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Thread: US Supreme Court 'decision' having major impact on capital investors

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    Default US Supreme Court 'decision' having major impact on capital investors

    (snip)""Crony capitalism" is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week's events demonstrate that the phrase now more aptly describes our own country.

    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.

    When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.

    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.

    Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?

    Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.

    The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa's body.

    As if this wasn't bad enough, testimony on Thursday from former Bank of America CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from B of A shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.

    Again, the justification for the interference seemed to be the "greater economic good" the merger would serve. The right of B of A shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.

    More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.

    As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments. However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat. The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness."(snip)

    from

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    The greater good trumps a contract? No surprise there. The greater good is determined by the democratically elected government of the day? No surprise there. People who invested in Chrysler got fucked in favour of protecting jobs? No surprise there.

    There's a new guy in charge. Things are done differently now? No surprise there.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    ^^^ well, some may not agree that the matter is that simple. Specifically, some would point out that both the US constitution and 200 years worth of US contract law precedent should have upheld the contractual 'right' of secured corporate bondholders to be 'first in line' when that corporation goes bankrupt and its assets are liquidated - REGARDLESS of which political party is in power and regardless of the view of the majority of voters regarding what constitutes a 'greater good'. Instead, those secured corporate bondholders view 'the new guy in charge' as illegally changing the rules of the game well after the game is already underway (i.e. many of these secured corporate bonds were issued / purchased many years ago), with their own claims against the bankrupt corporation receiving 'UNEQUAL treatment under the law'.

    Obviously the secured bondholders realize that with the US Supreme Court's lack of action that their supposed contractual rights are now worthless. This leaves potential future bond investors with one avenue of recourse, to refuse to 'play the same game' again in the future. Instead, potential investors are going to 'price in' the potentiality of taking huge investment losses when loaning future capital to US corporations. This will both raise the cost ( de-facto interest rate ) that US corporations must pay in order to obtain future capital for modernization and/or expansion, and reduce the potential amount of future capital that will be made available. This in turn will make US corporations more dependent on the US gov't as the source of future capital, will raise the de-facto cost of doing business for US corporations even higher than it already is versus foreign competitors, and will stifle future expansion of the US economy once things finally reach a 'bottom'.

    Make no mistake, these recent events re the abrogation of contractual 'rights' of secured bondholders constitutes a fundamental 'shift' in the US economic model. It WILL set unintended consequences in motion.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by hockeybobby View Post

    There's a new guy in charge. Things are done differently now? No surprise there.
    Point of order; it was not he new guy but the old guy's court that made the ruling. Perhaps they are ashamed of what the old guy did to US; I know I am.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Earl_the_Pearl View Post
    Point of order; it was not he new guy but the old guy's court that made the ruling. Perhaps they are ashamed of what the old guy did to US; I know I am.
    It is nice to have one person to blame. "BUSH DID IT!" It keeps the thinking nice and simple.

    Meanwhile, I look around past the propaganda and see a whole lot more. I will profit off of what others put blinders to.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    I am not exactly going to say "they should have known better" but who in there right mind would have invested in Chrysler or for that matter GM in the last year without having a realistic expectation that they were going to loose it all?

    If the decision had went the other way and this merger had been blocked and the company had went under, just how much would these bond holders even if they were in fact "first in line" have gotten then?

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by phonehome View Post
    I am not exactly going to say "they should have known better" but who in there right mind would have invested in Chrysler or for that matter GM in the last year without having a realistic expectation that they were going to loose it all?
    It is not a question of losing it all, but having other investors supposedly in less secure a position given a better result than the bond investors. This decision has indeed raised the political risk in the U.S. to, in my estimation, unacceptable levels. Now it's a case of who you know, and not what the law says. Until the Chrysler and GM bankruptcies, I thought the Obama team might be leading us toward a recovery. Now, I am convinced that indeed crony capitalism is the rule of the day. That bodes ill for all our economic fortunes, even Obama's cronies.

    If the decision had went the other way and this merger had been blocked and the company had went under, just how much would these bond holders even if they were in fact "first in line" have gotten then?
    Had the court ruled against the merger, the bond holders would have gotten more or less equal equity with the UAW. That was where their position should have been had the courts applied the law.


