Bondholders Secure-less
Research for Online Investors

by John Dalt

5/12/09

The Chrysler bondholders gave up the fight this weekend and agreed to take what they could get out of the bankruptcy court.  The Wall Street Journal covers the story of how Steven Rattner, the auto task force boss played hardball with the secured bondholders.  J.P. Morgan’s Vice-Chairman, James B. Lee Jr. told Rattner that Chrysler would have to pay its lenders all of the $6.9 billion that was owed.

That did not fit the plans that OH! Bama had, it did not leave anything for the unions.  If the company’s assets were sold off to satisfy the secured debt holders, the jobs and retirement would be gone.  Treasury was able to strong-arm the bondholders because they were the only lender willing to supply debtor in possession financing for Chrysler while it went through bankruptcy.  They offered a reasonable interest rates.  What bank that took TARP funds was going make a counter offer against the Treasury?  Let’s face it, the only financial institutions large enough to provide debtor in possession financing all took TARP funds.  Without this financing, the company had to go immediately to liquidation, a scenario that would have damaged the value of the assets.  The bondholders were put between two rocks, the grind of liquidating depreciating assets and pressure to not be the "Grinch” that killed Chrysler.  Bondholders have learned a lesson that will have repercussions on the market. “Secured” may not mean “secure”, if the government takes a political interest in the company.  It will be interesting to see if the interest rate spreads between secure and unsecured debt will reflect this new reality.

In a twist of fate, that has to bring a smile to your face, GM is facing bankruptcy.  They want the bondholders to take a bath and swap $27 billion in debt for a 10% stake in the company.  The problem for GM and the government is that investors hold $34 billion in Credit Default Swaps on GM debt.  They get paid 100% if GM goes bankrupt, why would they agree to anything less?  Guess who has to pay the CDS?  The poster child for government bailouts, AIG, with Treasury money.

Allen Stanford, of Stanford Financial, allegedly ran a ponzi scheme.  Seems he also was an undercover agent for the DEA for the last 10 years.  Much of the money he defrauded was from drug dealers and money launderers.  You cannot make this kind of stuff up.  Maybe that is why he wants to be arrested; it can be a little lonely when drug bosses are looking for you. The BBC has uncovered the story about Allen Stanford.

“In the United States, anybody can be President.  That’s the problem.”

--George Carlin

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

Read about the Treasury Bond Auction on May 5, 2009

Read More about Bonds and Chrysler

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