Wrong. The government IS a secured creditor. I have provided links to summaries of the loan documents which say as much.

I have no idea where some of you get this idea that that the government loans are not secured, but you are wrong. They are secured, as I have already demonstrated. If this site is going to be about the truth, stop repeating falsehoods, even after you’ve been corrected.

Secured creditor means that the money is being borrowed with physical asset as collateral.

Again, you don’t quite get it. Security is not as narrowly tied to specific collateral as you believe it to be, and you can read the UST loan docs and see that you are incorrect.

There are a lot of mistaken notions posted on this thread, statements that are just factually wrong. It’s one thing to have a hard on against the union, but try to keep your facts straight in the process.

From the sound of things, NBK-Boston is probably a bankruptcy attorney. Take heed of his points, the guy knows what he’s talking about.

The government is a legitimate creditor, just as much as everyone else. If GM didn’t want the loan, they shouldn’t have taken it.

The government and UAW are both legitimate creditors. We both agree with that. But the problem is that neither is a secured creditor. They will both receive zero dollar, when liquidation happens and more senior debt creditors are paid in full first.

The claim that the government is a secured creditor is simply a lie.

Secured creditor means that the money is being borrowed with physical asset as collateral. By the time the government stepped in, Chrysler didn’t have any more collateral to put down. If the government were to be a secured creditor, other existing secured creditors would have to agree to let the government have those collateral. But that never happened. And Bush was criticized for not putting the government ahead of everyone else when the first bailout package was granted.

What’s happening right now is the government/UAW confiscating properties of existing secured creditors. No wonder they are trying to befriend Castro at this exact moment.

The government hasn’t taken anything from anybody, yet, because we’re still in the out-of-court negotiation phase. The government, the union and GM can propose a plan under which existing stockholders get 1% of the new enterprise, existing bondholders get 10%, and the UAW and government get the rest. That’s not against any rule of law. Anyone can propose anything out of court.

And you know what? If the proposal isn’t good, if the government or the union is really trying to get more than they deserve under the law of bankruptcy, then the bondholders can withhold consent and drag this thing into court. It happens all the time. A trip to court is what just happened in the case of Chrysler, for just the same reasons: The government, company and union came up with a plan, a significant minority of bondholders thought they were asking for too much, and now it’s before a judge. We’ll see how that works out. For the moment, the system is working.

And I don’t blame GM and the government and the union for trying to reach an out-of-court settlement. A workout is usually faster and cheaper than dragging it out in court with all the lawyers on the clock, and less damaging to the brand and public perceptions. There is positive value to be gained if it can be accomplished, so its worth trying. But nobody is supposed to lose any rights in a workout that they don’t give up voluntarily, and there is no indication that people are being stripped of anything against their will. If anything, the institutional bondholders, who are dependent on TARP, are being strongarmed into “voluntarily” taking a bath on their CarCo bonds in order to keep the bank bailout bucks coming (as others have surmised).

There is something, though, to the point that large players have the deep pockets and incentives to bring a lot more sophistication and informating-processing power to the table. The small guy can’t match that, and has a harder time knowing if the offer is fair, and has less leverage to make a counteroffer heard.

But you know what? In the grand capitalist tradition, we’ve outsourced the job of representing the small guy to the private sector: That’s what Vanguard, Fidelity, PIMCO and all the rest are for. The fund managers at such places have the time, money, expertise, incentive and obligation to figure out if an exchange offer is a good one, and enough voice (especially when you get a half-dozen of them together) to make a counter-offer heard. You give up this protection (and the diversification of a fund) at your own risk. The couple in the article here were very poorly advised. If there was a law of malpractice for investment advisors, they’d have a good case against their broker. But that’s about it.

Two finer points to put on the discussion of bankruptcy law:

1. Certain forms of creditor “line jumping” are perfectly legal under existing law. Perhaps the most important example is when a person or company takes out a secured loan when he/it already owes money to unsecured creditors. The secured creditor is ahead of the unsecured creditors, at least regarding his ability to collect against the mortgaged asset, notwithstanding the fact he was later in time.

Imagine a person has outstanding student loans or a credit card balance and then one day buys a house, taking out a mortgage in the process. Or a person already owns a house free-and-clear, runs up a few grand in credit card bills, and then takes out a home equity line of credit. Then that person goes bankrupt. The mortgage lender gets first crack at the real estate, even though he was later in time than the student lender or credit card issuer. In corporate settings, some unsecured loans / bond indentures contain a “negative pledge,” under which the borrower promises not to take out any new secured loans while the unsecured obligation is outstanding. But it’s not obtained in all cases, and even when it is obtained, the law in many countries limits the ability of such a clause to actually disrupt the traditional loan priorities.

