Stick it to the Bondholders
Posted by Jeff Pruitt - 4/22/09 @ 11:22 pm - Filed Under National Politics
I’ve been saying that the way we can stop digging our financial woes deeper is to hammer the bondholders of failing institutions. Here was my previous comment regarding GM and Chrysler:
Right now bondholders have been unwilling to take a loss in order to help these companies restructure. Their reasoning is that they don’t believe the government will allow these companies to fail - a classic example of moral hazard. They fully expect the government to bail them out and pay the bondholders at 100%. This is problematic for the auto industry because the unions (and others) are willing to renegotiate their contracts but only if the bondholders take some losses too.
The very best thing the government could do is put GM into bankruptcy and make the bondholders eat it. This would send a clear message to everyone that their junk bonds are no longer backed by the government and nor should they be. This will also force the private sector to begin restructuring their debt without government intervention. Of course it will shock the market to no end but unfortunately that probably needs to happen to get things back on the right track.
And here’s an excerpt from yesterday’s NY times on the showdown between the Obama Administration and the bondholders (the largest which happen to be the bankrupt banks):
Last week the Treasury Department, which runs President Obama’s automobile task force, presented banks holding $6.9 billion in Chrysler’s secured debt with a plan under which they would get about 15 cents on the dollar, or about $1 billion. That is roughly the trading level of Chrysler debt in recent days
[...]
On Monday the banks, led by JPMorgan Chase and Citigroup, rejected the administration’s plan outright, with some of the debtholders arguing that they would rather break up Chrysler and sell its assets — notably its Jeep brand — because they believed that they would receive more money selling the assets than they were being offered by the administration.In a plan submitted to the administration on Monday night, the debtholders insisted that they receive about 65 cents on the dollar, or about $4.5 billion, and roughly a 40 percent stake in whatever car company emerges as a re-engineered Chrysler.
Are you kidding me? The same bozos whose companies only exist thanks to government bailouts now want their bonds purchased at four times the market rate? And they want 40% of the newly minted government-subsidized company? Give me a break. As Judge Smails said to Spaulding in Caddyshack - “You’ll Get Nothing and Like It”!
Chrysler can’t be saved no matter what the government does. If the administration sinks this sucker it will send a message to bondholders the world over that the free lunch is over…
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Bondholders have no say in bankruptcy, so this whole thread goes away if Obama would pull back and allow the automakers to file “normal” voluntary bankruptcy.
When the dust settles, the same number of jobs will be lost and the same number auto-related companies will fail. The difference is that the Treasury will pay out less money and the UAW will be no longer impair the productivity and competitveness of American business.
So do I believe that government interference and unionism is to blame for this current state of affairs? You betcha!
Spot on Gadfly, If we had simply not given them a dime to begin with and let them file a standard reorganization chapter 11, by now they would be re-emerging and on there way back, and the US taxpayers would have saved billions…
My position was clear, let them fail. The reason is simple, the cost of bailout is exactly equal to letting them fail, and the only difference is who suffers the consequences of the risk. Clearly bond holders and investors bore the risk. Because they cried foul and convinced congress and the president to bail them out, the taxpayer is now the one at risk.
Now many will say they were too large to fail. This is an absurd notion. What makes them too big to fail? When a company goes out of business what happens to its market share? What happens to all the machines, property and designs? Do they vanish into thin air? When Tolkhiem went bankrupt, they were 30% of the gas pump market. Who picked up this market share? Who began hiring new workers to make these additional pumps? There is no doubt there is a pause, but eventually the market settles out and business picks up.
With the bailout we ran $1.01 Trillion deficit in 2008 and it looks like $2.8 to $3 trillion for 2009. In fact the CBO predicts Trillion dollar deficits each year for ten years. Who is going to pay for this? Is this worse than letting the market flush itself quickly as in 1920 or taking a much longer period of time in which the value of everyone’s assets are devalued? Is it fair to pass this debt onto those who did not create it?
We took risk that was attributed to a few and spread it across everyone. Look for inflation to increase greatly or worse yet, when the U.S. Treasury can no longer convince anyone to loan it money.
PS People are still trying to figure out what things are worth. This is just stretching out the recovery.
[...] Pruitt had an interesting post a few weeks ago entitled “Stick it to the bondholders.” In that post Jeff correctly points out how the bondholders were asking for far too much. I [...]