I’ll also note that the GM bondholders seem to have learned something from the pathetic and idiotic performance of the non-Tarp bondholders in the Chrysler bankruptcy. Rather than run around squealing like a stuck pig yelling that the administration played hardball with them, whimpering on anyone’s shoulder who would listen, the GM bondholders apparently have a two-pronged strategy. First, use Fred Hiatt to issue vague threats:
The administration argues that it could not risk alienating the union for fear of triggering a walkout that could permanently cripple GM. It also posits that it had to agree to protect suppliers and fund warranties in order to preserve jobs and reassure prospective buyers that their cars would be serviced. These are legitimate concerns. But it’s too bad that the Obama administration has not thought more deeply about how its bullying of bondholders could convince future investors that the last thing they want to do is put money into any company that the government has — or could — become involved in.
Second, personalize the bondholder:
I am an American retiree. Like many small investors, I am relying on “safe” investments such as bonds backed by America’s largest companies to fund my retirement. One of these companies is General Motors.
First, let’s set the record straight about who owns GM’s bonds. We are hardworking families, individual investors and retirees who purchased billions of these bonds in $25, $50 and $100 increments. Many bonds were bought directly and others are held in our pension funds, 401(k) plans and other retirement programs.
I purchased GM bonds in 2005 and own $91,000 worth. These bonds account for a very sizeable portion of my retirement income, and so it is absolutely devastating to watch GM’s problems bring the once venerable company to the brink of failure. My standard of living is truly in jeopardy.
So far, I think we can all agree that this is a better effort than having a well-heeled lawyer in a several thousand dollar suit whining about being bullied. Meanwhile, in Detroit:
Bondholders at General Motors on Wednesday rejected an offer to exchange $27 billion in debt for a small amount of stock, as G.M. prepared for a bankruptcy filing that could come as soon as this weekend.
In Europe, the company moved to combine its main operations under the umbrella of Adam Opel, its German business, to simplify the sale of the unit.
In a statement about the bondholders, G.M. did not give vote totals for the tender offer, which began on April 27 and expired at 12:01 a.m. Wednesday. G.M. had required 90 percent of bondholders to agree to exchange their debt, said said Wednesday morning that the notes tendered were “substantially less than the amount required.”
Without approval, G.M. had said it would seek bankruptcy protection. But it made no announcement of its plans. The company said it had withdrawn its offer, and that its board would meet to decide further steps.
I have no idea where bondholders think that $27 billion is going to come from. From what I understand, GM has nowhere near that in assets, they are just bleeding out and would have been dead months ago but for government intervention, and there are people acting like there is money to be had. I simply do not understand the mindset. It just seems pretty clear to me that GM bonds were a bad buy, and if you owned them you are screwed. I know that sucks and it will be traumatic for lots of people, and maybe I am just completely wrong about this, but I don’t understand where the money is supposed to come from. Selling off aging factories in Detroit with long environmental tails? How much would those fetch in today’s market? Am I missing something here? I’m not trying to be sarcastic, I just don’t understand where people think the money is going to come from and where there is any value left in GM.
cleek
from dear old Uncle Sam!
Napoleon
F- the bond holders. They are just trying to screw the taxpayer by holding out. I don’t feel particularly sorry for any of them.
PS, if anyone ever had a question of what the WaPo stands for Fred Hiatt just cleared it up for you in the above quote. They are all for having the government renege on its Social Security commitments but if the government does not allow themselves to be robbed by bondholders, its suddenly some kind of a crime in the WaPo’s eyes.
kwAwk
The money is to come from credit default swaps. If the bondholders of GM volutarily agree to take less than face value for the bonds they hold, the credit default swaps don’t pay off.
If they force GM into bankruptcy and GM defaults on the bonds because of this the CDSs then are payable.
Brandon T
@kwAwk: Where are the CDSs from? AIG? If that’s true, then they’re effectively holding out for a government bailout.
Kevin
Not to be to obtuse about this, but this is the bargain you make buying bonds. You get paid higher than the risk free rate in returns because you assume the risk that issuer could default. Bonds carry risk and if you buy bonds in a shitty company, you get paid higher than average returns because you assume a higher than average risk that the shitty company could default. I think it has been pretty evident to anyone paying even a little bit of attention over the last 10 years that GM’s position was unsustainable.