    HTH
    Z

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    but who in there right mind would have invested in Chrysler or for that matter GM in the last year
    A very valid point, but one that is (or at least is supposed to be) irrelevant to the central point of this thread re Chrysler corporate bonds. These bonds were issued 5-10-15-20 years ago, and sold to long term capital investors who sought a stable long term return on their investment ( in the form of interest payments by Chrysler ) with very low risk of losing their principal. One of the 'protections' built into those bond sales of 5-10-15-20 years ago was that the bond buyer's principal was ( or at least was supposed to be) 'guaranteed' to be the first debt to be paid off in the event that Chrysler ever went bankrupt. In other words, the Chrysler corporate bonds were ( or at least were supposed to be ) 'secured' by having 'first dibs' on Chrysler's assets in the event the company ever folded ... ahead of Chrysler's common stock holders, ahead of or at least equal to Chrysler's union workers, ahead of Chrysler's sub-suppliers, ahead of banks holding straightforward loans etc. In exchange for this (supposed) security, buyers of Chrysler corporate bonds were willing to accept interest rates which were comparatively low ( which in turn reduced Chrysler's cost of capital and increased Chrysler's profit margin ).

    If the decision had went the other way and this merger had been blocked and the company had went under, just how much would these bond holders even if they were in fact "first in line" have gotten then

    Had the court ruled against the merger, the bond holders would have gotten more or less equal equity with the UAW. That was where their position should have been had the courts applied the law.
    Potentially 100%. Even if Chrysler was 'underwater' by a 2:1 margin, if the secured bondholders comprised less than 50% of Chrysler's total outstanding debt ( with other debt components being union worker retirement benefit claims, sub-supplier invoices, standard bank loans etc.), being first in line would have totally paid off the secured bondholders before any of the subordinated creditors received a penny from the sale of Chrysler's remaining assets.


    I would also add that the US Supreme Court essentially sidestepped all legal issues regarding the rights of secured bondholders, and simply made a hasty decision that the Indiana Pension Fund's petition had not met the required burden of proof.



    This potentially leaves open the possibility of future secured bondholder litigation both in the case of Chrysler and in the case of secured bondholders of future bankrupt companies (i.e. GM). The legal hurdle will involve proving that the secured bondholders have indeed been 'damaged' financially, as well as proving that said 'damages' were the direct result of unconstitutional government action ( most likely gov't violation the Constitution's 'takings clause' ).

    However, in the absence of some sort of reaffirmation of the (supposed) priority rights of secured bondholders, long term capital investors are definitely going to begin CYA against future losses of their principal. They will become reluctant to purchase secured corporate bonds in the future, making less 'private' capital available to all US corporations. They will also begin to demand the same sort of interest rate be paid to them as the corporations are paying to holders of 'subordinated' loans ( i.e. bank loans and commercial paper ) to compensate them for their increased risk of principal loss, which will increase corporations' operating expenses (via higher interest payments ) and decreasse their profit margins.

    The conspiracy theorists would tell you that the driving out of secured bondholder capital actually makes strategic sense if the gov't's wish is to 'socialize' American industries ... because in the absence of 'affordable' private sector bond capital the only place those American industries can still turn to for 'affordable' capital will be the government !!! This in turn can create a situation where certain 'gov't connected' American industries will be able to enjoy a de-facto cost advantage over their non 'gov't connected' competitors both domestic and foreign ( at the expense of the US taxpayer of course ). The gov'ts actions regarding Chrysler, GM and GMAC ( the financing arm of both Chrysler and GM that has enjoyed beaucoup de cheap TARP funds with which to begin making 'subprime' auto loans to would-be 'subprime' Chrysler and GM new car buyers ) certainly lay enough ground work to make one wonder !

    ~
    Last edited by Melonie; 06-14-2009 at 10:53 AM.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Zofia View Post
    I thought the Obama team might be leading us toward a recovery. Now, I am convinced that indeed crony capitalism is the rule of the day. That bodes ill for all our economic fortunes, even Obama's cronies.
    This is what would happen if Chrysler went under; the US would lose all bailout money and all employees would lose their job. Chrysler would not be able to pay the pensions of retired workers and the US under the Pension Benefit Guaranty Corporation would have to pay all the money owed. It is an insurance like FDIC.