If the government stepped in as a secured lender at a point late in time, it has plenty of legitimate authority to queue-jump the unsecured creditors — and so would a private secured lender, if there was one. Ford actually mortgaged virtually all of its assets when it took out some massive bank loans a few years back as part of its turnaround plan, and those banks would have priority over the older bondholders if Ford went to court for bankruptcy. If the government, as lender, did the same thing with GM just now — well, good for the Treasury. If the bond indenture allows management to put the assets in hock like that, well, that’s a risk you assumed when you bought the bonds.

2. The Trust Indenture Act if 1939 make the U.S. one of the more protective jurisdictions for bondholders, particularly small-scale bondholders. In many countries, a majority or super-majority (details differ) of bondholders can bind the whole class, by voting or tendering their bonds in an exchange offer. If this were Europe, GM could make an exchange offer which said that when 90% of bondholders tendered, then all bondholders would be bound by the exchange, even the dissenters.

But in the U.S., no bondholder can be bound by the decisions of the other bondholders to accept lower payments or equity in lieu of cash, even if the indenture agreement purports to create such power. Thus, small holders have a choice — they can accept the exchange offer, or hold out, watch 90% of the bondholders walk away with equity in the new enterprise, and then the 10% rump can go to court and fight it out with the other creditors for a cash settlement. They can argue over who gets how many slices of the pie, and/or argue that the pie (the value deposited in the old corporate shell in exchange for putting the working business into the new corporate shell) is not big enough, and that the NewCo (and it’s DIP financier) should leave more value behind in the OldCo.

The reason for this, by the way, is that during the original Great Depression there was evidence that big financial houses would buy up or hold bonds in distressed companies in order to vote a bare majority of those bonds in favor of cheap bondholder settlements, which would then leave more value behind in the company to pay off other securities or obligations. Why do that? The bonds were more widely held than the other securities, so when the banks took a haircut on the bonds, they forced mom-and-pop investors to take a haircut too. Meanwhile, when the returns on the other securities turned out richer than otherwise expected, mom and pop were not there to share in the bounty, because those securities were never sold so widely. Spread the losses but concentrate the gains — sound familiar?

Just a bit of history, you know.

AMEN! None of this computes…
The St. Pierres were secured bond holder, except they weren’t…
Their rights were usurped, except they aren’t…
This is Obama’s fault, except GW Bush/Paulson signed the loans…
They are in the dark, except the down grading of GM bonds was reported on regularly, by everyone…
The rules of the game have changed, except they haven’t…

Now we are saying that Chrysler Bond holders rights are under attack… Last time I checked these very Bond holders FORCED Chrysler into Ch11 and by all accounts they still hold most, if not all of the cards.

The article failed to establish that there was any lack of fairness or that political considerations were trumping anything.

Here’s what you miss –

-The government is a secured creditor, so it is superior to the bondholders

-The UAW holds a promissory note for the VEBA, so it is also a creditor (although to put a fine point on it, the convertible nature of their note turns their level of priority into a potential legal problem for them)

The government is a legitimate creditor, just as much as everyone else. If GM didn’t want the loan, they shouldn’t have taken it.

The union is also a legitimate creditor. They’re owed money, under a note. Surely you aren’t suggesting that we should ignore a promissory note that they hold, signed by the corporation?

As it stands, the union has expressed its willingness to walk away from the note in exchange for ownership of an entirely different business. This should make the existing creditors of the dying old company happy, because there is now one less party to split up the remains.

You really think that the bondholders would be better off if the union was still standing in line with them? That does not compute.

Their entitlements have not changed one bit.

They are a small unsecured bond holder… They could have been trumped by just about any one… and they were…

They probably didn’t know that this could happen… it did… doesn’t make what happened illegal… and it doesn’t change there protection under the law… They are just as protected today as they were last fall, just before GW Bush bought up a ton of secured GM debt…

This is only an issue because the new kid on the block is the federal government… If the credit market wasn’t so F’ed up right now… It would be some big bank…(like at Ford) Same difference, same consequence, same protection.

I’m 100% sure that if you were the one holding the secured debt in Chrysler and the government was trying to usurp your property rights, you’d have a different view on the subject.

Careful Ronnie, you are making stuff up again… No ones property rights at Chrysler are being usurped.

