Today I conducted a conference call with a branch office in Chicago. Following comments I made regarding where preferreds rank in the capital structure and why the markets are beating the tar out of bonds, preferreds and common shares of certain banks, I was pressured to comment on my own firm. This in spite of my stating (several times) that I cannot do so. I did not appreciate the pressure. I hope all of my readers understand that I am really not at liberty to discuss specifics regarding my own firm.
All I can say is that the markets do not believe that all of the toxicity has been addresses within certain banks. Judging by the dollar amounts mentioned by today's call participants, it appears that many advisers and clients are greatly underestimating the toxicity on bank balance sheets. From the information I have gathered, the worst offenders could have several hundred billion dollars of toxic assets on their balance sheets. Numbers approaching a trillion dollars have been mentioned for some firms, but I have no way to verify this. The Street sure doesn't like certain banks. It would be naive to think that, at this stage of the game, that the street was completely irrational.
The autos announced their "restructuring" plans. The plans amount to little more than more layoffs, requests for billions of dollars worth of more aid and warnings that bankruptcies would be the most costly option. GM and Chrysler are basically telling Congress and the Obama administration that the least change possible is best. So much for change.
The Detroit business model is broken. Corporate structures and labor agreements make lower priced vehicles money-losers. Therefore, these vehicles receive little in the way of R&D. Unfortunately for Detroit, smaller, cheaper vehicles are what are in demand. Even Chrysler, which was the domestic small car leader (Chrysler small engines were considered to be so good that BMW used a version of the Chrysler four cylinder engine is the first generation of the modern Mini), is knocking on FIAT's door for small car development. FIAT has been out of the U.S. market since the 1980s because it could not compete.
Fixed income investors beware. Just because GM does not file for a traditional bankruptcy, it is unlikely that bondholders receive 100 cents on the dollar for their bonds. Also, any compensation resulting from a government-sponsored restructuring may not be all cash. It is likely that bondholders would receive some combination of cash, new shares and, perhaps, new debt. Keep in mind that all existing Chrysler Financial and Daimler Chrysler bonds are obligations of Daimler AG.
Que Pasa, Chica?
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