    It is not new for laws to be bent during a national crises. Look at the bright side; no one died.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Zofia View Post
    Now, I am convinced that indeed crony capitalism is the rule of the day. That bodes ill for all our economic fortunes, even Obama's cronies.
    I think it's fair to say that crony capitalism has been around for a long long time.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Melonie View Post
    Make no mistake, these recent events re the abrogation of contractual 'rights' of secured bondholders constitutes a fundamental 'shift' in the US economic model. It WILL set unintended consequences in motion.
    I haven't been following this closely, but it is a very interesting observation. It seems to me that the issue here can also be seen as a "public taking" without due process of law. Not too long ago, states were using their power of eminent domain to steal from the poor (homeowners in "blighted" areas) to give to the rich (private developers)... I believe this was upheld in the courts for the "greater good" - we need more shopping malls, yuppie condos, Starbucks, etc...

    Here too, you have people being deprived of their ownership rights in property (secured bonds) by government (in this case, the federal govenment - Obama & friends) to effect a wealth redistribution for the "greater good".

    "Greater good" is a euphemism for cronyism and graft.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by jack0177057 View Post
    I haven't been following this closely, but it is a very interesting observation. It seems to me that the issue here can also be seen as a "public taking" without due process of law.
    It went all the way to the top court. I call that due process; it's as due as it gets.

    Ginsburg could have ruled on her own BTW but decide to let the entire court decide. Good move on her part.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    It went all the way to the top court. I call that due process; it's as due as it gets.
    Again, the framing of this Supreme Court 'look' at the terms of the Chrysler bankruptcy was very limited in scope. As Jack just pointed out, and as I pointed out earlier, there may indeed be constitutional 'takings clause' problems with the US gov't's involvement / terms for the Chrysler bankruptcy re the treatment of secured bondholders. Additionally there may be constitutional 'equal treatment' problems re the gov't's treatment of secured bondholders of bankrupt / forcibly merged / bailed out banks versus the secured Chrysler bondholders. The door is still open for future Supreme Court rulings on these subjects. But indeed it would appear to be the case that the existing Supreme Court is likely to subscribe to the 'greater good' theory versus property rights, if the 'eminent domain' for increased tax revenue decision is any indication.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    ^^^ My understanding is that this case was NOT briefed and argued. Just that the S.Ct. refused to hear the appeal.

    TARP was specifically proposed and passed ( the 2d time; remember ? ) to rescue banks. NOT automakers. Paulson specifically told Congress that it would NOT cover the automakers. What it really represents is an incredible usurpation of power by Obama. Nothing in the legislation; NOTHING !; authorized him to use TARP funds to rescue GM and Chrysler.

    Not only was what he did unconstitutional but so was the way he did it. He completely ran roughshod over the property rights of the bondholders who were supposed to be well ahead of the UAW in priority. It clearly represents a taking without compensation prohibited by the 5th
    Amendment.

    A lot of this goes back to the poorly understood ' New Deal " S.Ct. decisions. Originally the Supreme Court kept FDR and the Federal Government in check by overturning the worst of his unconstitutional excesses and inter alia giving the Commerce and General Welfare Clauses their proper and limited reading. After FDR's Court Packing Plan died a natural and deserved death, one justice switched his vote and started upholding FDR's exercises of Federal and Presidential authority. That was the proverbial camel's nose into the tent and now we have uncontrolled governmental meddling in everything from agriculture to zinc mining.
    Last edited by Eric Stoner; 06-16-2009 at 10:20 AM.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Earl_the_Pearl View Post
    It went all the way to the top court. I call that due process; it's as due as it gets.

