Democrats in congress and President Obama have proposed re-writing existing contracts in two instances: for underwater mortgages and for Chrysler's bondholders.
If the bankruptcy judge decides in favor of President Obama, it is easy to predict an increase in the rates at which creditors will lend to borrowers in unionized industries.Typically, lenders who make money available to a company in return for a first claim on the company's assets get about 80 cents back for every dollar they lend should it hit the rocks. Others to whom the company owes money, but who have no claim on the assets -- workers, suppliers, junior lenders -- get much less.
Yet Obama forced the senior lenders to take something like 30 cents for every dollar they'd lent Chrysler. Many lenders -- the big banks who'd taken federal bailout money -- rolled over. But some hedge-fund managers pointed out that they have a legal, fiduciary responsibility to do the best they can for their investors (which include pension funds) and decided to take their chances with a bankruptcy judge.
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