Investing is not a game where everyone wins all of the time. You make a bad bet and you lose. That’s the price you pay for an extra 5% on your money. The problem is that for the last 20 years, nobody has explained this to most Americans.
Balconesfault
Shhhh… how are we going to sell the privatization of Social Security if people realize that fact?
TenguPhule
It’s the same damn thing Chysler debt holders wanted, government backed bailouts of the debt to give them full value of shit that they bought for pennies on the dollar.
BDeevDad
@kwAwk: Beat me to it
kid bitzer
man, all this whining about the obama administration playing hardball.
which then turns into “chicago-style intimidation!” “chicago thuggery!”, etc. etc.
when is someone going to point out that the obama administration is playing hardball *on the taxpayers’ behalf*?
the reason they are squeezing these fuckers is so that taxpayers will pay less.
hell, i don’t object to the administration’s hardball tactics. i just wish they’d been a little more hardball with the banks.
but any time that they want to stick it to investors in order to reduce taxpayer exposure, that’s fine with me.
you might even say it’s their fiduciary responsibility.
TenguPhule
Look, cutting welfare for stupid old people not smart enough to get guaranteed golden pensions like Hiatt is one thing, but trying to rob vultures of their God Given Right to obscene profits is blasphemy!
-Shorter Fred Hiatt
jrg
Wah, Wah, boo hoo. Last time I checked, we don’t base corporate bankruptcy laws on the goal of feeding (some of the) retired people. That’s what Social Security is for.
I really wish that people could grasp the fact that making sh*tty investment decisions does not entitle one to free government funds.
Balconesfault
Yep – the same people who would happily see the UAW pensions disappear and no health care benefits extended to retirees suddenly get weepy-eyed at the prospect of some investors who put a few bucks into the health of the auto industry – as opposed to their whole working lives – getting stiffed.
kwAwk
Brandon T says:
Yep. That about right.
random asshole
Someone still put most of his (or her) retirement portfolio into a single company’s bonds, even after watching many the major corporate fiascos of the last five to ten years (Enron, Worldcom, etc.)? Have these people never heard of “diversification?” There are plenty of low-cost bond funds out there.
I don’t want to say this person “deserved” this, but it would have only taken ten minutes with a financial advisor to find out why this investing strategy was a bad idea, to say the least.
Zifnab
@kid bitzer:
But only the richest 1% pay 40% of the tax burden – a la Bill O’Reily. Therefore, the guy holding a cool million in GM bonds should get more back from the
governmentcompany than the Union worker who was stupid enough to invest in his company’s health care plan. You know, the health care plan employees can join that make universal health care completely unnecessary.As for Mr. American Retiree… I don’t know what to say to you, good sir, except “That’s Capitalism”. If you don’t like it, move to France where a much deeper and denser social security net will prevent you from living on dog food out of a shopping cart when you choose to retire. Or, I don’t know, vote to improve the bare bones safety net we currently “enjoy”.
Tax payers don’t really matter in conserva-topia. Just the rich.
PeakVT
If bondholders want to be at the front of the line they can pony up the DIP financing. Which is what Uncle Sam is doing. Because nobody else is willing. Which is why it is calling the shots.
In liquidation the designs and dies and tooling would be worth something to the Chinese, but everything else would have little value. Who else but GM would rent out the Renaissance Center?
Jon M Gallagher
I’m a GM bondholder. The offer worked out to be about 500+ shares, that after the immediate reverse split (1 for 100! Ouch!) would be 5.25 shares. So there’s that.
But, probably like the retiree in the article, I didn’t think GM would ever go under. I was wrong. So there’s that.
I voted for the deal. I guess there weren’t enough of my side to win (I’m used to that, being a liberal and all, esp. here in CA).
We’re all getting screwed in this situation. We’re goig to have to suck it up and try to create something out of this carefully placed stack of turds.
Napoleon
@Jon M Gallagher:
Are the bonds secured like the Chrysler bonds were?
Paul L.
They also realize that the Obama administration will not honor bankruptcy laws and will bully anyone who gets in the way of providing his union supporters with the best deal possible.
Martin
From the free market, of course. If Reagan was still around, the money would be there.
