The Obama School of Business, er, Redistribution

In the good ole days, when business schools taught corporate capital formation, they always taught that in a liquidation through bankruptcy, the money received by the trustees was distributed in the following order

1) Secured debt holders
2) Bondholders
3) Preferred stockholders
4) Unsecured debt holders
5) Common shareholders

Well, that was until Obamanomics. By essentially moving the order around to accommodate political constituencies, the Obamunists created a new playing field.

How? Assume you are a bond holder. In a traditional investing strategy, bond holders are willing to take less of a return for more security.

As we've seen from the Chrysler deal, bondholders now assume the risk of common shareholders with none of the upside.

Since bondholders now have increased risk related to their investments, what will be the outcome of such?

1) Bondholders will demand higher returns which results in increased costs of capital to a company.

2) Bondholders simply will not loan to companies in difficult financial situations since they cannot be assured of the first out in a liquidation.

If you want to believe that's a bunch of bunk, you need look no further than the state of Indiana's pension fund who decided this week to not invest in any bonds related to banks and auto companies.

Indiana will no longer invest in bonds issued by banks and automakers who receive federal bailout money.

Bondholders are supposed to be at the head of the line for repayment if a company goes bankrupt. But State Treasurer Richard Mourdock says the government rewrote the rulebook for the Chrysler bankruptcy, leaving investors with 29 cents on the dollar. Mourdock says that cost state investment funds $5.6 million.

Mourdock has lodged an objection to Chrysler's restructuring with the bankruptcy judge hearing the case, making Indiana the only one of the automaker's creditors to do so.

Mourdock says the state won't sell bonds it already holds -- he says that would lock in losses. But he's ordering fund managers not to buy any more bonds from Chrysler, GM, or banks covered by the bailout.

Mourdock says the Obama Administration's handling of Chrysler's debt wiped out $896,000 in value from the state's investment of the proceeds from the 2006 lease of the Indiana Toll Road, and $147,400 from the Indiana State Police Pension Fund. Mourdock oversees both portfolios.

Mourdock says the Teachers Retirement Fund, which is administered separately, lost $4.6 million.

Article here.

I guess I'll have to go back to school to get my MRA (Masters in Redistribution Administration) to I can figure out how investors get paid pack.