Can you back up your two assertions with a factual source ?

"These bondholders had not been holding the debt for years only to find their company going bankrupt"

"in most cases they had bought the debt for 30 cents on the dollar"

Repeating a claim does not count as evidence.

Well, Andrew, I trust Dean on this one. It makes sense. Perhaps not all the bondholders are speculators like this but if a significant number are, it makes a big difference in the way one should view these events. I'm curious about an assertion I saw recently that Chrysler was a victim of "strip and flip". I assume this means raiders stripped out profitable divisions or subsidiaries but what are the details?

If these bondholders had bought at 30% of face value and recovered 2 billion on
$6.8 billion owed (29.4%), then they would have only lost 0.6 %.

Source for recovery:
http://articles.latimes.com/2009/apr/29/business/fi-chrysler29

So if Dean's 30% number is correct, there won't be substantial losses from those bondholders.

Believe that ?

Let CPI prices gradually fall so that consumers can buy the extra goods made available by increased productivity. Don't force consumers to borrow unrepayable sums to buy the

interestnig finance & econ articles

"In most cases they had bought the debt for 30 cents on the dollar.."

I would also like to know the source of this information. It may well be true, but how do you know it?

Andrew and NeilS,

there were several articles in the media on the holdouts in the Chrysler debt story. There were hedge funds that had recently acquired the debt. Unless they paid substantially above the market price, then they would have paid roughly 30 cents on the dollar. None of this is secret.

There also is nothing wrong with it. These guys were making a bet. As it turns out, it didn't pay off especially well for them. But we should just be clear, the big pushers for more money on the these bonds were not long-term holders -- many of these folks had sold their bonds at steep discounts -- but rather investors who bought the bonds at sharp discounts and hoped to be able to extract more money from the government.

I don't have time to get any of the accounts that discuss this, but if you just go bad and read any of the stories in the business press, it should be very clear. In some cases, the funds putting up the fight didn't haven't even been around for more than 2-3 years, so there is no way they could have been long-term holders of the debt.

This is the only article that I could find that bears on the issue.

"The big banks quickly agreed to the deal -- equal to 29 cents on the dollar. Though that offered a profit to a few firms that bought debt as low as 15 cents on the dollar, most of the lenders had paid 50 cents to 70 cents, and the banks 100 cents. News that the big banks were accepting the offer leaked before they had told the smaller lenders. "To say the least, we were floored," says one."

http://online.wsj.com/article/SB124199948894005017.html
U.S. Forced Chrysler's Creditors to Blink, May 11

The Globe and Mail (Canada)

June 2, 2009 Tuesday

GM Canada bondholders feared public reprisal

BYLINE: JACQUIE McNISH AND SHAWN McCARTHY

KEY QUOTE

Some of the largest investors included U.S. funds such as Aurelius Capital Partners and Appaloosa Investment Ltd., which specialize in buying distressed company assets on the bet that they can profit from corporate makeovers.

ARTICLE BEGINS

It took the threat of public criticism by the Prime Minister to convince bondholders to approve an early morning deal yesterday that allowed General Motors of Canada Ltd.
GM-N to avoid the expense and uncertainty of a Canadian court proceeding.

According to people familiar with the discussions, holders of about $1.3-billion of bonds issued by a Nova Scotia-based finance arm of General Motors
were the last holdouts to the company's plan to restructure its Canadian operations outside of court.

After weeks of what insiders described as sometimes stormy negotiations in Toronto and over conference calls, a majority of mostly U.S.-based funds were still refusing by Sunday to accept a company offer that sources said would pay them about 33 cents for every dollar owed. Some of the largest investors included U.S. funds such as Aurelius Capital Partners and Appaloosa Investment Ltd., which specialize in buying distressed company assets on the bet that they can profit from corporate makeovers.

Thanks.

Now to contemplate what difference it makes if the the holder of the debt is a widow and/or orphan or a greedy speculator.

On second thought, I guess it is a no-brainer.

National Post's Financial Post & FP Investing (Canada)

May 9, 2009 Saturday
National Edition

Risks, returns on trial

BYLINE: Barbara Shecter, Financial Post, with files from John Greenwood

EXCERPT.

A small group of Chrysler lenders, holding some $300US-million in secured debt, appealed to the presiding judge to block the restructuring, claiming that U. S. President Barack Obama's politically motivated plan to give priority to the automaker's union and health plan would subvert long-standing bankruptcy rules on which they based their investments.

Jim McGovern, chief executive of Arrow Hedge Partners Inc., a Toronto-based player in the speculative bond space, says governments stepping in and telling senior creditors to put aside years of practice and treatment by the courts to accept a new, unanticipated value for their investments could lead them to abandon segments of the market or charge higher interest rates reflecting their now higher risks.