    Ginsburg could have ruled on her own BTW but decide to let the entire court decide. Good move on her part.
    In a Fifth Amendment "takings" claim, "due process" means more than just adjudication, it also requires "just compensation" for the "taking"... Its like the government taking a piece of your property to broaden the sidewalks... The Constitution requires that you get your day in court plus "just compensation" for the taking.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Melonie View Post
    Additionally there may be constitutional 'equal treatment' problems re the gov't's treatment of secured bondholders of bankrupt / forcibly merged / bailed out banks versus the secured Chrysler bondholders.
    I agree,... I would also argue an equal protection claim. However, this is very easy to defeat by a government, unless you're dealing with a "suspect class" classification, i.e., discrimination against women and/or minorities. If the classification system does not discriminate against a "suspect class", the government has a very low standard to meet - it need only show a "rational basis" for the classification system.

    Melonie, how do you know so much about Constitutional law?

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Melonie View Post
    Again, the framing of this Supreme Court 'look' at the terms of the Chrysler bankruptcy was very limited in scope. As Jack just pointed out, and as I pointed out earlier, there may indeed be constitutional 'takings clause' problems with the US gov't's involvement / terms for the Chrysler bankruptcy re the treatment of secured bondholders. Additionally there may be constitutional 'equal treatment' problems re the gov't's treatment of secured bondholders of bankrupt / forcibly merged / bailed out banks versus the secured Chrysler bondholders. The door is still open for future Supreme Court rulings on these subjects. But indeed it would appear to be the case that the existing Supreme Court is likely to subscribe to the 'greater good' theory versus property rights, if the 'eminent domain' for increased tax revenue decision is any indication.
    Ever since the Supreme Court changed it's tune on FDR's policies, "property rights" have received little more than lip service from the Court. Ironically, in this case those rights belong to retired cops and teachers from Indiana. A state that went for Obama.

    In contrast to the "Kelo" decision, the Chrysler case did NOT provide for adequate compensation. Even in "Kelo", the plaintiff homeowners were entitled to fair market value for their homes. They still got royally screwed but not as badly as the Chrysler bondholders.
    Last edited by Eric Stoner; 06-16-2009 at 10:35 AM.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Eric Stoner View Post
    Ever since the Supreme Court changed it's tune on FDR's policies, "property rights" have received little more than lip service from the Court. Ironically, in this case those rights belong to retired cops and teachers from Indiana. A state that went for Obama.

    In contrast to the "Kelo" decision, the Chrysler case did NOT provide for adequate compensation. Even in "Kelo", the plaintiff homeowners were entitled to fair market value for their homes. They still got royally screwed but not as badly as the Chrysler bondholders.
    Of course, the major distinction is that the Kelo case was not a bankruptcy case. Bankruptcy trustees and judges have a lot of discretion. But, I would still argue that this discretion does not operate as a license to take property without due process of law (just compensation) nor does it provide an immunity from violation of the Fifth Amendment's taking clause.

    Does anyone know whether a Fifth Amendment's "takings" claim was asserted and what was the appellate court's analysis of this? I don't have time to look up and read the case.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    The Constitution has been interpreted 180% differently at different times; separate but equal constitutional at one time but not at another. The Court at one time ruled it was OK to own human beings. Not that long ago it ruled that Americans born in the USA could be interned just because of their race.

    The courts ruled that 28% was just compensation for the bond holders. In total they lost a few millions including the $2,000,000 paid to the lawyers. Weigh this against the billions that were at stake.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by jack0177057 View Post
    Of course, the major distinction is that the Kelo case was not a bankruptcy case. Bankruptcy trustees and judges have a lot of discretion. But, I would still argue that this discretion does not operate as a license to take property without due process of law (just compensation) nor does it provide an immunity from violation of the Fifth Amendment's taking clause.

    Does anyone know whether a Fifth Amendment's "takings" claim was asserted and what was the appellate court's analysis of this? I don't have time to look up and read the case.
    A 5th Amendment takings claim was most certainly asserted.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Earl_the_Pearl View Post
    The Constitution has been interpreted 180% differently at different times; separate but equal constitutional at one time but not at another. The Court at one time ruled it was OK to own human beings. Not that long ago it ruled that Americans born in the USA could be interned just because of their race.