Hey, there’s an idea! Maybe Obama should sell some weapons to Iran and give that money to the bondholders. I’m sure that’s what Reagan would have done.
Napoleon
@Paul L.:
Funny thing is that they do honor the bankruptcy laws and the bankruptcy court is who has blessed it. What was done in Chrysler is done everyday in bankruptcy court (I know, I use to practice bankruptcy law) the only differance in this case is how quick they are getting it through the courts.
So screw you and your lies Paul L.
Brachiator
The money might come from the government. At what bondholders are protesting, with some justification, is that the government plan would see some of any available money resulting from a government-structured bailout go to GM’s auto union workers and to taxpayers before it went to bondholders.
From the SEC summary, here is the order of preference for the division of assets in a typical bankruptcy:
Secured Creditors – often a bank, is paid first; Unsecured Creditors – such as banks, suppliers, and bondholders, have the next claim; Stockholders – owners of the company, have the last claim on assets and may not receive anything if the Secured and Unsecured Creditors’ claims are not fully repaid.
The Administration has upended standard practice by putting auto union workers next in line after secured creditors. Here is an analysis from The Nightly Business Report on PBS:
Now, I loves me some Obama, but I have doubts about his re-writing the bankruptcy code in an attempt to save the auto industry or any other business. If the company ends up going belly-up anyway, then it becomes a bad investment to throw government money into a futile rescue scheme. Worse, you do jeopardize the prospect of future investment in companies if individuals might fear that government intervention might distort the normal way that business takes place and the normal way that bankruptcies are structured.
Bondholders are not expecting full value. But in a standard breakup of the company, they might receive something. To tell bondholders that the rules have changed on a whim and they might get screwed — even if GM fails anyway and cannot be restructured — seems perverse.
Martin
What do you want to bet he retired from GM?
That’s one of the worst byproducts of the 401K culture – workers investing far too much in the very company that is providing their job, pension, benefits. If the company goes down, they’re just fucked from stem to stern.
Patrick
The idea that “small investors” own GM bonds seems ludicrous to me. Last I looked, corporate bonds sold in lots ranging from $50,000-$100,000. To get a decent diversified bond portfolio, you would probably have to buy 10-20 different companies. That would be a million dollar portfolio.
gwangung
I do not think that is an accurate description of the process at all, as they do have obligations from the company that were negotiated by previous management.
socratic_me
I really cannot help but think that anyone who dumped 91k into GM in the last 3 years is a whole extra level of stupid. Moreover, when the amount you have invested in GM over the last 3 years is almost exactly my total (pre-tax) earnings in a supposedly middle class profession, my concerns about your ability to retire are remarkably small. Either you stupidly invested a very large chunk of your retirement into a single company that was known to have significant problems competing in the marketplace and which had already been bailed out a few times by the government or you make so much money that your worries about retirement are really about possibly having to live my lifestyle somewhere down the road.
TenguPhule
Paul L, you don’t even understand what going bankrupt means.
TenguPhule
Uh, no.
Employees get preference over creditors for wages and benefits owed.
Martin
If it was the first perverse act involving the financial sector we had seen lately, I might agree with you, but the financial sector threw the rulebook out the window last fall. I honestly think we’re at the point of the game that we have to choose between having a viable national economy or respecting the rules of the game that favor those who created this shitpile. I know that leave a lot of regular folks out in the cold, but that’s going to happen no matter what. If we sell out the workers, what chance will anyone have of getting concessions out of them in the future? There’s hazard no matter which way they go, so I’d head in the direction that least impacts taxpayers in the long run. I think there’d be a lot of agreement with that.
Martin
Unless you bought into a bond fund, which is what most people do. But that automatically gets you diversified, so minimal impact there.
booch221
A few years ago I saw GM bonds yielding 9%. I was tempted, thinking GM could never go out of business.
I came to my senses however, and decided to invest in a total bond market fund. Not the highest rate of return (5-6%), but I’m invested in nearly 4000 corporate, government, mortgage backed, US and international bonds.
When investing you should spread your risk, not bet on one company.
Michael
@Paul L
God damn your lies, you astroturfing asshole.
