The Bondholders Crack

Looks like GM's bondholders jumped aboard at the last minute:

The revised offer to the holders of $27 billion in unsecured GM bonds amounted to a take-it-or-leave-it ultimatum: Go along with what the government auto task force's proposal or be left holding the assets a new GM doesn't want — ones with presumably little value at all.

In addition to the 10 percent of the stock in a newly formed GM that was originally rejected by bondholders, the new offer would give them warrants to acquire an additional 15 percent stake at a deep discount. That would come only if they agree to support selling the company's assets to a new company under bankruptcy court protection.

Basically, the government made them an offer they could not refuse. I think they got a worse deal than Chrysler's bondholders.

As long as I view this as basically an extension of the stimulus package, I think I can live with it. But I still worry about the autoworker pensions coming out of these bankruptcies. That hasn't been well-defined just yet. And this isn't pleasing:

"We will come out of this rid of some of the historic legacy costs that have been dragging us down for the last 20 years or so," GM Vice Chairman Bob Lutz said Thursday at an Automotive Press Association luncheon in Detroit. "We will come out of it with an all new focus on product development."

I guess the retiree health fund gets a piece of the company in this deal, so maybe they can save something for the workers. But really this is just a bad scenario, especially if it fails to save GM or Chrysler. It's hard to feel good about these deals.

Stupid Unions, Getting Their Contractually Obligated Retirement Health Care

We have another meme about the Obama Administration's Chrysler deal - they gave the union the farm.

Labor unions usually dread bankruptcy, and for good reason. Their pay, benefits and pensions typically suffer significant cuts, as airline and steel workers can attest.

But for the United Automobile Workers union, Chrysler’s Chapter 11 case, which began in New York on Friday, could turn out to be — if the company survives and thrives — the Cadillac of bankruptcies.

The U.A.W., for example, has received upfront protection from the Treasury Department for its pension plan and the fund that will take over responsibility for retiree medical benefits.

Moreover, that fund, called the voluntary employee beneficiary association, or VEBA, will control 55 percent of the equity in the new Chrysler once it emerges from bankruptcy, and hold a seat on the Chrysler board.

That's because they made a deal with Chrysler beforehand, as did practically everyone but the vulture funds. So this is not a traditional bankruptcy. Emptywheel cuts up this nonsense:

Now to be fair, there is a germ of truth in this article: the poor little hedge funds purportedly being strong-armed by the union do hold debt that takes precedence over the VEBA (retiree health care) fund. In relative terms, a tiny bit of it. But that's their problem, not that the evil union stole their money, but that the larger secured debt-holders have a big enough share of the debt to be able to make a deal without them; as masaccio explains, it's called cramdown, and it's not unusual. The key to Obama's deal is not any allegiance to the union--tens of thousands of jobs are going to be lost in this deal even in the best scenario, and current workers have already made huge sacrifices (see this article for a description of what the Chrysler deal really means for the union members themselves)--but instead due to his leverage over the big banks--JP Morgan Chase and Citi--that have been sucking at the federal teat for the last year, and to those banks' interest in getting the most money out of their investment in Chrysler. I guess those poor little hedge funds should have found stronger big players to associate with, because JP Morgan Chase and Citi's interests are not in the same place as the hedge funds (or weren't after Obama's team started negotiating in earnest). Furthermore, the shills for these poor little hedge funds unions pretend that, without the government intervention they decry, there would be anything left for them to take.

If you believe the unions unfairly got a better deal than those poor hedge funds, you believe that debtholders should be able to take down the economy for their own pleasure and reward. Maybe the bondholder community should take the message before the same thing happens to them on GM as well.

Shrinkage Of The US Auto Industry

It looks now like GM and Chrysler will avoid bankruptcy, by consolidating operations, giving stakeholders a haircut and basically shrinking the size of the American auto industry. Chrysler's biggest lenders reached a deal with the Treasury Department to accept about 28 cents on the dollar for the company's debt. Add this to their deal with the UAW forcing them to accept losses, and an imminent deal with Fiat, and the automaker will presumably meet the requirements to borrow another $6 billion in federal assistance.

As for GM, they're essentially shrinking their output, cutting brands like Hummer, Pontiac, Saab and Saturn, and closing up to 1,000 dealerships (though that's on top of what could be another 1,600). That's likely to put 130,000 people out of work at least.

Emptywheel has this to say about the GM restructuring:

That said, today's plan finally gets around to cutting the number of dealers that GM will need to cut to turn itself around--they're talking of closing 2,600 of their 6,200 dealers across the country (did I say tons more job losses?).

On a conference call with GM CEO Ray Young, I asked how they were going to pull this off--was the government going to help them get out of their contracts? As a later questioner noted, the elimination of the Oldsmobile dealers was a very costly process. Young basically said that GM now could use the Oldsmobile process as a lesson in how not to do things.

