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Does Populism Take Precedence Over Rule of Law?

Posted by Larry Doyle on May 7, 2009 11:09 AM |

Bill Gross of Pimco recently wrote:

If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned.

Will the manner in which Chrysler has been handled up to now and is handled going forward serve as legal precedent for future bankruptcies? We will learn a lot VERY quickly as General Motors is in very much the same predicament. Given the issues raised by Tom Lauria, attorney for some of the non-TARP Chrysler creditors, are our markets witnessing populism taking precedence over the rule of law? Will our courts try to “thread the needle” under the guise of these automotive companies being special situations?

Answers to these questions will likely develop over time. Different justices may read the law in a different manner. I caution investors, though, that costs associated with parsing the rule of law may be postponed but are not foregone.

To that end, I believe it is also wise to take heed from Jeff Matthews of Ram Partners who raises these questions in a recent short interview on TechTicker:

tech-ticker

Additionally, for those who have not listened to the ten minute interview Tom Lauria provided Frank Beckmann on WJR Radio, I will provide my recap and link here:  Is Barack Obama Going Tony Soprano?  This interview is a MUST LISTEN!!

LD

  • fiscalliberal

    My view of the bond holders is they loaned money to a corporation with the promise of payback. The bond holders were not part of managment or the union all of which could affect the way the company was run. They were passive bystanders. To be certain the outcome of this will affect the propensity of people to invest in bonds, if nothing else raise the premiums because of the increased risk of default ala auto and others.

    So – this will affect not only direct bond purchasers, bu the mutual funds who hold bonds. The unintended consequences of this action is going to be much more than anticipated. Ruling against the bond holders will slow the recovery as people will not invest as redily in coporations with any risk.

  • EXACTLY!!!! Trampling property rights and violating contracts do not occur without real costs. You hit those costs right on the head.

  • bonddadddy

    so how in hell does the CEO of the biggest bond fund on the planet still claim he’s proud he voted for Obama and still supports him ?!?!?! ……. if i was a pension fund long billions in high grade corps worried about their value getting trashed as some wannabe media whore in DC prances around trashing contract law with ‘ the end justifies the means ‘ populist logic , i’d be calling Gross suggesting he should start expressing regret for what he helped unleash on the bond markets , not still proud of it .

    Lastly , as today’s disasterous 30yr bond auction shows us , bond markets can trade off and yield curves steepen like crazy despite clearly weak economy when idiots in DC try and issue far more debt than markets will buy at reasonable levels .

    Given the amount of UST and FNM/FRE bonds that PIMCO owns , he ought to be quite nervous about the prospect of 30yr bonds gapping up towards 5% which is all but inevitable given their need to issue lots more UST to fund the madness in DC . If risk free rates go spiking higher on oversupply , thats going to have harsh effects on PIMCO .

    • David

      Spot On! It certainly gives one an opportunity to explore the possibility of some other security replacing the current proxy for the Risk Free Rate.






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