And I agreed the St. Pierres made an awful investment decision. Not that this is terribly important or relevant.

And I concede that the St. Pierres, who have (or more likely, had) $200,000 in life savings, are better off than some. Not that this is terribly important or relevant. (Well, it would be for Marx.)

So let us focus on the heart of Ronnie’s article: are even “Ma and Pa Kettle” (as someone rudely called them) entitled to equal protection under the law, or should political considerations trump due process?

Blech.

If the revolution ain’t violent, then it ain’t Marxist. (It may be one of the near infinite flavors of socialism, true, like British Fabian socialism, but the Marxists I’ve spoken to are very specific about nature of of the revolution.)

Still Ronnie, I have to object very strongly to what you wrote. You make the same mistake the other guy did: you conflate any position to the left of you (which for all I know is to the left of Mussolini) with being the same as revolutionary Marxism, like the instant somebody starts to think Universal Health Care is a good idea they get a invitation in the mail to the global communist conspiracy. Not only is that wrong, it is paranoid in the extreme, something I’d expect from some hysterical Bircher. I’ve met socialists who think exactly the same way you do with the polarity reversed: they think I’m already trying on the jackboots of fascism because I say things like “the market has done good things,” and “I like cars.”

The reasons why this sort of thinking is objectionable are many, but I think I’ll restrict myself to two. First, it divides the world into a duality with two poles, where one pole is everything that is good, and the other is everything that is bad. This is bad not only due to the distortions it creates in your perspective (see remark about paranoia) but it also makes the kind of reasoned debate the founding fathers thought would inform democracy impossible. Think about it: why would you listen to the arguments of others if everything you know is directed toward the good? No only would those people always be wrong, they would in fact be agents of evil. The discourse of reason was supposed to be informed by logic and empirical facts, not slavish devotion to ideological poles.

The other reason, Ronnie, why this sort of thinking is bad is that it does not allow honorable men, for as we know, honorable men can differ! If TTAC is to actually take the idea of the truth about cars seriously, then there’s going to have to be a lot of discussion, and more importantly, a lot of argument and differing ideas. In other words, honorable men (and hopefully women!) differing. But with the dualistic worldview, there can be no real disagreement, only enemies of the way. Truth must be the highest value, no matter if it bucks orthodoxy or not, or if it goes against prevailing ideology or not. Hell, valuing ideology over unpleasant facts is how GM and execs got into this mess in the first place.

Anyway, that’s my point. A dualistic worldview has no place in the discussion of truth, since a dualistic worldview inherently distorts.

Oh my… It is THEIR job to be informed, figure out what is going on and represent their own interest.

How big is their bond? Let me guess, $200,000? Something like that? They are a flee on the side of a rail car…

When you are a tiny fish in a big pond you are on your own… Welcome to the real world.

That is just inaccurate, on pretty much every count.

You don’t follow the bad/ good company concept at all. The UAW is going to walk away from what it owed to it from the Bad Company, which is the original GM. That leaves more money for your bad investors like the ones discussed in this article, because there are fewer people fighting over it.

The UAW is not getting equity in the old company. They are being giving equity in a new company in order to induce them to abandon their claims against the old company, which again, leaves more money for the bad investors such as those described in this article.

A similar thing is happening for the government. The government is effectively losing the money that it previously lent to GM by taking equity in the new firm. (By the way, when some of us snarkily pointed out that these were grants, not loans, this is what we were talking about. We’re getting the shaft here.)

If you’re going to be critical, you should at least follow what is happening here. Your precious bondholders are benefiting from the government action. Had the government not induced the union to take ownership **in an entirely different company to which your bondholders made no loan**, the union would be in the old company, fighting with the bondholders over the scraps in a liquidation.

Your people would be getting even less had the government intervened. If it wasn’t for the economic crisis, we would have let you fail, and they would be getting zip. Blaming the government is a copout, and just part of usual dance of avoiding personal responsibility that destroyed GM in the first place.

Who gets to determine what is venture and what is vulture? Business ain’t beanbag. You can’t rewrite the rules in the middle of the game.

I don’t have a problem with people who recognize intellectual property that is not being exploited fully seizing an opportunity. I don’t see what’s morally wrong about making an investment based on the fact that profit might be made in a bankruptcy.

I’m 100% sure that if you were the one holding the secured debt in Chrysler and the government was trying to usurp your property rights, you’d have a different view on the subject.

