>
> On Sat, May 2 and 3:48 PM, Bill wrote:
>
> I want to amplify a couple of Warren’s points that the media that I’ve seen has
> missed. To me the key is the internal inconsistency of the Obama
> administration’s reasoning. Contracts were sacred (AIG bonuses). Now, secured
> creditors, who negotiated for a lower yield in return for priority (i.e., the prudent
> lenders), are attacked by the administration as morally evil for not giving up their
> rights.
>
> It’s one thing to use bankruptcy powers against unsecured creditors (and that
> includes secured creditors to the extent they are undersecured). That’s an
> inherent risk of being an unsecured creditor, particulary in a nation like the U.S.
> that allows Chapter 11 reorganizations. (Reorgs may be the interest of unsecured
> creditors as a class, but they can be hell on particular unsecured creditors.)
>
> Secured creditors are not the same, particularly where they are fully secured. The
> Supreme Court has emphasized that the bankruptcy laws cannot be used to
> commit a “taking” without just compensation.
>
> But the point I want to emphasize is this — why is the same administration
> refusing to wipe out risk capital (equity and subdebt) in favored banks and instead
> providing them with myriad federal subsidies while demanding that fully secured
> auto creditors take a deep haircut? To state the obvious, risk capital has the
> lowest priority — none. Moreover, it is supposed to be wiped out to create the
> proper incentives. Conversely, senior debt is not supposed to be wiped out (or
> extorted into serious haircuts) — that creates perverse incentives. Does anyone
> seriously believe that if Goldman or Pimco held the large senior debt positions in
> Chrysler the administration would have extorted and demonized them?
>
> Best,
>
> Bill
>
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