That said, Young wasn't prepared to explain how GM plans to get out of 2,600 dealer contracts without billions in costs. The government is not going to help--so this is still an area where bankruptcy would offer an advantage to GM over this restructuring. Young said the impacted dealers would be approached over the month of May, and dealers would be wound down over 2009 and 2010. One of the reasons for the big factory idling, he explaned, was to help dealers sell down stock before they closed up shop (which means dealers may be able to pay off their debt before closing their business.

I'll again point out that it makes perfect sense to shrink the part of the American auto industry that makes AUTOMOBILES, but not to shrink the companies that could make other useful durable goods; namely, wind turbines, high speed rail cars, and other factory-produced items. Why can't GM and Chrysler get in on those contracts? Why would we build up new factories instead of retooling the ones we have?

Haggling With Taxpayer-Owned Companies

This is a maddening enough situation when you isolate it, but keep in mind that the government has kept these same banks afloat with hundreds of billions of dollars in capital.

The Obama administration has entered a tense showdown with several of the nation’s largest banks that appears likely to determine whether Chrysler survives.

Last week the Treasury Department, which runs President Obama’s automobile task force, presented banks holding $6.9 billion in Chrysler’s secured debt with a plan under which they would get about 15 cents on the dollar, or about $1 billion.

That is roughly the trading level of Chrysler debt in recent days, a reflection of Mr. Obama’s declaration that the firm is not viable on its own, and must put together a partnership with Fiat or go out of business [...]

On Monday the banks, led by JPMorgan Chase and Citigroup, rejected the administration’s plan outright, with some of the debtholders arguing that they would rather break up Chrysler and sell its assets — notably its Jeep brand — because they believed that they would receive more money selling the assets than they were being offered by the administration.

The lenders offered 65 cents on the dollar and a 40% stake in Chrysler, and the government has now counter-offered with 22 cents and a 5% stake in the reorganized company. The union is sitting on the sidelines at this point.

Can I just re-emphasize how ridiculous this is? For all practical purposes, we own the banks that are haggling with us. And this isn't the only area in which the banks are using our money to show leverage over our government. Among the millions of dollars in political lobbying, the banksters are stopping progress on consumer bills:

The banks have made it difficult for Congressional Democrats and the White House to give stretched homeowners a stronger hand in negotiating lower monthly payments on mortgages and to prevent credit card companies from imposing higher fees and interest rates.

Having won some early skirmishes by teaming with Republican allies, the banks now appear to have the upper hand and may wind up killing — or at least substantially diluting — both pro-consumer measures.

I don't think they'll stop the credit card bill - the President has personally stepped in on that one and I expect a decent bill to pass, the way it did yesterday - but cram-down does look dead, with key Democrats jumping ship. James Kwak correctly sources my anger.

The banks leading the charge over Chrysler: JPMorgan Chase and Citigroup. The banks opposed to cram-downs: Bank of America, JPMorgan Chase and Wells Fargo. The banks blocking credit card protections: American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, and JPMorgan Chase. All or almost all are bailout beneficiaries. But don’t blame them: they’re just doing what they can to maximize their profits at the expense of the taxpayer, which is perfectly legal (and even ethical, depending on your conception of shareholder rights). Instead, you should be wondering why they are in a position to be maximizing profits at the taxpayer’s expense.

If you’re Tim Geithner or Barack Obama, you’re probably thinking that now would be a nice time to have a controlling interest in these banks so they would stop blocking your efforts to help the rest of the economy. But the government has consistently bent over backward to avoid gaining control over the banks. It began with Henry Paulson (Bush administration) taking non-convertible, non-voting preferred shares last October; it continued with the Citigroup and Bank of America bailouts in November and January (during the transition period), in which the banks got underpriced asset insurance in exchange for more non-voting shares; and it peaked in the third Citigroup bailout in February, when the Obama administration insisted on forcing other investors to convert preferred shares into common, precisely to avoid getting a majority stake.

If the government had simply accepted the ordinary consequences of its actions - majority ownership - it would at least not have to plead for favors from Citigroup and Bank of America, who desperately needed help on any terms the government chose to dictate. Arguably JPMorgan and Wells are in a different situation, since the government was never in a position to buy a majority stake, and they are claiming they only took TARP money as an act of patriotic solidarity. But leaving aside TARP capital, the government has gone to extraordinary lengths to protect the financial system - guarantees on money market funds, increased guarantees on deposits, guarantees on bank debt, massive programs to lend against or purchase securities, not to mention the AIG bailout conduit - without which none of these banks would be in a position to make a profit. Yet it has left the banks in a position to capture the entire surplus from its actions, without getting the kind of concessions that would come in handy now.

When government takes its own tools away from itself, this is the consequence - a society governed by oligarchs.

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.

JP Morgan Chase Greedier Than The Actual J.P. Morgan

Marcy Wheeler has been all over the effort by top banks who have been bailed out by the US government pushing Chrysler into bankruptcy by resisting pressure, as bondholders, to cut the carmaker's debt. Apparently there are a number of reasons for this.