You’ve seen over and over here (and elsewhere) that the value of collateral as of the filing is only liquidation value, and that any debt over and above that is undersecured (not to mention some of the lien priorities on specific cross-collateralization as a result of previously supplied credit). Meanwhile, like the scam artists making money from objecting bondholders, the right wing noise machine scoring political points and the pig ignorant bigots who follow them, you continue to propagandize blatant falsehoods in order to sow seeds of doubt and to destabilize our country.
You and your filth make me sick.
mvr
It would be interesting to know what percentage of the current bond-holders bought them at less than face value on the theory that they would make money in a bankruptcy, perhaps with help from a bailout. I’m assuming those bonds have been worth less than face value for some time and that many of the current holders bought them during that time. I have some sympathy with folks who bought then long ago and saw them go to shit, though that was the risk they took. OTOH, I don’t have nearly as much sympathy for those who talk about getting much less than the bond’s’ face value if they did not buy them at face value.
Napoleon
@Brachiator:
Your post is such an ode to complete cluelessness I don’t even know where to start. It is virtually wrong on every point.
To understand what is happening in Chrysler and will happen in GM some basics are in order. Bondholders are not “first”. Non-priority claims (which are the claims that are first) is generally divided into secured and unsecured. It is possible that your claim, even though secured by a lien on an asset, will be considered by the court as 2 seperate claims, one that is secured in a value that mirrors the value of your collateral and one that is what remains after the secured portion is subtracted out. That is what is happening to the bondholders. The court does not consider their entire claim to be secured. The only thing your secured claim entitles you to is if the court sells the asset that is securing your secured claim, which the court is free to do, and in the case of Chryler is exactly what the court is doing, is to then have your lien attach to the proceeds of the sale, or the court has the option of moving the lien to replacement property. That is what the court is doing in Chrysler.
By the way note that since the UAW has a contract that has been assumed by Chrysler (which was also done with certain dealers) its claims on that contract are basically a priority claim, unlike either secured or unsecured bondholders. Also as mentioned upthread certain past wages and pension contributions are also considered priority, regardless of if there was a contract with the employees and if there was if it was assumed by the company.
If the bankrupty court is not following these simple rules the bondholders can appeal, but the reason they are screaming so loud now is that they know the court is in the right and what is happening is perfectly in line with bankrupty law. The rules have not been upended on the bondholders.
Mnemosyne
These are the same kind of people who thought that if they just changed the bankruptcy laws so it was more difficult to write off your credit card debt, they would get their money and it would have absolutely no effect on other areas of their business, like mortgages.
They really don’t seem to get that it’s not that GM is holding out on them — GM genuinely doesn’t have any money. They can stand there and demand payment all day long, but if the money’s not there, it’s not there.
Mnemosyne
Wait, if my company goes belly-up, the bondholders get to pick over the bones of my pension and back wages and I get nothing? WTF?
Brachiator
@TenguPhule:
This is not always the case in a Chapter 11 bankruptcy proceeding, and often not the case in a Chapter 7 bankruptcy (where a company ceases all operations).
Further, Obama’s plan hinges on this key point (from the Nightly Business Report transcript): “Well those bondholders have until midnight tonight to accept an offer to trade $27 billion of debt for equity in a new, reorganized General Motors.”
This would move bondholders to the back of the line in any subsequent bankruptcy.
But the auto industry is not the financial sector. And if the administration’s plan ends up eroding investor confidence further by changing the rules of the game pointlessly, then they make any economic recovery more problematic.
TenguPhule
No, employee wages and benefits are generally at the front of the line.
The Moar You Know
@Michael: He’s not lying. He’s stupid as fuck and believes everything he’s told, whether it makes sense or not.
Perfect cannon fodder for the Republicans and corporatists. One day he’ll march off to die convinced it’s for his own good.
TenguPhule
This is a Chapter 11 filing. Creditor claims are gonna go after employee claims and there is nothing shady about it.
Napoleon
@Brachiator:
If they have a problem with the way they are treated courts have these things called “judges” that the bondholders can object to. The people who are writing the things you are quoting are either 1) dishonest, or 2) don’t know what they are talking about. Whatever happens in the bankcrupty court will be signed of on by the judge and if he or she miss applies the law appeal is always available. But of course some people want to simply pretend that is not the case.
Napoleon
@TenguPhule:
Also the EXACT same priority rules apply in both chapter 7 and chapter 11 cases.