The St. Pierres already said that this is the best deal they’ll probably get. They are more concerned about being left out of the loop and not being represented in the process than anything else, it seems to me.

Still, the Obama PTFOA is clearly trying to avoid the bankruptcy courts not because they don’t want Chrysler and GM to go bankrupt but rather because they don’t want to abide by the rule of law. No matter who appoints them, judges don’t like to be reversed on appeal and they are more likely to be impartial than Obama.

I would have done what Chrysler’s secured creditors did and taken my chances with a bankruptcy judge. While it’s true that in bankruptcies the larger creditors negotiate for all, in this case the larger creditors have a huge conflict of interest because they’ve all taken TARP funds and don’t want to upset Obama, so the smaller institutional non-TARP recipient creditors have a point.

The issue is not a cramdown. The issue is a forced cramdown by the US Gov’t so that it can convert its own loans to private enterprises into equity positions and push more senior creditors down the list, while it takes over the company with its UAW partner. Even when a bank acts as a lender of last resort or when it provides DIP financing cannot cut in front of senior secured creditors when it comes to splitting up assets or equity.

The US Gov’t cannot take cuts in line to get ahead of senior creditors. You say this is not “hardly all that unusual.” The gov’t is trying to rewrite bankruptcy law on the fly to its own benefit and to the detriment of senior creditors. Those senior creditors have much more money at risk than the federal government yet it’s the gov’t that’s demanding a large chunk, deigning to let the secured creditors keep 10%.

Like Mr. St. Pierre said, who’s going to risk putting money into a company if the government is going to tear up contracts?

While a bankruptcy judge might indeed place the needs of some unsecured creditors (like the UAW’s VEBA) ahead of the needs of some senior unsecured creditors (in order to keep the company running during Ch 11), that’s up to a judge’s judgment and the law, not up to a president whose party has received millions in campaign contributions from those unsecured creditors.

Who says it has to be a violent revolution? Most leftists/progressives/Marxists in the United States are gramscians. Gramsci felt that violent revolution would never happen so he advocated the “long march through the institutions”. Much of Gramsci’s agenda has been achieved, with many cultural institutions and the academic world firmly in the leftist camp today. Obama is a product of a gramscian strategy and alinskyite tactics.

The Chrysler bondholders that refused the government’s offer hold secured debt. The President is demeaning them for wanting to follow the law.

Why is that such a difficult thing to believe? Jacob Schiff was Leon Trotsky’s financial mentor.

Alot or rich and powerful people are for whatever ideology makes them richer and more powerful.

People who got shafted by Enron have the real sob stories because they didn’t know their company was engaged in illegal activities. GM, on the other hand, didn’t do anything illegal; they were just unsuccessful–there’s the risk.

There are lots of clues in the article (assuming that it is true) that would guarantee that they are unsecured.. Some facts
1) If they were secured… they still are. When Bush gave his loans he did not “bump” any secured bond holder. Even if he did, his liens would be secondary to the primary lien (like a second mortgage on a house) Ma and Pa would still be getting 100 cents on the dollar.
2) Secured bonds will say that… and they will specify which asset they are secured against… They come with a lien… No lien, no secured debt
3) Secured bond are rarely issued to individual investors and are almost always issued in LARGE amounts. AKA 100’s of millions/Billions
4) Secured GM bonds are still worth 100 cents on the dollar… There are still more then enough GM assets to pay off all of there secured debt. If they were secured they wouldn’t be complaining.

While Ronnie is right, the Bond holders did not ask for Bush to bail out GM, what he fails to understand is that is nature of holding unsecured Bond you have almost no say in the running of the company. PERIOD. You can’t just buy a bond and turn your brain off (which is what Ma and Pa Kettle here did) It is clear that they had no clue what they bought, no clue what rights they have (or don’t have) and no clue what could go wrong.

When you hold GM paper you need to watch what is going on just like holding GM stock.

GM bonds have been down graded several time since they bought these bonds… were they paying attention? Nope.. If they were worried about security they should have dumped them at any time they saw the bonds get “de-statused” what did they think the bond ratings meant?

Investors like these should be buying simple term deposits or treasury bills…

Secured bank loans are common, secured bonds are rare. From my reading, it looks like the big banks made billions in secured loans to Cerberus Owned Chrysler and then resold as many of those loans to third parties as they could. The hold out lenders in the recent Chrysler negotiations appear to mostly be funds which bought these loans from JP Morgan, et al. They bought those loans at a discount from face value and did so while speculating just what fraction they would be able to eventually recover.

