Major bond holders of GM and Chrysler are saying they are not getting enough value for the loss of their holdings in the Auto Manufacturer Bankruptcies.

It is important to understand who these bond holders are and why they need to get as much money as they can in the deal.

Large brokerages, investment banks, pension funds and other businesses that need to invest their profits lent GM and Chrysler money and in return they received a Bond. This is  the simple way to look at it. Bonds are basically loans.  Unlike Stock where you own part of the company and your investment is at total risk from outside influences the purchase of a bond is an agreement between the bond holder and the company that sold the bond.

Yes bonds can be openly traded but their value unlike stock rarely changes much. Unlike stocks bonds can be recalled by a company that finds they have enough profit to buy back some of their debt.

Bonds are used by companies to get money for things like new equipment and buildings.

For short term loans companies will go to banks. Bonds are usually outstanding for about 10 years.

Instead of paying interest to a bank the company issuing the bond will pay dividends or coupon payments once a year or more often at a percentage of the bonds value. Bonds usually offer better returns then a Savings Account or CD so sometimes you will see private investors that purchase single bonds or groups of bonds that are often valued at $1000 per bond.

Ok so where is the risk?

In Stock the value can go up or down based on anything… If britney spears gets in trouble everyone might sell all their General Electric stock and your investment is lost.

If People do that with bonds your bond may lose some resale value above par which is its $1,000 face value but you will never lose the principle.

People will often give you over face value for a bond if it is giving a good yearly payment.

THIS IS WHAT OUR INVESTORS DO.

They structure investments for large pension or retirement funds …. 401ks or whatever and market them as an investment that employees can put their money in.

The only risk is when a company goes bankrupt.

If the company does go bankrupt the Bond Holders have a pretty good chance of getting paid a good part of the face value of the bond if all the equiptment and buildings and other parts of the company are sold.

If a company goes bankrupt and you are a stock holder you lose everything.

So How does that effect me you say?

There is a very good chance that the tens of billions of dollars that are outstanding in bonds from GM and Chrysler are part of your retirement package. If your investors lose that money then you lose your retirement money.

Additionally if as President Obama wants … those bonds are converted to Stock as a percentage of ownership then the mutual fund or other investment is now TOTALLY at risk and probably will not comply with the terms of your investment.

This means although the investment bank or individual company that does their own investing may get some stock out of the deal they will have to replace that value in total to make sure your investments are safe.  The stock is of no value and they will have to buy bonds from another company to put in your retirement package.

If by some miracle in 5 or 10 years the stock becomes worth something then your investment manager could make some money but in the mean time they must find the funds to replace the value of the bonds that were in your account.

That is IF THEY TAKE THE DEAL.

If they do not take the deal they will get maybe 50% on the dollar and then they will write off that other 50% against other investments they hold.

The Bond holders are saying it is better to have a Bird in the hand then President Obama stealing your retirement.

This is true. All of us have seen some pretty scary reports about our investments and our banks in the past year or so.  If the Bond holders do not get the best value they can be sued by investors.

This will make life even harder and our banking system that is now just beginning to get its head out of the toilet will soon find its self flushed into the septic tank of the Federal Government.

So this effects us all. Even if you personally do not invest in GM or Chrysler you can bet your company does or your retirement investment services are holding bonds or your school district’s pension plan or a company that you do business with….

It is just another 50 to 100 billion dollars that President Obama has magically made disapear. Unfortunately its not the guy down the street who builds houses or works in the car factory.. this time…. its everyone who has savings or even debts of any kind.