More Drama with Chrysler

I've got little time to be blogging this morning, but an article I was sent yesterday describes the major legal problem with the way Chrysler (and GM to follow) are structuring their "bankruptcy" proceedings). The bottom line is that what they're doing is illegal, but the government is sanctioning it so no one is going to stop it. The linked article was written before Justice Ginsberg decided to allow the sale of Chrysler to Fiat to proceed (denying the challenge of the Indiana pension funds).

Here's the short version of the long story. The pension funds - and other senior bond holders (who are considered "secured") - are legally entitled to receive 100% of their investment back before unsecured (or junior) investors like stock holders or unions get anything. But in the Chrysler deal, these senior bond holders are getting about $0.27 on the dollar while the unsecured UAW gets about double that amount.

Beyond wrong, this flies in the face of an underlying principle in corporate finance. You can be anti-capitalism all you want, but trust me if people stop buying bonds to back your favorite companies (like Apple) it'll be bad for all of us because they can't operate effectively without that capital.

Just one other thing. Remember the speech the President gave when the Chrysler - Fiat deal was announced? The one where he chastised a few bond holder groups for playing hardball and trying get more than they were entitled to. He was talking about the senior bond holders that were entitled to get 100% and were asking for somewhere in the neighborhood of 50%.

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