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The demise of contract law

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Jun 10, 2009 7:19 pm

Agreed the Chrysler bond holders got hosed,  according to the law.
On the other hand, the federal government has put trillions on the line to protect the holders of bond and credit swap holders and other toxic junk. Everybody who holds Citigroup or BAC bonds might be at zero had the feds not protected them.
And you know, this is a crisis. Desperate times, desperate measures. Like jkl1v said, a lot of smart people figured we were on the brink of Armaggedon.

Jun 10, 2009 10:18 pm

Well, it’s official, Chrysler’s bankruptcy moves forward. Those creditors who lent Chrysler money, protected by contract law, get nothing. Those individuals owed money by Chrysler whether it be for a lemon vehicle, or product defect lawsuit, get nothing. With a wave of the wand the government changed the rules and all those liabilites go away. These liabilites are from creditors that in a normal bankruptcy would have been protected.

    As a bondguy i don't like it when the bond holders get shafted. I like it less when the governemnt spins it to make the bond holders look like the bad guys. But what really concerns me is the out and out suspension of contract law in play here. Precedents are being set. What do we hang our hat on now that the government has just rewritten the contract law rule book using  "Banana Republics for Dummies " as their guide book?     So what do you think? Justified or plain ole government thievery?      
Jun 11, 2009 12:27 am

Your book title is incorrect.  Should have read Mein Kapmf or A Communist Manifesto.  

Jun 11, 2009 1:25 am

BG, I don’t like it either.  A lot of things are happening right now that absolutely run counter to a free market economy.  Today, I heard of a Merrill preferred issue being arbitrarily changed from a fixed rate to a floating rate and the explanation I heard from our own bond guys was that the government more or less forced B of A’s hand on that one.  Preferred holders had no say or warning about the change.

  BSpears posted a piece about the rise and fall of democracies that I've seen before only this is the first time I've really given it serious consideration.  I very much fear the path our government is taking and if they continue down it too far, there will literally be nowhere for investors and savers to hide...we'll simply become a socialist/communist nation with everything of value owned/confiscated by the government and redistributed as they see fit.   Despite valuations and signs of economic recovery, I'm no longer as bullish as I used to be, but I simply can't think of an alternative investment that can withstand a government that changes the rules on the fly with little regard to the fairness toward those who worked hard to accumulate what they have.  Maybe someday, all of you who voted for "change" will have an idea of what the rest of us were so concerned about last fall.
Jun 11, 2009 1:25 am

Didn't you vote for change BG?

That's certainly a change.
Jun 11, 2009 2:47 am

Have you noticed the older we get the more paranoid we get.  If in ten or twenty years we’re a socialist/communist regime I will apologize to you then.  We are, imho, no where close to that. 

  I don't want the gov't running our private companies and I don't believe the government does either.    What would have happened to our economy if we would have let these giant companies fail?  Nobody knows for sure but my guess is the affect would have been catastrophic for our entire economy and the world's economy.  Where would unemployment be?  30-35%, 50%?  The market crumbles due to panic selling, bank runs because large banks are failing.  Where would the bear market have ended?  I'd go so far as to say our industry would be almost wiped out.  The value of the dollar would have plummeted, gold would have skyrocketed.  Increase in bankruptcy, poverty, crime, suicide, you would have seen chaos like you never would have imagined.  I guess I feel it would have been much worse if we would have let free market forces go.    Do I think the government is doing things perfectly?  NO!  But holy sh*t!  Come on!  They had to prop up these companies.  I guess I'm happy they are getting ownership in them and not just giving them free bailouts.    If you don't think we were on the brink of disaster go watch the Frontline about the banking crisis.  Will scare the sh*t out of you.    My one cent worth.    As to BG's post.  This is one thing I believe the government got absolutely wrong!
Jun 11, 2009 3:37 am

August of 2008 Sercetary of the Treasury Henry Paulson publically tried to stem the selling pressure on FNM securites by reassuring all that all was well. He actively stepped in front of those who saw the writing on the wall and were proactively trying to protect their assets telling them they had nothing to fear. Two weeks later for those who listened he took those assets wiping out those investors and creditors. Over the course of the next month he set out to socialize the banks. So yes, seeing this I did vote for a change. Unfortunately our course seems to be set and capitalism as we were practicing it, is on the precipice. Chrysler/GM are another push toward the edge. The suspension of bankuptcy rules and contract law. 