In many ways those funds are similar to companies which buy patents in hopes of eventually wresting some value from the patents through litigation, as opposed to profiting from patents by actually making and selling the patented items. These are not venture capitalists, they are vulture capitalists. They like to puff and preen about the sanctity of the rule of law, but in reality these guys are legal/finance types who spend their days trying to extract as much wealth from the productive economy for themselves as possible. Curiously enough, these are not the hero protagonists of Ayn Rand’s novels, they are in fact some of the blood suckers against whom Rand’s protagonists inveigh. Her “Atlas” wasn’t a lawyer/banker.

BTW, conflating the individual GM junk bond holders and these vulture fund Chrysler debt holders is one of the mistakes some people are making.

It is, but bonds usually aren’t, and as far as I can tell, GM’s are no exception. Their bonds are unsecured, and they’ve issued some convertibles that could be turned into equity, but GM’s secured debt is most likely owed to banks and other financial institutions. You can look at the specifics of the bond debt in the investor section of the GM website if you care to check.

Chrysler does have some bondholders who hold secured debt. That’s a bit unique, and they’re not in the same boat as are the GM bondholders. If memory serves, the Chrysler bonds are all post-Daimler; I believe all of the old ones were paid off as part of the Cerberus deal, and new ones issued.

It is not at all clear to me that Cliff and Patricia are better off that GM has been on welfare since December, rather than having gone into bankruptcy protection earlier.

It should be clear. If the government hadn’t bailed out GM, it would have already filed bankruptcy.

Without government help, GM would be in no position to survive Chapter 11; there would be no DIP financing from the private markets, and no acceptable business plan to result in reorganization. If Chapter 11 fails, 11 becomes 7 and everything gets sold off.

GM’s assets aren’t worth a damn. Used factories and rotting Cobalts don’t get converted into much cash. Meanwhile, there are other creditors who take priority over bondholders. So they’d be fighting over scraps, and they’d be hashing it out for quite awhile. The only asset that counts in these situations is cash, and GM clearly doesn’t have enough of that.

The people in this story allegedly bought these bonds in 2006. Well, guess what? By then, those bonds were already rated at junk status.

Retirees are not supposed to buy junk bonds with money that they need for living. If those were pushed onto them by a planner, that guy should be sued. If they thought that they were secured, then they should have read the prospectus.

As usual, these financial mistakes are usually produced by a combination of greed, ignorance, naivete and bad timing. The bonds looked cheap, but they were cheap for a reason. I feel badly for them, but they screwed up. That happens sometimes.

“The GM *financial situation* wasn’t going to be solved by President Bush – there simply wasn’t any time. I believe President Bush loaned GM the money to stabilize the situation so that President Obama could *solve* it.”

Thank you for stating this. I have seen so many mis-characterizations of both Bush AND Obama on this. Obama detractors say it’s all his fault for the way things are heading, Obama defenders say no it was Bush’s fault for giving them loans in the first place. Listen, the normal thing for an outgoing and incoming administrations is to TALK TO EACH OTHER and co-ordinate the hand off of power. That’s what makes our democracy work. Bush did NOTHING in this case that Obama did not approve of, because they discussed it. I don’t blame Bush, and I don’t blame Obama for the loans and the viability deadlines. I’m not an Obama (Soft Drink) supporter. But he did the right thing in trying to throw a life line to GM and Chrysler. As did Bush before him. To have done nothing would have made the current economy seem like a party compared to what it would have been with a GM/Chrysler liquidation.

What is happening NOW in the C11’s, is up for debate. I haven’t made up my mind one way or the other but I recognize that some of Obama’s decisions are troubling and probably precedent setting (as in bad). But I’m not going to make a knee-jerk reaction that everything he is doing is bad.

All of you Bush detractors should be greatful of one thing: The outgoing president acted like a mature adult and co-operated with the new incoming president and administration. Contrast that with the last changeover in which little was exchanged, property stolen, college level pranks were played, and a rash of executive orders were filed at the last minute including some environmental edicts that Bubba was too cowardly to try to do under his own watch, edicts that Bush had to reverse and took heat for from the left wing zealots. Compare and contrast. Bush is an adult. Obama so far appears that he is an adult. Clinton and Gore were just older college frat boys in comparison.

I’d appreciate a thank you,

Thank you. I mean that. I’m very grateful for the bailout It’s hard enough living in MI as it is. A sudden collapse of the GM/Chrysler would devastate us.