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JUNE 10, 2009 2:37PM

Supreme Court Screws Chrysler Bondholders

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The pension fund of the state of Indiana, the Indiana State Teacher's Retirement Fund,  and a few other brave souls decided to defy the United States government and challenge the White House's remarkable intervention and engineering of the Chrysler bankruptcy filing.

Chrysler went bankrupt for several reasons, but the bottom line is that they had accumulated massive amounts of debt which they could not possibly repay.  The process of going through bankruptcy can be complicated for a large company, but there is a method to the madness.  In general, the assets are sold off to the highest bidders and the money recovered is then distributed to the creditors. 

A company raises capital by selling debt.  A common way to sell debt is by issuing bonds.  The purchasers of the debt are the bondholders.   A bondholder is considered a creditor.                                               

Not all creditors are created equal.  There are a long line of people trying to get their money back, and the bankruptcy law specifically stipulates who has the highest priority.  At the front of the line are the "secured" bondholders.   At the back of the line are the holders of common shares.  Somewhere in the middle are preferred share holders.

The White House intefered in Chrysler's bankruptcy.  Legally binding contracts were ignored.  The secured creditors were given the message,

"Sorry but this is how it is and we really don't care what the law is.  We are the law and we can do whatever we want."

Most of the secured creditors caved in to the pressure from the White House, but a few, such as the Indiana State Pension Fund and the Indiana State Teacher's Retirement Fund decided to assert their legal rights and took it all the way to the Supreme Court.

At first it seemed the Supreme Court would do the right thing when Supreme Court Justice Ginsburg issued a "stay" or delay to Chrysler's bankruptcy filing.  Then she ruled that the bankruptcy filing could go forward.

Did the Supreme Court cave in from White pressure?  Whatever happened to our system of "checks and balances"?  Supreme Court Justice Ginsburg ruled that the Supreme Court would not hear the case.  It is my opinion that White House and Justice Ginsburg did not want the case to proceed because the plaintiffs had a strong enough case to block   the inapropriate abuse of power by the executive branch.  

Why is this story of executive branch power run amuck, a precedent started by Bush and continued by Obama, not blaring from the front covers of the New York Times and Wall St. Journal?

Why is this story not on the cover of Open Salon (Hint, Hint).


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This is the same Supreme Court who elected George W Bush president. That's too bad about the bondholders. But as the disclaimers say "past performance is not an indicator of future performance."

Last time I checked my history book, the Supreme Court is a co-equal branch of government.
No, the Supreme Court did not screw Chrysler bondholders, they just did not accept the case. Perhaps the Court of Appeals screwed them or the original court. But the Supreme Court didn't. That's Civics 101.
Walter - Civics 102. The Supreme Court was given the opportunity to rectify the situation and by NOT exercising that opportunity, they screwed the Chrysler Bondholders.

OEsheepdog - Yes. The Supreme Court gave Bush the election in 2000, so their inaction in this case is not surprising to me.
The story has been covered extensively by the Wall Street Journal, both on the news and editorial pages. Some of the wire services have done a good job finding individuals affected by the decision, i.e., people who have Chrysler bonds in the pension plans and who will be hurt. The Indiana case undercuts the empathy standard for judges that the adminstration favors; the people who will be hurt are retirees and low-income workers. Just goes to show that there may be more than one party in a legal dispute with claims to empathy. The decision may simply mean that the Court feels that the bondholders still have legal remedies (and they may have) and so the court shouldn't step in until those are exhausted.
Civics 201...No, the Indiana bondholders appealed to the Supreme Court which does not have to accept the appeal. SCOTUS was not given the opportunity to rectify the situation, the Indiana bondholders had the RIGHT to PETITION the SCOTUS. A stay was granted pending review to determine the liklihood of the petitioners being able to prevail. Apparently, as is usually the case, the minimum 4 justices voting to accept the petition was not achieved, the stay was vacated and the Court of Appeals decision was upheld. These appeals are typically made on the narrowest point of law possible where the appellant believes they have a legitimate opportunity to prevail.
I agree with Con that there may be other avenues to explore. I'm also of a frame of mind (legalities not-withstanding) that a Chrysler sold to Fiat, with units that can be profitable intact is in the best interest of Chrysler, the public, the investor and the U.S. government (the largest investor). How that all shakes out is still unclear.
While you might not like the decision that was made you must respect the process and that it was followed according to the letter and spirit of the law. I don't see politics at play in the SCOTUS determination. And even if I did, I wouldn't whine about it, I'd just move on.
This is an example I think of Court deference on economic matters dating to 1937 and the switch in time that saved nine, although upon further reflection, altering the seniority structure of bonds is a breach of contract that is troubling to me in terms of arbitrary exercise of even a bankruptcy court and actually has broader implications donw the pike in terms of the tranches of CDO's and CMO's that could be ugly.
The bondholders got screwed?