    The courts ruled that 28% was just compensation for the bond holders. In total they lost a few millions including the $2,000,000 paid to the lawyers. Weigh this against the billions that were at stake.
    Point being ? Just because there was erroneous and poor jurisprudence in the past does NOT excuse judicial sloppiness now. It is strange, to say the least, that the current Court is selectively deferential to the President. It wasn't so deferential to Bush's role and decisions as C in C ( correctly afaic btw) but in this case was deferential to Obama's self appointed role as economic czar.

    In the Chrysler case the Court approved a radical diminution of the value of the bondholders stake and gave a much larger share to the UAW. Not only was Bankruptcy Law turned on it's head but the Courts blithely approved of Obama's picking and choosing of winners and losers based on HIS political predilictions. Somebody please show me WHERE in the Bankruptcy Code or anywhere else is THAT noted or listed ?

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Eric Stoner View Post
    Point being ? Just because there was erroneous and poor jurisprudence in the past does NOT excuse judicial sloppiness now.
    The Court cannot make an error as they are the final word on what is constitutional. The people can overrule a court by constitutional amendment as was done in California with Proposition 8.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    ^^^ again, all the SC did in regard to the Ginsberg stay order and refusal to grant 'cert' was decide that the narrow criteria of eligibility had not been met by the state of Indiana such that this appeal AS FILED would not be heard. They made no decisions in regard to the 'takings clause', nor in regard to 'equal treatment under the law', nor in regard to TARP legislation authority, nor in regard to any other constitutional / legal matter potentially applying to the Chrysler bankruptcy. Indeed future appeals may be filed by other parties and heard by the SC that DO address these constitutional issues.

    Melonie, how do you know so much about Constitutional law?
    It's amazing how much one can learn in a Manhattan VIP room when inebriated top shelf attorneys are conversing with inebriated corporate execs, bankers, brokers etc. ... and they assume that the other person in the room overhearing their conversations is simply a dumb blonde with big tits who wouldn't understand a word of what they are discussing !

    The courts ruled that 28% was just compensation for the bond holders. In total they lost a few millions including the $2,000,000 paid to the lawyers. Weigh this against the billions that were at stake
    Actually there were billions and billions in secured Chrysler bonds that took a massive shellacking as a result of the 28% settlement. However, most bondholders were private investors, hedge funds, etc. who decided to keep quiet on the issue after having made an initial complaint ... a complaint which resulted in a personal response by Obama in mainstream media that these private sector bondholders were being 'greedy' fat cats (and which probably resulted in threats of all sorts of unwanted gov't 'heat' being brought to bear as well). It was only the public sector nature of the Indiana pension fund and its unionized public service employee investors which conferred some 'immunity' against also being accused of unbounded greed or fat cat status.

    The Court cannot make an error as they are the final word on what is constitutional.
    There is ample precedent of 'future' SC's issuing new rulings which override 'mistaken' past SC rulings ! For example, the 1894 SC ruled that a national income tax as we know it was unconstitutional !

    ~
    Last edited by Melonie; 06-16-2009 at 02:25 PM.

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Let's be honest here; Indiana Governor Daniels is trying to grant Limbaugh's wish that the country fail. He lost $5 million in pension funds but spent $2 on a lawyer. He also was Director of the Office of Management and Budget under President George W. Bush. We all know what happened to the budget under Daniels direction.
    Have you no sense of decency, sir? At long last, have you left no sense of decency?

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    Default Re: US Supreme Court 'decision' having major impact on capital investors

    Quote Originally Posted by Earl_the_Pearl View Post
    This is what would happen if Chrysler went under; the US would lose all bailout money and all employees would lose their job. Chrysler would not be able to pay the pensions of retired workers and the US under the Pension Benefit Guaranty Corporation would have to pay all the money owed. It is an insurance like FDIC.

    It is not new for laws to be bent during a national crises. Look at the bright side; no one died.
    This was not about Chrysler going under, but about bond holders who should have been placed on a roughly equal footing with the UAW's pension plan. They were not. To characterize the Indiana bond holders as somehow placing Chrysler in a position that it would go under is just wrong. The fact that the Obama administration was willing to reward its cronies, the labor unions, and penalize honest investors raises the political risk in US markets far beyond any small risk presented by Chrysler.

    Z

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