"If risk premiums go up [because of government intervention], asset prices are going down," he says. "The odds are there is some price to be paid in the marketplace."

Since the financial crisis began last year, governments have been taking a more active role in companies, from taking stakes in financial institutions to injecting cash to bail out auto companies. This week, even the Ontario government pledged to take direct investments in companies to help stabilize the economy.

"As well-intentioned as they may be, it potentially creates other problems down the road," cautions Mr. McGovern. "You can get a result that's entirely different than what you're trying to achieve."

A fund held by Mr. McGovern's group capitulated and agreed to go along with the government plan for Chrysler yesterday, taking a "haircut" on its investment in the automaker's bonds.

While the experience has not soured him on investments in all "distressed" bonds, Mr. McGovern says his strategy will be to stay clear of investments in entities a government might consider crucial to the economy.

"We just have to look in spaces where the government doesn't think there's systemic risk to the U. S. or the Canadian economy," he says.

******

When these specualtors are driven away completely we'll all be much better off. Imagine everyone's income being tied to useful work rather than glorified gamling.

Neil,
you can easily confirm tha the overwhelming majority of people receive zero (or barely any) financial income.
If you're really concerned about the most vulnerable then these vulture capitalists shoudl not be high on your list of concerns.

Joe E

Someone had to by the bonds from the long term stake holders, even if it was at a sharp discount

I think that the speculators perform an important task, but I'm not going to shed any tears when they get clipped.

"If these bondholders had bought at 30% of face value and recovered 2 billion on
$6.8 billion owed (29.4%), then they would have only lost 0.6 %."

If you pay 30% of $6.8 billion($2.04b) and recover $2 billion you've lost close to 2%, not 0.6%
(Unless I've missed something?)

I read your article and i got many information.i hope you will write again useful article.
Thanks for great links with nice tips that will be helpful to me thanks again.

To Hobbes: yes, a 2% loss of your purchase which is the same loss as 0.6% of face value.

I will continue to be dubious of statistics that come from what Dean remembers, from articles that he does not have time to find.

And think for a bit, except for the bondholders themselves, who knows what they paid ?

The truth matters, whether it is convenient to your argument or not.

"The Indiana funds bought its holdings in July 2008 for 43 cents on the dollar."

from
http://www.nytimes.com/2009/06/06/business/06chrysler.html?hp

"Some investors, including OppenheimerFunds Inc. and Perella Weinberg Capital Management LP’s Xerion hedge fund, bought the debt of the automaker before last July. On June 30, Chrysler auto loans were trading at about 49 cents on the dollar."

http://www.bloomberg.com/apps/news?pid=20601103&sid=a109vAXclorI&refer=us

Nice Info

Thanks

why do we keep accepting the citing of "reports" as a viable "source". thats not writing, thats forwarding an agenda.

June 2008? You don't say.

They were betting on a government bailout.

http://money.cnn.com/2007/12/21/news/companies/chrysler/index.htm

Chrysler CEO: We're 'operationally' bankrupt

December 21 2007: 7:26 AM EST

The Indian pension fund bought Chrylser bonds in July 2008, just days or weeks after the company was forced to deny publicly yet again the rumor that it was facing bankruptcy. A rumor, that at the time the bond market players and business press assumed to be true.

http://www.thetruthaboutcars.com/chrysler-on-c11-we-are-categorically-denying-this/

Chrysler spokeswoman Shawn Morgan wants the world to know that her employer isn't going to file for bankruptcy. "This rumor is false and without merit whatsoever." Rumor? More like thoughtful analysis, after ChryCo drew down a $2b line of credit ($1.5b from 20 percent owner Daimler and $500m from 80 percent private equity owners Cerberus). This a couple of weeks before their company-wide "summer vacation." And Fitch Ratings dropped the ailing American automaker to B- with a negative outlook (more bad juju to come). Meanwhile, it was deja vu all over again for former Chrysler rescuer Lee Iaccoca. Lee addressed the troops today, bringing them a message of hope from an earlier, equally fraught time. "Automobiles in America are still a vital business," he said, seated on a stage next to current chairman Bob Nardelli. "We'll live through it. Don't panic. Things are going to be OK."

So there is support for saying that they were not multi-year investors, but hardly any support for Dean's claim that most paid 30%. Around 40% is supported.

Note that Dean backed off a claim that he had sources by saying "Unless they paid substantially above the market price, then they would have paid roughly 30 cents on the dollar."

In other words, 30% is what I can infirmation ( data which is infirm ) rather than sourced information.

I assume this means raiders stripped out profitable divisions 。

Great!Thank you!

That's really nice and wonderful article,i like to read it and bookmark it for future reference.

Thnx