Chrysler's Bankruptcy: Historic Changes for Markets?

When will the stock and bond markets begin to reflect the huge changes in bankrutpcy and contract laws that President Obama has demanded and is demanding from Chrysler’s bondholders?

After reading numerous comments on Chrysler’s filing for Chapter 11 bankruptcy, it’s clear that lawyers, investors and bond buyers are very worried about how the president is blaming and bullying Chrysler’s creditors for the company’s bankruptcy.

The consensus of all but the pro-union and pro-Obama types is that the president’s disrespect for 200 years of bankruptcy law precedent will make it very difficult for companies to sell bonds and borrow money in the private markets. The president is in the process of destroying the credibility of borrowers and the trust that has made our corporate debt markets work for generations.

Unionized corporations will find it will be especially difficult and expensive to borrow from banks and bond buyers. This is because the unions have so much political clout with Obama and Congress that a lender can never count on the contracts that they write with borrowers being enforced. The Democrats seem bent on rewriting the laws in the favor of unions and at the expense of lenders.

If this nonsense continues, the Rust Belt’s manufacturers are in big trouble. Most depend on selling billions in bonds to the private markets, and they work hard to maintain reasonably good credit ratings to keep their borrowing costs under control.

Now, what happens to a deeply in debt General Electric when it wants to refinance in the bond markets? Why will anyone want to lend to it, given its close ties to the Obama administration, which is known for helping its friends?

Until today, the markets have ignored the implications of the trillions in budget deficits and debt that Obama and Congress are putting in place.

But after a nice 100-point rally this morning, the market faded and closed lower.

Could this be because investors are coming to realize the troubles that the stock and bond markets will be in if corporate America’s borrowing costs are inflated by changes in bankruptcy law and our most powerful politicians’ growing disrespect for contract law?

Look for a bunch of blogs and articles about companies whose ability to borrow will be hurt by the Obama administration’s bullying of Chrysler’s bondholders.

Time to sell corporate bonds?

Read the comments that follow articles about Chrysler’s bankruptcy on Seeking Alpha, the WSJ (especially here) and the NYT. The unhappy campers are out in force.

Disclosure: I don't own GE. I do own Vanguard's Total Bond Market exchange traded fund (BND).

Comments

[Jasper M:]

"If this nonsense continues, the Rust Belt’s manufacturers are in big trouble. "
Like the weren't before?! Not to belittle the various bad ideas in play re the Chrysler situation, but isn't this a bit like complaining about the method of execution of a terminal cancer patient?

May 01 04:56 AM

[Clive Corcoran:]

You ask - "what happens to a deeply in debt General Electric when it wants to refinance in the bond markets? Why will anyone want to lend to it?"
Just as we are all having to adjust to a much riskier world, especially as taxpayers, so will those who buy corporate debt?
Ultimately it's all a matter of pricing risk correctly.
The ratings agencies should be doing a better job in assisting this process although at the end of the day large institutions are paid well enough to make those risk determinations themselves.

May 01 04:58 AM

[Moon Kil Woong:]

I detest everyone preventing proper bankruptcy and/or mucking around with normal bankruptcy procedures. Bankruptcy is one of the most tried and true free market systems that cause complete economic collapse. Mess with it and you risk complete economic anarchy.

AS for CDS players, you better hope you bought insurance from someone that can pay. And I don't mean AIG. If they ask for bailout to help those who are shorting corporate America and expect to get paid out think again. This is even more politically distateful than AIG helping Goldman short the mortgage market before it imploded.

May 01 05:43 AM

[russ:]

The column is dribble. Crysler was going to go bankrupt if the Goverment had not been involved, no one interferred with the process. There has been more stability and less panic than would have been the case. Without the governmnet, the bonds would have become worthless and had no market anyway. No one prevented banruptcy, it has just been more orderly.

May 01 08:14 AM

[captainccs:]

I, for one, am happy that Chrysler is finally allowed to go bankrupt. It should have happened 30 years ago on Iaccoca's watch. Unfortunately, back then, Congress messed with free markets. So what else is new?

May 01 08:37 AM

[a. palmer jr.:]

I hope nobody is counting on me to buy their corporate bonds, I've learned my lesson. Heck, I'm still waiting to hear what to do with my Lehman bond; I know it's worthless but what do you do with it? I guess I could use it next time I need to start a fire in my fireplace!

May 01 08:41 AM

[jeandit75:]

Well remember the too big to fail logic. GE does not need the capital markets for as long as Obama signs the blank checks.

