Should We Be Concerned About What is Going On With Chrysler?

Thursday, May 07, 2009

The other night as I was watching the news, yes Fox news, I heard an attorney from Case & White talking about how his clients (the Chrysler bondholders) were being asked to take a deal for .33 cents on the dollar and they were being chastised (bullied was the word that was used) by the Administration for holding out.  Now bondholders are secured creditors and should get paid more in a bankruptcy than unsecured creditors (including the union).  Now the assets of Chrysler are being sold to a new company controlled by Fiat and the union!!  I just can’t believe some of this stuff we are hearing and that is going on in America and give alot of respect to those that can speak out, specifically Cliff Asness, a hedge fund manager at AQR Capital.  Here is an excerpt of what he has to say: 

“Here’s a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders’ contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.

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