They will get around 30 cents on the dollar for their bonds under the deal.

Under liquidation, which was the other alternative, they wouldn't have gotten as much.

If it's so bad, then why did 99 percent of the bondholders approve of the deal? The people who filed the lawsuit bought the bonds at around 40 cents on the dollar. If they got screwed, what about the people who bought the debt at par?

I have no sympathy for them.

This was the best deal they were going to get. And they should have shut their pieholes and taken it. Their delay cost us taxpayers another $200-300 million.
Walter - I bet that you are not a member of the Indiana State Pension Fund. In addition, the government should NOT be in the business of taking over failed automobile companies. Where is the line drawn? Who else is "too big to fail"? "Eddie Bauer", the clothing company just declared bankruptcy. Why doesn't the government take over "Eddie Bauer"? Go ahead, keep defending the government's abuse of power. One day you may be looking for protection from the government's abuse of power. That might "change your tune" - Survival 101
Tony Wang - That's the point. The bankruptcy of Chrysler should not have cost the taxpayers one single penny.

Don Rich - "Altering the seniority structure of the bonds is a breach of contract" - Thank you.
Civics 202--The pension fund went all the way through due process (check the 14th amendment) and unfortunately for them (some would say fortunately) they did not prevail.
If you want to have a philosophical discussion of whether the government should take over failed auto manufacturers and whether or not that constitutes abuse of power we can do that.
But, your entire post is little more than whining, generalizations and a meager rationale for something you just don't like.
All the people who sneer at the claims of "legacy" ex-workers--"legacy" being, workers who took salary reductions for the promise of company pensions and health care--seem to be the same ones who said "We must pay those executive bonuses, it was an agreement!" Agreements don't apply to labor apparently.
Walter - Everyone is entitled to their opinion. The abuse of government power is NOT a philosophical debate - it is real like the sound of men in uniform smashing down your door. You can debate philosophy all you want with yourself after they throw you in a dark cell. Then we'll talk again. Until then, get lost.
I'd like the gov to take over Old Navy if they fail--maybe I can get my jeans cheaper.
Poet of Logan Square - Have you ever shopped at TJ Maxx or Marshall's? They sometimes have good quality jeans at bargain prices.
Walter Blevins - How dare you come on my blog to lecture me about civics and the constitution when your interest in the Chrysler case is based entirely on your selfish motives?
Yes. I found your June 8th comment on Saturn Smith's blog (Supreme Court Stays Chrysler Fiat Merger). You wrote and I quote, "I've been waiting on a pending job offer from Chrysler that has been put on hold by this." end quote.
You don't care at all about the legal/constitutional aspects of this case. You just want the Supreme Court to step out of the way for selfish reasons - your "pending" job offer from Chrysler.
Consider yourself exposed.
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This is partly unfair to the Crysler bondholders. Can't they just file a motion for reconsideration? I strongly believe that the bond issued by the auto maker then are way over a thousand. That's way over a thousand debt to these bondholders. well, loosing that heap of money is part of risking which is the game of financial economy and therefore, of the financial institutions.That is why risk measures are being done. Well, perhaps they did but the recent happenings in the auto world are extreme cases that don't usually occur.If they don't get the payback, they should just get the chrysler parts in each plants and sell it!Just kidding.
If you sold all of Chrysler's land, cars, parts, etc and then sold the dealership network (the Saturn is doing to distribute foreign cars), then you might well get two billion dollars.
The reason a lot of the secured creditors went along is that they were banks who were under the Obama blackmail thumb (bailout money) or were being singled out in speeches for asserting their rights.

The United State is made up of three branches of Government for a reason, to keep power in check. It is good to see that dating advice works.
It's about time Chrysler got their act together. On the other hand if you'd like to have some skills with the women, check out how to attract them by using some great dating advice tips here.
I am employed in car accessories business and these things are really scary... All of the automotive industry is crippled now. And it seems that the government does not really care.
Well, given the massive hit this company took, it's almost justified. I mean, take a look at used cars los angeles? That market which is supposed to be the most successful took a massive nose dive over the last couple of years. The fact that they're still around is surprising enough.
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The whole thing was a disaster. Chrysler gets a bailout, the taxpayers are on the hook for the money, and the executives continue to get their exorbitant bonuses. What is wrong with this picture? Oh, and why didn't Ford need a bailout?