The J.P. Morgan position, said these people, is that concessions by Chrysler's creditors should be treated as they would be in a normal bankruptcy -- meaning the billions of dollars of government debt and the UAW retiree health-care obligation should be wiped out before the secured lenders lose anything on their $6.8 billion.

In other words, JP Morgan Chase would be able to jump the line, as in a bankruptcy, and get repaid before US taxpayers and retirees. This is the same bank that's accepted at least $25 billion in public money, through TARP payments, AIG counter-party funds, and more, just to survive. But that's not all. A bankruptcy would cause, in Marcy's estimation, the loss of over 200,000 Chrysler jobs. You would think that a bank with substantial outlets in Michigan wouldn't want to see 200,000 unemployed Michiganders without the ability to deposit money into their Chase bank accounts. But they've got that covered.

JP Morgan Chase has figured out a way to profit off all the unemployed people it is creating in Michigan. Chase, you see, provides Michigan's unemployment insurance debit cards.

And the services can end up being pretty expensive for beneficiaries. Here's what Chase charges (and will be able to charge those that it causes to lose their job) for use of their debit card.

More than two withdrawals in a 2-week pay period: $1.50 each

Non-Chase withdrawals: $1.50 each

More than one bank teller withdrawal in a pay period: $4.00 each

Transaction denied for insufficient funds at POS, ATM, or teller: $1.50 each

More than one ATM balance inquiry in a pay period: $1.00 for each

Statement delivered by regular mail: 95¢ per statement

Granted, if an unemployed person manages their meager finances well and has Internet access (those inquiries are free), they probably can get by on one weekly withdrawal. But if someone loses track of their spending or doesn't have Internet access or likes dealing with human beings, these fees are going to start to take a huge bite out of what little they get.

Though debit card users can spend all they want in stores. As with Chase customers normally, Chase loves when you use your debit card at stores, because they get a bigger fee from merchants (back in the day when we still banked at Chase, that's what the Chase guy told me) than if you use a credit card. They're profiting coming and going.

The word "conflict of interest" fails to describe JP Morgan Chase at this point. And so if they want to force workers onto the street while keeping corporate welfare for themselves, consumers have a choice as well. They can cut up their cards.

My husband and I decided the only way to pressure JP Morgan Chase to negotiate in good faith with Chrysler was to close our Chase accounts. We want our money to go to a bank that is investing in rebuilding Michigan--not bankrupting it.

Now, FDL and Progress Michigan are calling on others to join our Chase boycott.

Sign the petition

Join the FaceBook group

Find your Michigan Chase branch and close your account

We don't have much more than our purchasing power at this point. Help out if you can.

The Bondholder's Gamble

President Obama characterized the withholding of funds to GM as a chance to give them 60 days to submit plans for further restructuring, but clearly he has already decided that he would rather try an accelerated bankruptcy to force haircuts on all the key stakeholders. It looks like that will take the form of a good GM and a bad GM.

The Obama administration's auto task force has pressed General Motors to consider a form of bankruptcy that would split the company in two, with one entity containing the unprofitable units and the other in essence becoming the new GM consisting of the company's more successful brands, people familiar with the matter say.

The company prefers not to ever enter bankruptcy because the mere word would stir fear among consumers and further damage sales. But GM will be forced to do so if it fails to win concessions from its bondholders, union and dealers within 60 days. Then bankruptcy court would compel GM stakeholders to make sacrifices, rehabilitating the company by clearing away billions of dollars of debts from its balance sheet.

"They're all options. They're all being studied," Kent Kresa, GM's new chairman, said in an interview. "The preferred [option] is to do it outside of bankruptcy."

You would think this would be the last outcome sought by the bondholders, as their stakes would be crammed down in a bankruptcy court. However, I wondered earlier whether they think they have a better shot from a judge than from a negotiation. And Autoblog reports on another potential reason - they could cash in their credit default swaps.

The bondholders appear to be the biggest obstacle to restructuring. They're not allowing GM to reach its government-mandated target for debt reduction because they would lose much of their investment in the process. According to Denninger, however, the biggest and most savvy of those bondholders could get 100% of their investment back if GM files for bankruptcy. Those bondholders would have had their bonds backed by credit default swaps (CDS), which Denninger supposes would have been written in large part by insurance giant AIG. If that's the case, then we the taxpayers are on the hook to repay 100% of those bonds because the government has agreed to fulfill AIG's CDS collateral obligations.

Thus, these particular bondholders would have no reason to help GM stay afloat by reducing its debt obligations. If GM goes under, they would just wait for checks from the government to be made whole again. Denninger goes on to say that in such a scenario, these bondholders could make even more than 100% of their investment back because the government backing takes place "even if the bonds have a recovery in bankruptcy." The only way to stop this would be for the government to decline to back any more AIG obligations, which could then bankrupt the "too big to fail" AIG depending on its ultimate exposure, but would save GM. Decisions, decisions...

Wow. Just, wow.

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.