Mnemosyne
@Brachiator:
So bondholders who bought in at the last minute get to raid my pension and take my wages? And this makes perfect sense to you?
Brachiator
@Napoleon:
Sorry. Your argument is not with me, but with the SEC and with PBS.
I posted links so that posters could get a better background on the issue. People who were posting that bondholders were stupid for investing in GM clearly did not understand why bondholders were balking over accepting the Obama plan.
People who were posting that bondholders had no reason to expect any money from GM clearly did not understand that bondholders might get something in a bankruptcy if GM’s assets were to be sold.
As the Nightly Business Report transcript notes, one problem is that the Obama plan would offer bondholders $27 billion in equity for their debt, which would risk making their investment totally worthless since bondholders might get something from an asset sale if GM were broken up and sold.
Since I didn’t make any reference to Chrysler, there is no reason for you to bring it up.
someguy
Somewhat related, partially off topic – but if this is true, it’s f***in’ awesome!! It’s called ‘losing,’ bitches. Hope it taste’s nice.
Brachiator
@Mnemosyne:
Bondholders don’t get to raid your pension or take your wages.
Bondholders normally have a claim on the assets of a company. As I noted, the Obama claim would turn bondholders into stockholders to the tune of $27 billion. Stockholders are last in line to any claim of a company’s assets.
Thus, the government plan is not such a good deal for bondholders, unless the government magically promises to make them good as well.
TenguPhule
And whoever came up with that is full of shit.
1. GM would only be broken up and sold as a last resort, since it would be dropping an economic nuke on the fifty states.
2. GM assets on the ground are worth crap compared to what they owe and everyone knows it. Between what it owes taxpayers and employees, everyone else wouldn’t see a crumb.
3. GM’s current debt and equity is effectively worthless now. Them’s the way the market plays.
TenguPhule
And since GM has no intention of selling those assets, the bondholders are shit out of luck.
They can take the equity and hope it turns around, or rely on the good graces of a bankruptcy judge.
Pick one.
Michael
@Brachiator
Between 5 and 10 cents on the dollar on distress sales of contaminated real estate, tooling and equipment that is now only good for scrap metal.
Assuming that a buyer can be found.
Mnemosyne
@Brachiator:
Then why are you arguing that bondholders always get priority over the union and their wages and benefits and the Obama administration wrongly gave the union priority over the bondholders? I belong to a union (not the UAW), so is it only union workers who can have their wages and pensions taken away by bondholders?
mcd
My father had a couple of Pan Am bonds, couple thousand dollars worth bought in the 70s that were supposed to mature in the late 90s. Adios to that.
I don’t remember Fred Hiatt coming to our defense either …
Martin
Neither is the housing industry or the insurance industry.
But their financers are the financial sector and taken broadly they’re a big part of the reason we are in this mess. I don’t mean to tar with too big of a brush, but I don’t think that any of them are in a position to protest how the government unravels this.
Napoleon
@Brachiator:
In an 11 they have no right to force a sale. The court is perfectly within its rights to let their secured interest ride through the bankrupty on the assets and require the bankrupt to pay down the “loan” secured on such assets going forward at rates and on terms determined by the court.
Again, everything is signed off on by a judge and there are rights of appeal. Neither GM or the US Gov have any ability to unilaterally impose anything.
Brachiator
@TenguPhule:
The latest news is that bondholders have rejected the government’s plan. Now GM may be headed toward bankruptcy.
If the company ends up being liquidated, taxpayers and workers lose.
On the other hand, it appears that Chrysler is being sold intact to Fiat, and has avoided liquidation.
Evinfuilt
I don’t know how hard it is to understand the Obama had to save the company before its non-secured debt holders. If he bailed them out and not the company itself, then he gets nothing in return. Just a dead company, many out of work, but the people who supposedly took risk would walk away with profit?
Yeah, thankfully that’s not how it works or worked out.
Church Lady
The bondholders aren’t wanting money, per se, they just want and feel like they are owed a bigger equity stake in the reconstitued GM. The face value of the debt they hold is greater than the amount the government has poured into GM so far to date and greater than the amount owed to the UAW for pension and health care funding requirements. Yet they are third in line as far as the equity split is envisioned. The seemingly latest figures being bandied about are 70 for the Treasury, 20 for the UAW and 10 for the bondholders. The stockholders are wiped out, where earlier proposed splits had them getting 1%. I guess the bondholders figure that if it goes to a banruptcy judge, they might get a little larger stake.