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I appreciate this decision of Supreme Court.
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Good article you have all the good qualities of a blogger keep up the good work.
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I perfectly agree with you! That should always be the case. triathlon shoes
If the government does something like this then how can we as a people have faith in such a big governing body!!! A lot of care for driving is also needed. The automobiles majors should also make their customer guide on some defensive driving classes, such as the ones,Texas drivers safety course onlinewhich are more important for them while driving on roads.

Just to have good revenues, is what should not be considered all the time. If the government take strict actions then all the companies will be very cautious while doing such kind of things.
Chrysler has been a very poorly run company for a long time. They actually got bailed out before by the US government. The invention of the mini-van gave them the capacity to rebound. Now Chrysler did not have the ability or the product pipeline to grow now.

They need to outsource the automobile parts production and put more resources into making a better engine. I don't doubt that Fiat's engineering expertise well also help get things back on track. Keeping in mind there is still risk inherit in the auto sector in general.
You are right mathew, If the government does something like this then how can we as a people have faith in such a big governing body?? Online Defensive Driving Texas
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can make law? Where does it say that Congress must follow Presidental Directives, and where does it say that the President can force states to do anything. How can you not believe that they can override stockholders when we don’t hold them accountable for the Supreme Law of the Land? cover letters
This is showing the deference of courts rulling on the same economic subject. there is a good example of the Escorts Camden
case in 1983: deference in escorts case.
This is bad times for everyone with so many people losing their jobs. interior wall paneling
It's really same to snatch money of senior citizen because at present they are highly dependent on their funds.And if Govt. take their money to deposit debit they will become depend on their child.which will decrease there(Senior citizen's son's) saving capacity.
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It is very bad for old person who are dependent on their fund.Because generally when person get old nobody much care as compare to young one,then they can care himself by spending own money on health checkup and better lifestyle.
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sad that these harley davidson shirts guys are gonna lose their pension.
The Supreme Court was given the opportunity to rectify the situation and by NOT exercising that opportunity, they screwed the Chrysler Bondholders.

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I hope that this financial crisis in our country will end very soon. many people are loosing their job already.
This is really it for chrysler, I hate to say this but I am so devastated bout their situation. Even titans could fall. This company depicts it.
This is the same Supreme Court who elected George W Bush president. That's too bad about the bondholders. But as the disclaimers say "past performance is not an indicator of future performance."
You have to take what you can get. It's similar to the boston plumbing company that had to liquidate their stock and screwed over half of the lower middle class in one of Boston's suburbs.
good for the supreme court¡¡¡¡¡¡¡
love this post, very interesting and informative. keep up the good work.

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First Chrysler screws its bondholders and then the Supreme Court makes it happen again.The bondholders must be having a great time running from pillar to post and White House must be having a great laugh watching this comedy. The whole affair is indeed
reduced to a hilarious ridicule.
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I totally agree. Ever since Bush Jr. the power of the executive branch has gotten way out of hand. I really think that the US needs to "reset" their set of checks and balances. Sometimes I wonder if there is some kind of hidden force really calling the shots behind the guise of our pseudo-democracy. But then, I guess I'm getting a little too conspiracy theorist on you here, huh :)

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I think that the Supreme Court did the right thing.. Good for them.
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I was very encouraged to find this site. I wanted to thank you for this special read. head lice treatment I definitely savored every little bit of it and I have you bookmarked to check out new stuff you post.Chrysler's bankruptcy is done well with the great effort my uncle have same issue he was retired for teaching.
The Supreme Court caving to White House pressure? I wouldn't worry about that too much.
This is sad that Chrysler company went out of business. One of my friend lost his job and many more people lost their jobs.
Hope the economy will straighten out the way it was during Clinton presidency.
Chrysler is still screwed right now as they have labor troubles in addition to debt concerns. - Research papers Chrysler labor dissatisfaction.
The process of going through bankruptcy can be complicated for a large company, but there is method in madness. In general, assets are sold to the highest bidder and the proceeds distributed to creditors.testbellsblog
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In my opinion Indiana teacher are in right path. Hope Supreme court will give decision in the favor of Indiana teachers.
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I have mixed feelings ---- I owned a Chrysler.
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