This is astonishing to me.
When you invest in a company there is an order of rights for stakeholders. There are debtholders (various levels) and shareholders (various levels).
When a pension fund invests in another entity in the form of secured debt, they are doing so because they know that it is a less risky proposition than investing in the common shares. They know that there is an order for who gets paid first and will make their investment knowing that it is their duty to protect the capital that they have been entrusted with. The State of Indiana pension fund made such an investment in GM. They took on a good deal of risk, but ultimately felt that it was still secure enough due to the assets the company held and the fact that their interests were far above common share holders or other parties.
What is happening with Chrysler is that their interests are being set aside for the interests of other parties. The union workers in this case. This case will be used in future cases to the detriment of the order of investments. If you are a distressed company in need of funds to survive… Good luck. If the court can set aside the rights of a secured creditor, why bother. The risk is not worth it.
Perhaps this will be good for our system. More companies, who probably aren’t worth saving, will fall and add a little velocity to our recovery. It will be VERY ugly for a while, but it liken it to ripping the band aid off, rather than pulling it off slowly (as we are doing now).
Excerpts from a Peter Schiff story regarding the Chrysler case:
What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?
On Monday, the Supreme Court refused to hear an appeal from Chrysler’s secured creditors based on the government’s argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising…
…The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That’s precisely why we have contracts.