Test Of Mettle

As part of the federal stimulus package, President Obama will green the federal fleet of vehicles, which makes economic and environmental sense. He's leading by example in that arena, and it's a good thing. Ultimately, however, while 17,600 fuel-efficient vehicle purchases for American-made cars will help in the short-term, the Administration can truly get the backs of the Big Three by cramming down the bondholders, many of whom are big banks who took TARP money.

General Motors is working on a new debt-exchange plan for its bondholders, one that would most likely offer only equity instead of cash or new debt, a person briefed on the proposal said on Thursday.

The new exchange offer, which is being drafted in consultation with the Obama administration’s auto task force, may be announced next week. To succeed, G.M. must reach an agreement with bondholders by June 1, when some of its bonds are due [...]

The task force, led by Steven Rattner, has demanded that G.M. bondholders take a steep discount to the value of their debt holdings. The presidential team has signaled that it would not allow taxpayer money to be used as interest payments for G.M.’s bonds.

Advisers to an unofficial bondholders committee have argued that they are being forced to accept a bigger sacrifice than other creditors. They have also complained that they have met with the presidential auto task force only once, on March 5.

This is where Obama will truly reveal whether he has the interests of manufacturing or the financial behemoth at heart. The bondholders want to force GM and Chrysler into bankruptcy because they figure they can get a better deal in front of a judge. It will take a supreme effort for Obama's Administration to force them to accept a debt-for-equity swap. For all that the US taxpayer has done for the banks, and given all the leverage that Obama actually has but is not using, there is no reason to accept the bondholder demands. We will know where the President stands soon enough.