Wednesday, May 20, 2009

Tip of the Iceberg (Chrysler fiasco scares off future investors)

AlphaNinja - Expect more of this to come. Why would someone buy bonds from a company that is beholden not to contract law, but to the whims of an administration's political interests (in this case the United Autoworkers)? Not trying to be partisan, just pointing out reality. Posted in full:

State to No Longer Invest in Federal Bailout Recipients By Eric Berman 5/20/2009 Indiana will no longer invest in bonds issued by banks and automakers who receive federal bailout money.

Bondholders are supposed to be at the head of the line for repayment if a company goes bankrupt. But State Treasurer Richard Mourdock says the government rewrote the rulebook for the Chrysler bankruptcy, leaving investors with 29 cents on the dollar. Mourdock says that cost state investment funds $5.6 million.

Mourdock says the state won't sell bonds it already holds -- he says that would lock in losses. But he's ordering fund managers not to buy any more bonds from Chrysler, GM, or banks covered by the bailout.

Mourdock says the Obama Administration's handling of Chrysler's debt wiped out $896,000 in value from the state's investment of the proceeds from the 2006 lease of the Indiana Toll Road, and $147,400 from the Indiana State Police Pension Fund.

Mourdock oversees both portfolios.Mourdock says the Teachers Retirement Fund, which is administered separately, lost $4.6 million.

The FT has more on this matter:

"The funds accused the government in a court filing on Wednesday of adopting a strategy of “the ends justify the means”.
Echoing unease at the strong-arm tactics by Washington to speed the restructuring through bankruptcy court, the funds said “the Treasury department has taken constructive possession of Chrysler and is requiring it to adopt a sale plan in bankruptcy that violates the most fundamental principles of creditor rights – that first-tier secured creditors have absolute priority”.
The Indiana funds said the proposed restructuring would strip their collateral into the new company, benefiting more junior creditors.
The funds also alleged Tarp funds were meant to be funnelled only to financial institutions. Chrysler and its bigger Detroit rival,
General Motors, are being kept afloat by billions of Tarp dollars.
“Whatever powers the Treasury department may have under Tarp”, the funds said, “it does not have the power to control the entire restructuring of a company to the detriment of the company’s secured creditors and for the benefit of other interest groups so that certain broader policy and political objectives may be achieved.”
The bankruptcy court approved the restructuring process this month over dissident creditors’ objections. But the ruling left the door open to later objections. The funds have now asked the district court, a higher authority, to intervene."

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