Philip asks me to add some more information about the Chrysler situation.
I will give some brief points, but here is a very clear article by George Will in today's Washington Post.
Problem: Chrysler cannot repay all the money it has borrowed, and it cannot meet the retirement promises it has made to its workers.
Traditional solution: The company declares bankruptcy and either gets 'a refinancing' on its outstanding debt (Chapter 11 bankruptcy), or liquidates, repaying lenders according to priority (Chapter 7 bankruptcy). Priority levels are established by law - bankruptcy law: banks and bondholders have first claim to be repaid, stockholders have the last claim.
White House's proposed solution: The white house is forcing the lenders to forgo their promised first claim on assets. It is forcing them to take as little as 29 cents on each dollar lent. This would be fine if that's all the money that there was left, but by law the lenders have the right to receive more. Instead, White House is (1) demonizing the lenders (video 2:49 mark) who in many cases represent American retirement plans and (2) demanding that they 'voluntarily' agree reduce the amount they would receive. All this is done in the name of "common good" or "shared sacrifice".
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ReplyDeleteLeave it to G. Will to pick a great metaphor. Ok, but where do multi-billion-dollar hedge funds come into all this?
ReplyDeleteThe hedge funds are some of the lenders which have lent money to Chrysler. They bought Chrysler's bonds (lending money to the firm). This, naturally, is risky business. Lender never knows whether he will be repaid, sometimes lending involves more risk, sometimes less risk. Lenders take great caution in managing that risk by, for example, asking for collateral. Similarly, in this case, hedge funds which bought Chrysler's bonds have a law-backed promise of collateral - if anything was to happen to Chrysler, then the lenders would be the first to receive any money from sale of Chrysler's assets, after the liquidation costs have been paid.
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