Obama screws the GM bond holders

Opinion Journal:

President Obama insisted at his press conference last night that he doesn't want to nationalize the auto industry (or the banks, or the mortgage market, or . . .). But if that's true, why has he proposed a restructuring plan for General Motors that leaves the government with a majority stake in the car maker?

The feds have decided they should own a neat 50% of GM, yet that is not the natural outcome of the $16.2 billion that the Treasury has so far lent to the company. Nor is the 40% ownership of GM that the plan awards to the United Auto Workers a natural result of the company's obligations to the union.

Yet Secretary Timothy Geithner and his auto task force, led by Steven Rattner, have somehow decided that Treasury and UAW chief Ron Gettelfinger will get to own a combined 90% of GM. If there's a reason other than the political symbiosis among the Obama Administration, Michigan Democrats and the auto union, it's hard to discern. From now on let's call it Gettelfinger Motors, or perhaps simply the Obama Motor Company, though in the latter they'd have to change the nameplates.

The biggest losers here are GM's bondholders. According the Treasury-GM debt-for-equity swap announced Monday, GM has $27.2 billion in unsecured bonds owned by the public. These are owned by mutual funds, pension funds, hedge funds and retail investors who bought them directly through their brokers. Under Monday's offer, they would exchange their $27.2 billion in bonds for 10% of the stock of the restructured GM. This could amount to less than five cents on the dollar.

The Treasury, which is owed $16.2 billion, would receive 50% of the stock and $8.1 billion in debt -- as much as 87 cents on the dollar. The union's retiree health-care benefit trust would receive half of the $20 billion it is owed in stock, giving it 40% ownership of GM, plus another $10 billion in cash over time. That's worth about 76 cents on the dollar, according to some estimates.

In a genuine Chapter 11 bankruptcy, these three groups of creditors would all be similarly situated -- because all three are, for the most part, unsecured creditors of GM. And yet according to the formula presented Monday, those with the largest claim -- the bondholders -- get the smallest piece of the restructured company by a huge margin.


GM, the government and the bondholders all insist that a bankruptcy filing would be a disaster. GM's SEC filing on the debt-equity swap also warns darkly that if the requisite 90% of bondholders don't agree to these terms, they may recover little or nothing in bankruptcy court. But given the choice between a 10% stake in Gettelfinger Motors and the independent mercies of a bankruptcy judge, bondholders could be forgiven for taking their chances in court.

I still don't understand why the bondholders don't force GM into a bankruptcy. They have the power to do so and even if they had to take the company into a Chapter 7 liquidation to do it, it would give them the leverage to get a fairer deal from the government and the unions. These bondholders also include pension funds and other institutional investors that deserve the same deal as the union pension fund. In fact, they deserve a better deal since the unions are one of the reasons GM is in the mess to begin with.


  1. I think it may very well work out for the bondholders in the end - either way.

    A.)This horribly lopsided plan that would grant so much to those who actually possess relatively smaller stakes, and so little to those who actually have larger stakes would probably not be viewed any more favorably by a presiding bankruptcy judge than it is viewed by most reasonable thinking people. Therefore, I think the judge would arrive at a more equitable solution to this dilemma. Or . .

    B.) Obama just may be bluffing with the bondholders, trying to frighten them into this gross form of submission. But possibly at the last moment 'sweetening the pot' as they did with Chrysler.

    But I don't think he is bluffing because they set such a hard line stage for inevitable failure by insisting that 90% of the bondholders comply with their 'offer' or else.

    If Obama is not bluffing, he may be more ignorant than I thought. A real GM bankruptcy could be much more catastrophic to all parties involved. His precious UAW members may not end up with the same piece of pie that he intended them to have, and he may not get his pie either.

    A judge, who has devoted his or her entire life to the 'rule of law' is not going to rubber stamp Obama's plan for the survival of GM simply because of presidential brow beating. It didn't work for Bush either on several occasions. And no one that I can think of in recent history has had more power, influence and strong arms in their respective administrations than Bush.

    A judge is human, and I think that deep down may even enjoy that occasion when he or she has the rare opportunity to overrule the will of a sitting president. They have the power to make history one way or the other.

    Certain members of this auto task force, and certain talking heads seem to over simplify and attempt to vilify the GM bondholders as if they were an isolated entity all to themselves. They assert that we need to protect other 'isolated' groups to greater degrees - the UAW members, and the taxpayers. But is it not true that many of the bondholders may in fact also be union members both active and retired? And is it also not true that GM bondholders may also be taxpayers?

    The plan that GM and the auto task force devised for the survival of GM may not be the best plan to accomplish that goal. There are other perhaps more viable options. I think the bondholders have already provided one. Let's all hope together that some semblance of an old concept called 'common sense' returns to America one of these days, and hopefully before May 26.


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