This could trigger ‘Credit Crunch II’ which will be far more destructive than anything we’ve seen to date.
In Credit Crunch I lenders stopped lending temporarily for the likes of homes and cars due to fear of falling prices, rising unemployment, etc.
Credit Crunch II will be about all potential lenders, including the banking system, not lending to anyone for fear of not being legally entitled to collect past due balances.
This is a very different kind of systemic risk.
It is politically self inflicted systemic risk.
Intentional or not, the word ‘subversive’ is surfacing.
Hopefully the courts quickly affirm the legal rights of secured lenders.
Sell in May and Go Away
by John Maudlin
May 1 (Ritholtz) — And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.
If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations.
OK, one more thought. If Chrysler couldn’t figure out how to make efficient cars from their partnership with Daimler-Benz, are they now going to become viable through a partnership with Fiat, which has been on the verge of bankruptcy for the last decade? Really? GM paid $2 billion in penalties to Fiat in 2005 so as to not be forced to buy them. And Fiat gets 20% for no cash?
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