Another Day, Another Crash: Junk Bond Kings, Revisited

Gadzillions of Citibank customers worldwide (the writer of these lines included) were sweating through the weekend, popping Valium, worried that their sleepless bank may go to eternal rest. Then, relief: Citi was bailed out. No hearing, no fuss, $326b total, Wagoner, eat your heart out. But wait: moiré dark clouds on the horizon: “The foundering Detroit automakers owe more than $100 billion to their bankers and bondholders, and Wall Street is starting to wonder how much of that will be paid back,” writes the New York Times. And wait, there is even more exposure, namely to “to automotive suppliers and dealers.”

A lot of the debt is in the way of bonds that have been foisted on hapless 401K holders that had ticked the “conservative” investment goal on their profile. These bonds are now depreciating faster than the junk produced in Detroit. If you have the stomach for it, you can buy GM’s 8.375 percent bonds due in July 2033 for 17 cents on the dollar. Even a Mike Milken wouldn’t have the guts. Flashback: At Milken’s sentencing, Judge Kimba Wood told Milken: “When a man of your power in the financial world repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself, a significant prison term is required.” This country’s legal system is based on case law, and quite possibly, Kimba’s sentence before the sentence may come up again. This time, for milken tax payers, retirees, and banks alike. Speaking of banks …

As far as banks go, nobody knows how much of the debt has been unloaded. “Banks typically retain a small portion of the securities they underwrite,” says the NYT, “and many banks that had hoped to sell high-risk loans have been unable to find buyers for them since the credit markets froze over.”

Bottom line: “Few doubt that banks are sitting on billions of dollars of loans to the industry,” says the NYT. “Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley were among the banks that arranged $11.5 billion in financing for Cerberus’s takeover of Chrysler. Analysts say the banks are stuck with much of that debt.” At the risk of repeating myself and boring you: The Chinese government has a lot of money in some of those banks. The Chinese government also owns a few car companies that may be interested in saving some of Detroit before everything goes down the drain. In the words of Sergeant Phil Esterhaus: “Hey, let’s be careful out there.”