The following is not meant to be a political article, but intended to defend free markets.
On May 1st, the rule of law, the bedrock of our legal and economic systems was chipped. Instead of company ownership being redistributed based on the provider's place in the legal capital structure, as the law requires, Chrysler's redistribution of assets took place based on a very subjective criterion. By shafting bondholders and undermining the bankruptcy system, the legal system may change the way investors view different investments and the risk of those investments.
Using the public's economic fear of the current recession as a weapon, the government took Chrysler from its rightful owners: Secured loan holders (banks, stockholders, mutual funds, hedge funds and pension funds). They gave it to struggling, very sympathetic, $40-an-hour earning blue collar workers, who will now be earning $15 an hour (Chrysler's employees and the United Auto Workers Union). Chrysler was stolen from its rightful owners.
Bond investors spend time studying bond covenants, which spell out how assets are disbursed in the event of a bankruptcy. Secured senior lenders get the secured assets; unsecured, junior bondholders and loan-holders follow (as a part of leveraged buyout, Chrysler had no unsecured outstanding bonds or loans); unions and employees are next in line; and equity investors get whatever is left, which in this case would be almost nothing.
For 200 years the United States has had a well functioning bankruptcy-court system that was designed to make sure that division of assets is equitable. That system has now been threatened.
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