/subsidies, and big corporations have a large set of assets...

Note that I would be happier to just take away this preffered debtor status, I think.

JM

[Drake Tungsten]

Note that I would be happier to just take away this preffered debtor status, I think.

Jesus, Jon...

[KrazyHorse]

Not with this preferred situation. It is basically making, to new lenders, old debt be worth less.

The old debt was issued with this knowledge in mind. It is already priced in to the cost of borrowing for all companies. What about that don't you understand?

Or are you unaware of the fact that secured debt cannot be subordinated by new borrowing, except in a bankruptcy situation (in which the secured debtholders are supposed to be the primary people consulted)?

You can't issue secured debt, then issue more secured debt on top of it which makes the secured debt junior.

[KrazyHorse]

Jon wants to take away collateralized loans?



So no more mortgages then? Or car loans? Only unsecured credit lines?

It's obvious you don't have a ****ing clue what the **** you're talking about, Jon.

[Jon Miller]

Nothing wrong with collatorized loans.

Just something wrong with collatorized loans invalidating old loans.

Can we agree that debt has been too easy to get for many companies and private citizens in this country?

Lenders will be alot more careful with private citizens, in the future. They should be more careful with corporations as well.

JM

[KrazyHorse]

Jon, I'm afraid that you're once again operating under a delusional premise of how this stuff actually works.

Junior debt is like a personal loan your bank makes to you, or the lease you sign on your place of business.

Senior/secured debt is your mortgage or car loan. They made loans against specific assets that you own. The line of credit is wholly unsecured debt. They have no claim against any specific asset. This is why you pay a much higher interest rate on the line of credit than you do on your mortgage.



Say you go into bankruptcy. You have a 15000$ personal loan from the bank. You have 3 months left at 2500$ a month on your lease for your small business office, and you had a 1 month security deposit with the landlord. You owe 250000$ on a home which is appraised at 300000$, but which will sell in a short sale for 260000$. You owe 8000$ on a car worth 6000$.

The claims against you are 250000+8000+15000+7500 = 280500$
The liquidation value of your assets is 260000+6000+2500 = 268500$

What happens in your bankruptcy?

The mortgage issuer seizes your house, sells it. 250k goes to the mortgage issuer. 10k goes into the pot. The car loan issuer seizes your car, sells it. Is still owed 2000$. The landlord seizes your security deposit, is still owed 5000$

Now there's a pot with 10k in it, and the (now subordinated) debts worth 15k+2k+5k = 22k have to squabble over who gets what.

Junior debt is issued based solely on the company's WORD that it will be able to pay back. Senior debt is issued based on the LEGAL CLAIM a lender has against a SPECIFIC ASSET of the company.

[Jon Miller]

Let's do a thought experiment.

Lets say that a coporation has expected future profits A. So corporations lend out A to them.

This corporation has assets B. This means that the corporation can, after is has already received all it can based on expected future profits (the amount A), take out a secured loan for B based on its assets.

This allows the corporation to take out A+B, which is greater than the expected future profits.

Now, A was lent with the thought that with the A loans, the expected future profits would be realized.

But lenders who leant B didn't have to care about that, they just had to care about the assets worth B.

JM
(Obviously I have approximated a bit.)