Throwing good money after bad


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Posted by David Sherman on Thursday, April 30, 2009 at 16:22:32 :

In Reply to: What was the other option??? posted by Eric B. on Thursday, April 30, 2009 at 15:45:14 :

The reason investors don't want to risk their own money buying Chrysler is that they're pretty sure they'll lose it. It seems to me that men who make it their business to study companies and decide where to invest probably have a pretty good idea of what constitutes a viable investment. Government and unions, on the other hand, have other considerations. A lot of times the employees have an emotional attachment or simply hope to save their jobs, whereas government has all kinds of political considerations that have nothing to do with business practicalities. From what I've seen, when the employees take over a failing business, it still fails. Of course the government can keep it on life support forever if need be, so long as the taxpayers are willing to keep throwing money into a rat hole.

The reason Chrysler is declaring bankruptcy is that a large chunk of the bond holders decided they'd rather take their chances in bankruptcy court to get a larger portion of their money back than what the government was offering them in cash to go along with the government's attempted deal. In bankruptcy, bondholders and other creditors come first. Equity holders, which would be the government, the union, and Fiat at this point, come last. A lot of the time, companies in this sort of a mess can manage to restructure their debt by swapping all or part of it for equity (company stock), but the bond holders have to make a risk calculation -- would they rather own part of a company that may well fail completely or at least get some of their money back when the bankruptcy court liquidates the company's assets? If the company looks likely to turn around, equity might be the better option, but these bond holders apparently don't think Chrysler has much of a chance even under the government deal.



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