Obama worse than Kissinger?

[Jon Miller]

Jon, the point is that is a FANTASTICALLY BAD idea to run around invalidating private contracts made in good faith.

Of course the government sets the ****ing rules. That's always true. It doesn't mean that what they're doing is a good idea.

The lesson is that when the government starts bailing out a company, it becomces a bad investment and your risk of not getting your valid return goes way up.

This is to discourage companies from asking for government bailouts. If the lender had acted to keep Chrysler from having such a bailout, or had sold off the loan/etc when it saw Chrysler excepting the bailout, the current problem would not exist for it.

Having your private contract nullified is a result of continuing to do business with a company that is being bailed out/etc by the government.

JM

[KrazyHorse]

You mean like union contracts?

Under the law these union contracts are STRICTLY less senior than secured debt (hat tip: DanS)

[chequita guevara]

In the long term, if you fail to take care of the workers, they kill their bosses and establish workers republics.

[KrazyHorse]

Bull****. When the **** was the last time a developed nation experienced a successful, violent revolt of the proletariat?

[Jon Miller]

This is important because future investors who buy secured bonds in companies will have to discount the legal assurance of seniority they have because they will be uncertain of whether or not the government will step in and invalidate their claims. This means that struggling companies will have to pay more for financing, leading to more bankruptcies than would otherwise have been the case.

I also wonder if this will have an effect on future debtor-in-possession financing, even though that isn't what's at issue here. If the security of senior debt is in doubt, will anyone trust promises on super senior debt?

Super senior debt when the government starts bailing out the company is no longer safe.

Yes.

I think that is entirely correct. I want to minimize the times that the government bails out companies, so I want those with super senior debt and stocks and everyone else to do their utmost to not allow a company to be so mismanaged that it requires government bailouts (or is seen to require government bailouts).

A company saying that it has no risk, is not going to act responsibly to keep a corporation from being mismanaged.

JM

[Drake Tungsten]

You make me hate commies so much, che.

Super senior debt when the government starts bailing out the company is no longer safe.

Yes.

This is such a bad idea that I can't even think of words to describe it.

[Jon Miller]

And if we were simply aiming to do wealth transfer the way to do it would certainly not be by ****ing over a specific group of people based on nothing more than what company's secured debt they chose to buy.

Secured debt of companies that are catastrophically mismanaged shouldn't be, and isn't, risk free.

JM

[Jon Miller]

I am not sure why you guys are arguing for risk free loans?

JM

[Drake Tungsten]

Secured debt of companies that are catastrophically mismanaged shouldn't be, and isn't, risk free.

It isn't! Do you really think Chrysler's senior debt holders were going to get all their money back in Chapter 11?

[Jon Miller]

Once the government got involved in the corporation, via the bailout, the senior debt holders were no longer the most senior members, rather the government was.

That is the risk that you get with involvement with a corporation getting a federal bailout.

And catastrophic mismanagement of any major firm can cause a federal bailout. This is based on politics, not economics, it will occasionally happen in any democratic system and when it happens it will always be of questionable politics (people will disagree).

So yeah, they engaged in a risky activity and got bit. If they had acted to keep the firm from catastrophic mismanagement, or gotten out when it was obvious it wouldn't turn around, then they wouldn't be facing the consequences of the risk they took.

JM

[Jon Miller]

Chrysler has been mismanaged for over a decade. It isn't like the mismanagement is a surprise.

The senior debt holders decided to give it credit anyways.

JM

[KrazyHorse]

The lesson is that when the government starts bailing out a company, it becomces a bad investment and your risk of not getting your valid return goes way up.

All you're doing is moving the problem backward in time.

Say I bought Chrysler debt from the company a year ago at 40 cents on the dollar. This was done because I was getting secured debt. If I'd been forced to accept unsecured debt then I would have only paid 20 cents on the dollar and the company would not have been able to raise sufficient financing to stay afloat. Time goes on. Things look a little worse for Chrysler. The good news is that their assets are worth 30 cents for every dollar of secured debt that they owe. This puts a floor on the value of my investment because I have first claim on those assets in a bankruptcy.

Now the government steps in and bails out Chrysler with a loan. Under your assumption, everybody knows that my assurances as a secured creditor are thrown out the window. Overnight the value of the debt I hold goes to 15 cents on the dollar.

How does this change anything?

This is to discourage companies from asking for government bailouts. If the lender had acted to keep Chrysler from having such a bailout, or had sold off the loan/etc when it saw Chrysler excepting the bailout, the current problem would not exist for it.

Perhaps you don't understand how the control of companies works. BONDHOLDERS DON'T GET TO TELL THE COMPANY WHAT TO DO. Equity holders do.

Having your private contract nullified is a result of continuing to do business with a company that is being bailed out/etc by the government.

See above. This just moves the problem BACKWARDS IN TIME. Under this model of a "legal system" the uncertainty is introduced over whether or not the government is going to bail out a company rather than over whether or not they're going to invalidate my contract.

[Drake Tungsten]

Chrysler has been mismanaged for over a decade. It isn't like the mismanagement is a surprise.

The senior debt holders decided to give it credit anyways.

So you're arguing that struggling companies shouldn't have access to credit? Do you not realize how retarded that is?

Once the government got involved in the corporation, via the bailout, the senior debt holders were no longer the most senior members, rather the government was.

This makes no sense. The issue at hand is that the government is forcing senior creditors (who accepted lower interest rates in exchange for more secure assets) to give up their rights and allow junior creditors (who received higher returns in exchange for less security) to jump ahead of them in line for access to Chrysler's unsecured assets. That's ****ed up.

[The Mad Monk]

I am not sure why you guys are arguing for risk free loans?

JM

Because "risk-free loans" are cheaper for the company to service. What is happening now will make them effectively disappear, and will make it harder for responsible companies to use them to survive and grow.

[KrazyHorse]

Chrysler has been mismanaged for over a decade. It isn't like the mismanagement is a surprise.

The senior debt holders decided to give it credit anyways.

JM

Jon, this is NOT a credit/no-credit binary world.

They gave credit at the interest rate that they did (implied from yield to maturity on the bonds they bought) BECAUSE THEY HAD CERTAIN LEGAL PROTECTIONS.

If they had known ahead of time that these legal protections were subject to the whims of the government then they WOULDN'T HAVE LENT THE MONEY AT THAT RATE. They would have required a HIGHER interest rate. And now future investors WILL. The government is introducing legal uncertainty. We will see MORE BANKRUPTCIES because of this.