PaminBB
The retiree quoted above in John’s post is not some random man on the street, but a participant in an astroturf scheme and long time Repub activist. I summarized this deal here.
Surly Duff
The free market kicks ass…until you lose your own shorts.
DougJ
Very good description of this PR campaign.
TenguPhule
Except 1)Most of them didn’t pay face value for those bonds.
2)Government provides the financing since nobody else ponied up.
3) Employees take priority over bondholders
4) So do taxpayers
TenguPhule
Chapter 11 is not Chapter 7, Brach.
Learn the difference please.
Joel
Why didn’t the WSJ run op-eds about retiree bondholders who were wiped out last year by all the defaults? Oh yeah, Bush was president.
The WSJ can eat my ass.
JGabriel
Hmm, $91,000 in $100 increments equals 910 increments over the course of 1 year. I guess he buys an increment with each meal, like someone taking too many vitamins, excepting Sundays and holidays. Or something.
.
tc125231
Brachiator
@TenguPhule:
GM filed for Chapter 11 protection. It may not work, and the company may still end up being liquidated.
So, what’s your point?
Meanwhile, a messy fight is brewing over pieces of GM Europe.
And here’s a bit of irony: “Many large investors also hold insurance policies known as credit default swaps that would reimburse them if GM goes under. That might be a better deal than battered GM stock.”
More on the battle of GM Europe can be found here (Concerns grow over GM Europe jobs).
Mike G
I am an American retiree. Like many small investors, I am relying on “safe” investments such as bonds backed by America’s largest companies to fund my retirement. One of these companies is General Motors.
GM bonds were not a “safe” investment in 2005 unless you were stupid enough to listen to the WWE-of-Wall -Street screaming morons on BSNBC. GM has been on deathwatch for years. He got a fatter yield for taking a higher default risk on the bonds and he got burned.
Brachiator
@TenguPhule:
GM may file for Chapter 11 protection within days (maybe Monday), according to news reports. It still may not help.
Meanwhile, the implications of this problem keep expanding, according to other news reports.
And here’s a further irony: “Many large investors also hold insurance policies known as credit default swaps that would reimburse them if GM goes under. That might be a better deal than battered GM stock.”
The bottom line is that the taxpayers may end up taking it in the shorts because bondholders could not be persuaded to accept a bad deal:
I’m not seeing much of an upside here.
Porlock Junior
The plain, hard-working people with those modest bond holdings can’t bring themselves to believe that the money just isn’t there. Down to the Lord Peter Wimsey shelf to retrieve the wisdom of the 1930s:
“Crutchley was about as much convinced … as were the Allies, on being informed by Mr Keynes, after the conclusion of the [Versailles] Peace Treaty, that they might whistle for their indemnities, since the money was not there. It is impossible for human nature to believe that money is not there. It seems so much more likely that the money is there and only needs bawling for.”
–Dorothy L Sayers, Busman’s Honeymoon, 1937.
The victors in World War II, amazingly enough, had learned something from experience and were pretty quick to forget about collecting from the guilty. For small investors suckered into buying supposedly risk-free stuff from giant can’t-fail corporations, the prognosis is not so good. One can have sympathy for their plight, if not for their misinformed rage and the tendency (I prophesy) to look for Fascist solutions to current problems.
Mister
Some of GM’s separate units are probably worth quite a bit — I might be willing to shell out 27B for the trucks division if I had that laying around.1 But if I understand this thread, that’s off the table while they’re in chap 11 — not until things get really bad and they go chap 7 can the court break off divisions for separate sale, right? While they’re in chap 11, the only thing that’s going to make 27B appear is a check for 27B…?
Possible alternative use of my 27B: hookers and blow. [back]
Ginger Yellow
“Like many small investors, I am relying on “safe” investments such as bonds backed by America’s largest companies to fund my retirement. One of these companies is General Motors”
In 2005, GM was downgraded to BB – ie “junk”. It was not even remotely a safe investment. This quote right here is a fantastic argument against allowing people to invest their own social security money.