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Commentary Detail

More Hardship from Auto Industry Downturn
Commentary by: Tom Schlafly
Aired June 08, 2009


St. Louis has suffered more than most cities from the downturn in the automobile industry. We have lost assembly plants and lots of dealerships throughout the area. Ironically, the government plan to save the industry is likely to cause even greater hardship, at least for some people.

Consider the plight of people who own bonds issued by automobile companies. Most of them paid a premium for what they thought was a safe investment, perhaps to fund their retirement. These bondholders have been pressured to give up their legal rights as secured creditors. They will now have to settle for a small fraction of what they are owed by the automobile companies.

Some of these bondholders are also debtors. Some of them owe money on loans they took out to buy American cars. Some may have depended on income from the bonds to make their car payments. They still have to pay 100 cents on the dollar plus interest on their loans.

Secured debt is designed to provide legal protection for lenders. Companies that finance automobile purchases depend on this protection. Until very recently people who bought bonds issued by automobile companies could also depend on it. No longer. The government plan to rescue the automobile industry has created a double standard for secured creditors. Consumers who borrowed money to buy cars remain fully obligated. If the same consumers bought corporate bonds to fund their retirement, the companies that issued the bonds and sold them their cars are not obligated.


(The opinions expressed are not necessarily those of St. Louis Public Radio.)

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Tom Schlafly

Tom Schlafly

Commentator

Tom Schlafly is an attorney in St. Louis.

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