Tuesday, May 5, 2009

The Most Important Ruling

I understand that the judge in the Chrysler bankruptcy case is going to rule today on whether or not the sale to Fiat can go through. While getting little press, I feel this decision can potentially impact the entire framework of the American system. If he decides to rule in favor of the deal, we are in for a prolonged recession (if we weren't already).

Here is what the deal is: the bondholders, the ones Obama basically called greedy, are fighting the government's arrangement. They feel that their interests were not protected. They were offered $.30 on the dollar while the Union's fund got $.60-$.70 on the dollar. This is absolutely unacceptable to the bondholders and against the basic tenets of our laws.

The basic issue here is secured versus unsecured debt. In this case, the bonds were secured by the assets of Chrysler. When a company goes under, the secured debt holders are first in line. The Union's debt was unsecured which means they are entitled to be paid after the secured debt holders get their money. This is how contract law works.

If the judge goes ahead and approves the deal the government set forth, we will see private equity for investments disappear overnight. One of the successes of our system is that people can invest in worthwhile ventures while receiving some assurance their money is safe. Of course, there is still the chance of a loss, yet it is reduced when the debt is secured with assets.

Obama decided that the 'speculators' in this situation were being too greedy. After all, they were receiving a profit. Well, under a capitalistic system, companies are entitled to maximize the return for their shareholders. That is what these big, bad hedge funds did. Naturally, it is easy to demonize them.

Before jumping on the bandwagon, remember that these funds, Oppenheimer in particular, invest 401K and pension fund money. Their jobs is to make as much for their retirement accounts as they can. The entering into the deal with Chrysler was with the understanding that the debt was backed by assets. That is the rule of law and I hope the judge sees it that way.

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