Tuesday, April 28, 2009

GM won't go into bankruptcy

From one of my favorite publications The Economist this afternoon Two passages of interest:

IN DECEMBER, when GM secured a large slice of government bail-out funds to keep it alive, the giant car company was jokingly dubbed Government Motors. The company’s latest—and most sweeping—restructuring plan, announced on Monday April 27th, could make the joke a grim reality. GM had until the end of May to present proposals to persuade America’s government to release billions more of taxpayers' dollars to keep it from the bankruptcy court. GM believes it has done the job already with a plan that gives the government a 50% stake in the firm. Now the important deadline is May 26th, by when the company’s creditors are supposed to agree to a deal which treats them far less generously.

This my friends is why Rick Wagoner had to go. No CEO worth his golden parachute would have devised a plan such as this; this makes GM a ward of the state and essentially launders taxpayer dollars to be paid out to the UAW through dividends and the continuing support of taxpayer dollars.

Despite protestations from the White House that the government had no desire to own or run a big car company, the politicians may have little choice but to get involved, if the deal goes through in its present form. The alternative might be to cede control to the UAW, the second-biggest shareholder, which is hardly blameless for GM’s current parlous state. Rumours also abound that a similar deal to avoid bankruptcy at Chrysler would see the UAW take a 55% stake in America’s third-largest homegrown car company. If so, it is unclear whether further concession from unions, if they are needed at the two carmakers, would be easier or harder to extract.

Standing in the way of restructuring outside of the bankruptcy courts are GM’s aggrieved bondholders. GM wants holders of just over $27 billion in unsecured debt to swap it for a mere 10% of shares in the company. If debts cannot be cut by 90% then GM will file for Chapter 11 bankruptcy protection. Bondholders smell an unsavoury deal cooked up between the UAW and Barack Obama, who had the union's support in last year’s election. Early signs suggest that the bondholders may conclude that they will do better to hope for a bigger pay-out in bankruptcy rather than agree to a deal on these terms.

It may be that by announcing the proposals early GM has left time for renegotiation with the bondholders. But the ferocity of their initial disapproval suggests that small sweeteners will not persuade creditors to change their minds. Bondholders face the prospect of a small stake in a clapped out car company run by a union-friendly government with a zeal for green cars that may not have much of a market. With that as an alternative, a gamble in a bankruptcy court may seem quite appealing.

If I were a bondholder in GM, I would hold off and allow them to go into bankruptcy court. Of course, with the way that we saw the FEDS handle the transaction of Merrill Lynch to BofA, the question becomes will the FEDS hold the bondholders feet to the fire in their quest for a "green" car company.

Read the article here.

I believe that this video covers it all.

Video H/T to Iowahawk

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