May 01 08:55 AM

[john s. gordon:]

a. palmer jr, -

you are supposed to paper your bathroom wall with it like i do.
> jack

May 01 09:20 AM

[jazzme:]

The action taken by Obama's group has ensured that the Federal Govenment will be either insuring corporate bonds henceforth or acually doing the lending as they seem to be the only entity that is risk adverse enough from this point forward. Saving a public or private company by bad mouthing private capital (secured debttors)is surely the best way to run off private capital. I am a Obama supporter but this is a huge mistake..a blunder of immense proportions. In essence he said yesterday that FIAT will be the answer to compete with the likes of Toyota, BMW,VW and Daimler Benz. I have 37 years in the retain car biz. I wouldn't put one plug nickel into any new franchise that may (or not) come out of this. It take millions to be a dealer today..the admin obviously has ignored just who might sell any new product. Let alone who may buy one..from FIAT !

May 01 09:27 AM

[makerealthings:]

I'm still hoping the senators will face some of our country's recent economic trouble with more frank discussion, and analysis. More financial reform is needed. I'm speaking of the CDS instruments used by hedge funds, which are backed by AIG, which in turn are backed by TARP. What a vicious cycle - which appears to channel taxpayer dollars to hedge funds. How do we deal with these insured hedge funds that held Chrysler hostage? To me it is a hostage situation - monetary terrorists, if you will. And, GM is next!

I personally did a web search of one of the principals of the hedge funds - that held out against Chrysler. Only to find that Stairway Capital's principal has offered seminars on setting up these "financial knots" for distressed investments. To them it is never about people, or economy, or country. The president was right in not standing with them - I wish he would have went one step further, and forced them to compliance as a matter of national interest. After all your taxpayer money is funding the hedge fund insurance.

May 01 09:49 AM

[Perry B:]

We finally get a President that is bright, and intelligent enough to make decisions; That not only go against the buisness as usual crowd, But are based on sound reasoning, and he is accused of being a bully.
I say go-bama. If he had the power to clear house in the SEC, and the State banking commissions. Our Nation may have a chance at a bright future. Citizens need to help Obama by standing up to your state reps, and making them reorganize the audit departments in banking.
But keep writing. Mr. Johnson; Expressing differences in opinion are what truly made our Nation great.

May 01 10:04 AM

[spope33:]

The fundamental change in bond markets started with the September 2008 Washington Mutual Bank bankruptcy, in which without precedent the bondholders were excluded from the assets of the company. Notably an unsecured creditor, the deferred compensation plan, was made whole while bondholders were wiped out, contrary to precedence and normal sensibilities. Since WM was under federal regulation it may have seemed an anomaly at the time, but with Chrysler and GM the government seems equally determined to grab bondholder equity and hand it to lower-precedence parties-- Union health plans in this case.

So in an environment where we still have no universal healthcare, the government seems determined to fund the health plan of a privileged group, to do it with money it tries to take extra-legally from investors who had put up hard cash to fund a premier American employer's operations, and at the same time bad-mouthing the bond investors. If instead he would implement national healthcare there'd be no need to go through contortions to transfer wealth to the union health plan in the first place.

It is good that this one is ending up in court where the US President is not the ultimate decision maker.

Bad-mouthing bond investors! I have trouble believing it. People willing to accept modest returns and willing to take one a narrower risk than the average stock investor. Lots of retired folks have bonds from companies like GM or WM or Chrysler. Why is the union more important than them, other than pure politics??

Disclosure: I was wiped out on WM bonds, and exited a Chrysler bond position within the past year.

May 01 10:05 AM

[PassingBy55:]

A market where the rules are constantly rewritten is not one where anyone is going to play. Expect widespread speculation until the country rights itself.

May 01 10:30 AM

[too old:]

I agree with Perry B that comments should continue to be made but they should be based on fact and reason not the whitewash that surrounds anything written by the Obamaites.

May 01 10:31 AM

[cameroni:]

Obama and his administration are saying and doing what is politically acceptable and palatable right now. They are finding blame and shame with holdout bondholders and other Chrysler creditors,...but could it be any other way? Should it be any other way?

At the end of the day we are all somewhat relieved by Chrysler's move to bankruptcy protection. There is a real opportunity now for the company, it's stockholders, lenders and employees to work together to rebuild this company.

Wages and costs have not fallen enough yet though. This is not going to be a popular thought but we are in competition with the whole world now. We will greet that competition with some sacrifices and it must be done for the survival of all the automakers. Let's make it happen. All costs need to come down. There are no "special" groups ahead of everyone else.

The company will live or die on the support of all stakeholders, or lack of support as the case may be. Dramatic changes need to be made. That means sharing the pain around equally for everyones benefit.

The grim alternative is that Automakers in India, China, Korea etc will take up the slack and do what we cannot accomplish here. If we do not cooperate now, we will be second place in this industry for a generation. Perhaps it will never be rebuilt.

Time to take one for the team.

Cam

May 01 11:31 AM

[Donald Johnson:]

For a clear explanation of the legal issues, check out Roe's op-ed pieced in today's WSJ or on opinionjournal.com.

The article is "Chrysler's bankruptcy won't be quick."

online.wsj.com/article...

