Another Day, Another Crash: Junk Bond Kings, Revisited

Bertel Schmitt
by Bertel Schmitt

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.”

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  • Autonut Autonut on Nov 24, 2008

    Milken is a boy scout compare to what is going on in financial industry now. If Milken would done anything comparable to Rubin shenanigans, he probably would be sentenced to hanging during rough 80's. Today Mr. Rubin is running a bank into a ground, after successfully orchestrating recession of 2000 (I know that he was out of DC in 2000, but recessions not necessarily coincide with inauguration). After he is done with Citibank, I am sure we will see him in DC doing some important cabinet level work.

  • Porschespeed Porschespeed on Nov 24, 2008

    Milken's not a boyscout compared to this bunch. He's a saint. Cramer has bragged about things he's done in his 'books'. All of it an order of magnitude worse than MM ever imagined. Anybody dragging that f'n goofball Cramer off to the firing squad?

  • MaintenanceCosts Shame about the DCT. If this had a manual it would be a great daily driver.
  • EngineerfromBaja_1990 These cars hit rock bottom in value by the mid 2010s when the DCT related lawsuits came in droves. Too bad because other than that poor transmission and limited legroom, these are very good handling and well equipped vehicles with decent build quality and materials.We can all be very positive it was the DCT fiasco what ruined this nameplate for North America rather than the shift from sedans and HB to CUVs.The only upside is manual transmission vehicles were also affected by the low resale value, which make them an excellent buy.
  • MaintenanceCosts And this is why I just bought myself a good 2011 manual car that I plan to keep for a good long time.
  • Lou_BC The Camaro always had to contend with the Corvette. Up until the mid-engine Corvette, bother were just muscle cars occupying the same niche. The demise of the Challenger and Camaro will be great news for Ford and the Mustang. Once again they are the last domestic Muscle car standing.
  • MaintenanceCosts I love these. They are really too loud for the street--you'd have to tiptoe around subdivisions and parking lots if you don't want people to get mad--but the noise is SO beautiful.But if I got this one the first thing I'd do would take a heat gun to the white stripes. The car is plenty shouty enough without them.