...the talking heads on CNBC have a lot of talent. But knowledge and experience with the laws governing lending, the pledging of collateral as security, and bankruptcy are NOT among them.

They were correct in saying that a "secured" loan does not necessarily mean that its repayment is "guaranteed". I'll give them that much.

But they confused their viewers, including Kayaker apparently. Let me amplify what legal rights the secured lenders have (had) and what is actually happening in this bankruptcy.

• A syndicate of lenders made a $6.9 billion loan to Chrysler.
• Chrysler pledged all of their assets (plants, equipment, inventories and intellectual property) as collateral for the loan.
• Filings documenting the pledge of the security were filed in each state where the property existed.
• As the result, the senior secured lenders placed themselves in a position senior to all other unsecured lenders, including suppliers, lessors and any of the expenses accruing to payments to their employees or obligations under the UAW contract.

The bottom line is that the senior secured lenders had every right to anticipate that under both state and federal commercial law, and under the laws of bankruptcy, their loans would be repaid before any of the other obligations due unsecured creditors.

Realistically, that's not the way it always works. If a debtor company files for protection from it's creditors under the bankruptcy laws, the company is not obligated to pay either principal or interest on those debts until ordered to do so by the bankruptcy judge. Typically such orders are issued based on negotiations between the creditors, or at the very least filings with the judge for him to make a decision on payment or partial payment.

I should mention that there can be one creditor that can trump even a senior secured creditor. That is the lender(s) who provide debtor-in-possession (DIP) financing. The DIP lender provides what is essentially working capital loans to the company so it can continue to operate while it is reorganized in bankruptcy. While I don't think that the federal government legally placed itself in the position, it is essentially providing DIP financing by providing the auto companies and banks with money. But in the case of Chrysler, GM, some auto suppliers, all the banks and insurance companies, etc., the position that the government took was as the purchaser of preferred stock. In bankruptcy, that means that the preferred stockholders would be paid after both the secured and unsecured debtholders, but before the common stockholders. Typically, after the debtholders are repaid, even a portion of their loans, there is nothing left for distribution to the preferred and common stockholders.

What happened with regard to Chrysler seems pretty straightforward. Once the administration made the political decision that they would not permit the auto companies to fail, then the last place they wanted the Plan of Reorganization determined was in the bankruptcy court. There is a perfectly reasonable expectation that the creditors would never reach agreement within and among themselves, leaving the government to continue to pour money into Chrysler to keep it afloat. What was needed was a "pre-packaged" bankruptcy, where the company and the creditors had signed off on a plan before actually filing for bankruptcy protection.

To accomplish that would take all the influence that could be provided by the government--and that can be significant. I am quite certain that the administration leaned on Chrysler to agree to what they did (reduce the value of the equity to -0-, sell to Fiat, get rid of the CEO, dump hundreds of dealers, reduce car lines, etc.) Similar pressure was clearly applied to the secured and unsecured lenders.

What pressure you might ask? My short list would include increased regulation and a witholding of more bailout money to the banks, the threat of unsavory new regulations, the threat of tax audits on the companies and their management, actually firing the bank management, you name it. Take note that the only secured lenders who resisted were hedge funds and money funds which had not taken any TARP money from the government. The syndicate's lead banks had taken a collective $90 billion from the Fed in TARP distributions. They were almost certain to do precisely what the Fed wanted them to do, including accepting a far lower repayment of their loans than might ultimately result if Chrysler were liquidated. The last of the secured lenders to cave in said, ""Being such a small group trying to fight the force of the government made us very uncomfortable." That pretty much says it all.

The government can be an overwhelming opponent if it so chooses. In the case of Chrysler--and GM in the near furure--the last thing the administration wants is a bankruptcy filing before a plan of reorganization is agreed to and documented. That simplifies the role of the bankruptcy judge and limits the risk of calls for more and more money from the government. If you closely read the statements of the last few secured lenders who succumbed to government pressure, it was quite clear that they abandoned their solid legal position under the threat of political pressure.

Now back to my "fairness" question. The government didn't ask much, if anything, from the UAW. Those folks were both big political contributors and they are voters!

So my question remains--was the "settlement" fair?

Actually, there's another couple of questions. Will the Chrysler and GM bankruptcies cast a permanent shadow over the rights of lenders under our rule of law? WIll lenders continue to lend to these kinds of companies if it's demonstrated that they cannot rely on our commercial laws to protect their positions. It's pretty clear that these bankruptcies will result in the political administration stomping all over the legal rights of parties to commercial transactions. Will they do it again? Can lenders rely on their contracts? The fallout of this will be a whole lot more important than whether the UAW survives or whether we can continue to by Dodge trucks.

The CNBC reporters haven't mentioned it...yet. But the Chrysler and GM bankruptcies will have a permanent and negative effect on U.S. commercial law.

And Steve, if the financial community concludes that it cannot rely on our rule of law, there won't be anyone except the government to finance those companies making the horse carts and merry-go-rounds. The good news is--that's a business the government could easily enter--they certainly own enough banks.