May 01 11:38 AM

[carey_jim:]

People who want to see the free enterprise system flourish know that bankrupt corporations, should be allowed to go bankrupt.

It's rule number one of efficient markets.

But once the government 'saves' and then owns AIG, BofA, Chrysler or any other corporation, why shouldn't the government control it?

And who, in the end, can stop the government from controlling what it owns?

Anyone who buys 51% of a company's stock expects to control the company. It's the way the game is played.

To survive, these corporations have made a Faustian bargain with the devil, who is We the People, and once a corporation gets in bed with We the People, they shouldn't expect their corporate dreams of wealth and power to last.

Until they are re-privatized that is.

These are lessons from Europe but America doesn't even know there is a classroom.

It will be a bumpy ride.

May 01 11:43 AM

[oldman:]

Donald, I also own BND and today I see that LQD, which has a higher duration than BND is trading higher. I know 1 day doesn't change a trend but would you expect lower duration bonds to trade higher in price than lower duration?

May 01 01:50 PM

[spope33:]

The government wants credit markets to free up YET it is mistreating those who have conservatively lent money to banks, financials, and autos in the form of investment-grade bonds. And shouldn't it be enough to say "you lose your investment" without the all the vindictive negative rhetoric? The negative repercussions here will be long and deep.

May 01 01:54 PM

[LKofScotland:]

they are the government. who are you to argue with the government as to what the law is? government is god. if this was in my country i could have you killed for merely speaking. if that makes me a god so much the better. i have no need to care for people like you and neither does your government. they should disappear you and be done with your nonsense. perhaps your wife will weep for you when you are gone. i kill millions of my own yet the people weep for me when i'm gone. even here i can tell my friends from my enemies. can't you?

May 01 03:59 PM

[LKofScotland:]

by the way my understanding of you puny customs is that even your hospitals are run on borrowed money. add them to your rust belt comments and feel the true result of your insolence. hospitals suing hospitals for hundreds of millions all in the name of "healthcare." let this be a lesson to your kind and what you should expect going forward. no healthcare for evil doers like you.

May 01 04:09 PM

[altaman:]

Increasingly we see the unintended, or perhaps intended, negative consequences of Obama's meddling with the normal, relatively non-politicized operations of the market to allocate risks and to determine winners and losers. Eventually many investors will stop placing bets because of the fear that capricious changes to time-honored legal, tax and business principals, by an increasingly fascist and socialist government overlords, will make it impossible for them to predict outcomes and do risk benefit analysis. The will kill economic growth.

May 01 04:13 PM

[I am not a ...:]

Why didn't anyone bother to see or ask why Daimler AG dumped Chrysler? That had to be a corperate coup of the first order and yet knowone took on the information that must have been there for all to see. Chrysler may have been able to float along for decades but it's glory days were in the early 1960's when they were next to Daimler in terms of automotive engineering and a reasonable amount of quality. From then on it was disaster after another.
The poison theatened to infect Daimler which saw it's once precious asset ,It's reputation for quality.diluted by the need to prop up Chrysler like some sort of alcholic spouse . We know the rerst,Daimler,hurting but surviving ,Chrysler dying from within and suddenly it finds yet another bunch of suckers ready to buy it a drink...let it die before it drags America down with it.



On May 01 08:14 AM russ wrote:

> The column is dribble. Crysler was going to go bankrupt if the Goverment
> had not been involved, no one interferred with the process. There
> has been more stability and less panic than would have been the case.
> Without the governmnet, the bonds would have become worthless and
> had no market anyway. No one prevented banruptcy, it has just been
> more orderly.

May 01 05:37 PM

[silentobserver:]

I agree,

There was nothing better to expect from the beginning.
As my dad used to say: You cant build a castle with a pile of sh*t.

Those who want to believe that anybody involved with Chrysler after Daimler left, would have loved to build great automobiles, may dream on. To me they were ignorant of the car business.

It takes more than cheap money to be competitive.

BTW: The current spouse just recently got back from rehab.



On May 01 05:37 PM I am not a number.. wrote:

> Why didn't anyone bother to see or ask why Daimler AG dumped Chrysler?
> That had to be a corperate coup of the first order and yet knowone
> took on the information that must have been there for all to see.
> Chrysler may have been able to float along for decades but it's glory
> days were in the early 1960's when they were next to Daimler in terms
> of automotive engineering and a reasonable amount of quality. From
> then on it was disaster after another.
> The poison theatened to infect Daimler which saw it's once precious
> asset ,It's reputation for quality.diluted by the need to prop up
> Chrysler like some sort of alcholic spouse . We know the rerst,Daimler,hurting
> but surviving ,Chrysler dying from within and suddenly it finds yet
> another bunch of suckers ready to buy it a drink...let it die before
> it drags America down with it.
>

May 02 02:24 AM