Chrysler Bankruptcy: Raising Money
Sponsored by (Your Company Here)
Fundamental to our economic system are three sources businesses use to raise capital i.e. profits, owner’s investment, or loans. Jeopardizing any single source can reek havoc with a businesses’ capital structure but eliminating all three would be fatal. In the case of Chrysler the administration is seeking to threaten the existence of the very company it claims to be helping, by “shooting the wounded” the shareholders and bondholders.
First of all the redistribution of the ownership between the UAW, Federal Government, and Fiat leaves the old stockholders with nothing eliminating their original investment and ownership position in Chrysler. They after all made their investment fully accepting and understanding the normal business risks. Now by adding the unpredictable “political risk” to an already long list of business risks threatens the principle of risk versus return throwing it out of balance. A higher return is demanded for a certain amount of risk. Adding another factor in the form of political uncertainty may produce too much risk for too little potential reward threatening a viable capital source with too much downside and not enough upside.
Selling bonds is another way to raise business capital. These loans provide a long-term secure source for raising capital at reasonable and competitive rates. In short, bonds are long-term loans made to help companies finance operations, or short falls during downturns, and expansion during the inevitable up business cycle. In Chrysler’s case bondholders are being portrayed by the administration as the bad guys, holding out simply because of greed and at the expense of the other stakeholders, which in this case means the UAW and the Federal Government.
Many mutual funds have a bond component and maybe your 401k is invested in a fund with a corporate bond component. If it is, then the administration is trying to force you to take thirty cents for every dollar of your original investment and placing you in the position of an unsecured creditor, way down the list in the event of a total liquidation, Chapter 7 Bankruptcy. The administration is playing the bondholders against the workers. In other words the administration is trying to force you into accepting less for your investment and not what you agreed to when you originally lent the money, purchased the bond. They want to take your money and give it to the UAW, violating your underlying agreements and then adding insult to injury when you object, portraying you as the bad guy.
Some brave bond trading companies have taken a courageous stand against the administration by saying their investors, you and me, are secured creditors and should do better then thirty cents on the dollar. Standing up for bondholders should not be a courageous stand. After all, this is a fundamental funding source and an established way of doing business protected by underlying agreements. The administration’s heavy-handed tactics threaten the very core of the most successful economy the world has ever known, all the while making innocent people villains.
In the case of Chrysler the administration is trying to change business fundamentals by destroying all funding sources i.e. owner’s investment (equity), and lenders capital in the form of bonds (debt) for a company that is not profitable it’s only other source for money . Let’s hope the bankruptcy judge follows the established bankruptcy process allowing this to play out as it should, giving everyone their fair and rightful share. Otherwise the only way for Chrysler to get funding will be through additional government bailouts, taxpayer’s money, which essentially means our tax dollars, will be used to support Chrysler’s new owner’s the UAW with its generous pension plan. Do we really want to destroy our business financing system using your retirement money and tax dollars to pay for someone else’s retirement?
Business/News & Views® is a business newsletter published monthly. To subscribe, visit Business/News & Views® Sign-up.
There is no annual subscription fee. Business/News & Views® is a registered trademark of Weatherholt & Associates, LLC. Copyright © 2008-2009 Weatherholt & Associates LLC. All rights reserved worldwide. The content of this newsletter may not be redistributed without the express written consent of Weatherholt & Associates LLC. Individual editorials, articles and essays appearing on this site may be republished, but only with full attribution, which must include the author and Business/News & Views® as well as a link to http://www.waconsult.com.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher and author are not engaged in rendering legal, accounting, or other professional services though this newsletter. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
Library of Congress Cataloging-in-Publication
Business/News & Views® / by David. W. Weatherholt
ISBN: 978-0-9823041-1-2 (electronic format)
Published in the United States of America through www.waconsult.com
Published in an electronic format by Weatherholt & Associates, LLC
First Trade Publishing: October 2008
Newsletter designed by Zoo in a Jungle Marketing, Graphics by Getty Images