Chrysler Bankruptcy
Stocks started up today, but ended slightly down as the weight of the Chrysler bankruptcy caused some pessimism.
Bonds continued their interest rate climb, and is now at scary levels as the 10 Year Treasury interest rate is continuing well beyond the 3% bound.
The Dollar, oil, gasoline and gold continue to be in their sideways tracks with no obvious bias for up or down.
In the news today….
Consumer Spending – fell 0.2% in March, and surprised the analysts. This was read as a negative sign for the economy. I warned yesterday that GDP would be revised later downward as actual consumer spending numbers came in. This is the first one.
Consumer Savings – rose to 4.2% from 4.0% in March. This is the reason consumer spending is going down as income is not increasing right not to take up the slack. An increased consumer savings rate is a great thing for the future of the US economy. This is the money that will be used to rebuild the industrial base into something that reflects the 21st century.
Jobless Claims – were 631,000 last week. While this is slightly down from the previous weeks, it still represents a level where there will be an increase in the Unemployment Rate when it is next announced.
Mortgage Rates – the 30 Year Fixed Mortgage Rate hit 4.78% a low since Fannie has been keeping records (1971). The rise in the 10 Year Treasury normally would signal that this mortgage rate will be going up in the near future.
Tonight’s Dinner Conversation…..
President Obama announces that Chrysler will be placed in bankruptcy, or Chapter 11 protection, and will give Chrysler a bundle of money ($8B) more of your money to keep it afloat as it negotiates with Fiat. Ho Hum…
Here is the real issue. The Chrysler bondholders did not agree to a deal that the government wanted them to take. They were asked to take 30 cents on the Dollar for their bonds. These bonds are guaranteed through counterparty derivatives. In other words, they are guaranteed by a third party if Chrysler doesn’t pay. AKA a Credit Default Swap.
What happens if these bondholders go into bankruptcy court and lose some value? Will the counterparties pay? If the counterparties are required to pay, does that bring down some big companies?
What happens to the counterparty risk associated with GMAC if GM goes under?
Here are the last numbers for today:
Dow Jones 30 Industrial – 8168 (down 18 points)
10 Year Treasury Bond – 3.12% (up 0.03%)
Euro – $1.3225
Gold – $891 (down $9)
Oil – $51.03 (up $0.15)
Gasoline – $1.45 (up $0.05)