Wednesday, April 22, 2009

The Next Potential Catastrophe

I know I sound like a gloom and doomer, but there are so many problems with the economy that it is really hard to ignore. On Sunday I pointed out the credit card market and why the problems there will escalate. Today, I want to point out the next potential catastrophe on the horizon.

Chrysler. Chrysler is in negotiations with their lenders to take 15 cents on the dollar for their loans. The banks are not even remotely interested and want the full 100 cents on the dollar via cash and preferred equity in the company. Apparently the banks loaning to Chrysler don't get it.

These banks have no reason to take the Chrysler offer of .15 on the dollar because they have TARP money to replace the lost Chrysler money. It is simple to say no to such an offer. The banks want close to .70 on the dollar in cash and the rest in guarantees of future payments or company equity.

It really makes me sick to my stomach. Chrysler, on May 1, will file for bankruptcy due to the banks not playing the game. The banks will get about .10 on the dollar via bankruptcy so the gap is very small. But the jobs that will be lost are enormous, not to mention pension programs, insurance benefits and the massive increase in unemployment and GDP this will cause. The banks do not care. They will get money from Timmy and Ben no matter what.

If you have not read up on the Chrysler situation, you really need to. They are too big to fail unfortunately but they will and I think they need to. Even so, the way the banks are handling this is very much un-american. Apparently the gov't is good at giving out money to banks so they can pay big bonuses but the gov't is not good at making these same banks help bailout the auto industry.

May 1. Put it on your calendar. It could be the beginning of a very ugly cycle in the economy.


  1. Your analysis is a bit off. The bondholders will get 100% compensation - through their CDS holdings.

    In fact, there is a lively debate going on in the legal world about the conflicts of interest b/t bondholders who are also CDS holders and the other interested parties such as employees and suppliers. The CDS bondholders have a perverse incentive to push for bankruptcy since they bid low ball on the bonds and will get paid for full par in the event of a bond default.

    The administration's response is to delay this event for as long as possible so that a smooth and efficient transfer of liability can be made to the US taxpayers. Otherwise, a straight CDS payout will hammer financial earnings.

    *The same situation is going on w/GM and F.

  2. Thanks In Debt. I don't proclaim to be an expert on the subject but based on what I am hearing and reading, it all just stinks. Chrysler deserves to go under but the way it is happening is a complete conflict of interest and in the end, it is the middle class and taxpayers who get screwed while Wall Street counts their money.

  3. Just to clarify - not all bondholders are built equally. SOME bondholders dont have CDS protection (small grannies in Indiana who bought 20 years ago). OTHER bondholders like big wall st pimpco type ppl have cds protection.

    Obama's game is to drag out the process for as long as possible so that the bondholders have to keep paying protection money to the insurance CDS sellers. This artificially inflates earnings for pigs like AIG. At least before the inevitable payout.