When a prospective client looks over our proposal for investing their hard earned money and asks "Will the government  seize my money if i invest it?" how do we answer that question? Hasn't the precedent been set?  
Jun 11, 2009 5:45 am

I am guessing a low percentage of us at the forum voted for Obama…but the communist references shouldn’t surprise us since his democratic stance is just a hair away from socialism.

Jun 11, 2009 4:29 pm

We all were peeing our britches late last summer as we saw the financial abyss open before us. We came within inches of going over the edge. And we all saw it well before our clients did or did John Q. Public. Scary times! No argument from me that a bailout was needed. However, there is a big difference between standing ready to backstop our economy and stealing assets from people who have worked hard for them.

  For example, looking at Chrysler, this isn't the first time they've come to the government hat in hand looking for help. In 1979 they asked the government for help. The government gave them 1.5 billion dollars, an unheard of sum at the time. The government didn't come in and zero out the balance sheet at anyone's expense. Nor did the government set itself up as a shareholder. Instead of usurping U.S. contract law, the government took a place in line as a creditor.   Chrysler went on to develope some of the most successful vehicles of the next generation. Starting with the "If you can find a better car buy it" K car. They then invented the mini van and the mid sized SUV AKA Jeep Grand Cherokee. They paid the government back within three years, which was ahead of schedule and were highly profitable until Mercedes screwed them up.   Point is, there was no rewriting of the rule book. There was no wiping out share holders or bond holders. Instead of getting hosed, everyone made money, including the the U.S. tax payer.   This could have been differently.   As for the buying of the toxic assets at banks, nothing is being done about those assets. We are doing no more than kicking the can down the road.    
Jun 11, 2009 4:32 pm

Make that: this could have been done differently.

Jun 11, 2009 7:26 pm

[quote=BondGuy]Make that: this could have been done differently.

  Question is:  Why wasn't it?  (serious question)[/quote]   Then or now?    
Jun 12, 2009 3:00 pm

Now, they could have guaranteed loans and purchased military trucks from Chrysler as they did 30 years ago. The Chrsler’s situation in 2008 was no more dire than it was in 1978. They were down for the count then. And worse, at that time there was no over riding economic meltdown to point to as a cause. Chrysler had burned it trusted name with loyal customers by building horrible cars. The Plymouth Volare and Dodge Aspen were under engineered and poorly built. Along with the collapse of the european operations and the too little too late Horizon Chrysler had cooked itself. Then as now there was a ton of opposition to helping them. Mostly coming from the anti-union right. Carter stood against that opposition and worked a deal to keep them going. It was wa win-win for all parties.

  Chrysler went on to become an innovative car company literally inventing entire auto segments that we now take for granted. The Mini van is the main achievement in that arena. However, they also bought AMC to save Jeep and raised them from the ashes to their top brand status. They invented the mid sized SUV with the Grand Cherokee/Cherokee and sales went off the chart for that segment as the entire world followed their lead.   Billions of dollars in profit were made. Hundreds of thousands of jobs were saved and created all because Carter didn't cave to the immense pressure from the opposition to let'em go.   Chrysler went on to be a profitable company until Daimler delegated them to second banana status. Daimler cast them off after they had bled them dry.   My view as a long time observer of the autos is that the down cycle the industry found itself in would have passed. The the one two punch of ridiculously high gas prices and the economic meltdown put these guys on the mat. Both, unpredicted events that caused an unprecedented change in consumer buying habits.  It has nothing to do with quality. As for product mix, the critics including the experts at government motors point to the lack of small cars as reason for the roll over. The problem with that is that there is almost no profit in small cars and no profit at all in Hybrid cars.  The Prius is case in point. So how would building cars at a loss have helped?   Interestingly, as gas prices have eased truck sales have rebounded. In my view, government loan gurantees to help C, GM, and F through this down cycle giving them a chance to bring new product to market would have been a better way to go. As we can see, it worked just fine in the past.