Not A Threat But A Promise

bAs I see it, the point of President Obama's plan for GM, at least, is to force the bondholders and the dealers to take losses by offering the prospect of a "quick-rinse" bankruptcy. The bondholders are decidedly unhappy.

During the next 60 days, G.M. and its stakeholder have the last opportunity to save the company — or risk letting a bankruptcy judge do it for them. To do so, G.M. will almost certainly need concessions from two groups: workers and bondholders.

The workers, represented by the United Automobile Workers, have made concessions already. And the president said they need to make even more, as painful as it will be. The workers — despite often appearing recalcitrant — have the most to lose. If G.M. falls into bankruptcy protection, they could lose not only their jobs but also much of their retiree health care plan.

Then there are the bondholders. Their motivation is very different. For them, this is not about keeping their jobs or, frankly, about patriotism. It is about dollars and cents. And, according to some analysts, there is a chance they would actually do better in bankruptcy court than they would negotiating against G.M. or the government, which is seeking to reduce G.M.’s debt by two-thirds.

“If I’m a bondholder, the best forum for me is in front of a judge,” said Daniel Alpert, a founding managing director of Westwood Capital, an investment bank. “Let’s face it: the biggest problem at G.M. is still its cost basis, and that’s chiefly labor,” he added, suggesting a judge would look at the situation dispassionately.

80% of these bonds are held by large investors and hedge funds, and the hedge funds at least have been doing quite well of late. They want the best deal, and if they have to drive GM into bankruptcy to do it, they will. In fact, the new head of GM seems resigned to it.

General Motors's new chief executive told CNBC that filing for Bankruptcy may be the best option for the struggling automaker.

In a taped interview to be aired tonight on NBC Nightly News, Fritz Henderson said that because of greater demands from the Obama administration to restructure, GM is considering the bankruptcy option. The auto giant previously had ruled out such a move, saying it would discourage people from buying GM cars [...]

Henderson told reporters that the company would still prefer to restructure outside of court, but the level of support Washington is offering would help the company quickly restructure through bankruptcy.

In the event of a quick bankruptcy, the bondholders would certainly get paid at a higher rate than, say, the pensioners. The legacy contracts would probably be ripped up (but I thought contracts were sacred!). The good news about that is that most of Rick Wagoner's $20 million dollar pension could be wiped out; only $833,000 is protected. The bad news is that everyone else wouldn't have a pension, and keep in mind that the PBGC just gambled away a fortune on Wall Street at precisely the time when they would be a backup on these funds.

I think the White House views the 60-day window before bankruptcy as a threat; the bondholders might see it as a promise.