Glenn A Knight

Glenn A Knight
In my study

Sunday, May 3, 2009

Running On Empty

The attached column by Daniel Gross is entitled "The Scary Rise of the 'Empty Creditor.'" I'll let you read the article to find out the technical definition of "empty creditors." The point on which I wanted to comment concerns Chrysler. Last week, certain hedge funds and other investors forced Chrysler into bankruptcy by not signing onto a deal in which they would have received stock for their debt. Having been through the WorldCom bankruptcy, I can tell you that it is normal behavior for creditors to take equity in exchange for their debt. In fact, one of the odd things about bankruptcy is that the stockholders lose all their equity on the front side, while the creditors receive equity on the back side. Thus the ownership of the firm completely changes hands.

In any event, I thought the Chrysler story was odd, and President Obama obviously didn't think that these investors had the interests of the company at heart. This article offers a possible explanation for their behavior.

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