May 22, 2009

Here We Go Again: This Time Gov’t. Is Trying to Shaft Unsecured GM Bondholders

NoToGMandChrysler0109 Earlier today, I noted in a post updating the sad situations at bankrupt Chrysler and headling-for-bankruptcy General Motors, that GM is, according to a Wednesday Reuters report, offering secured bondholders a much better deal than the 29 cents on the dollar Chrysler’s secured creditors have been offered. Chrysler’s “non-TARP secured lenders,” after what they allege with much evidential support was a campaign of threats and intimidation by President Obama and the White House, abandoned their efforts to have their first-lien rights recognized in bankruptcy court.

But Indiana pension funds holding some of that secured debt representing teachers, police, and other workers have taken legal action objecting to the terms of the Chrysler bankruptcy that don’t give first-lien lenders their proper and legal due.

It thus appears, despite a chest-thumping May 2 assertion in the New York Times that the White House’s Chrysler hardball might have taught GM lenders a “lesson,” that Obama and his car guys don’t have the stomach for riding roughshod over the rights of GM’s secured bondholders and ending up with the possibility of another bankruptcy moving into a regular federal district court (the Indiana situation could be the first).

Now what? Well, if you’re Team Obama, you instead try to put the screws to GM’s unsecured bondholders — to the benefit of the United Auto Workers’ Voluntary Employee Benefits Association (VEBA) trust.

GM owes the VEBA about $20 billion. It is believed that the company’s tentative deal with the UAW, announced Thursday but not officially commented upon, has it paying the VEBA $10 billion and forgiving the other $10 billion in exchange for a 39% ownership stake in the “reconstituted GM.”

Meanwhile, remaining unsecured bondholders, according to this report which references a Bloomberg TV commentary, are being asked to forgive $27 billion of the $35 billion they are owed in exhange for a whopping 10% stake in the new company.

The complete proposed lineup is supposed to turn out this way:

  • UAW’s VEBA — Of $20 billion owed, $10 billion forgiven, 39% ownership.
  • Unsecured bondholders — Of $35 billion owed, $27 billion forgiven, 10% ownership.
  • Uncle Sam — Of $15.4 billion owed, representing money funneled to the company since December, “the bulk” is forgiven, for a 50% ownership stake (it’s reasonable to believe that it’s really a tad more than 50%).
  • Existing shareholders get a 1% ownership stake.

Everything I’ve seen thus far would indicate that the VEBA does not have superior status in the bankruptcy pecking order over unsecured bondholders. Yet its ownership stake is about 4% for each billion forgiven, while the unsecured bondholders get less than a 0.4% stake for each billion they are supposed to forgive.

As you would expect, unsecured bondholders are furious. A group calling itself “Main Street Bondholders” alleges that:

Unions and large investors have a seat at the negotiating table, but what about the average Americans that have played by the rules and now face a devastating loss, particularly seniors and soon-to-be seniors?

….. The Administration’s offer to “Main Street” bondholders is unfair – cents on the dollar – for individuals relying on these bonds to finance retirements, college tuition and medical expenses. It is disheartening that the Obama Administration is driving GM into bankruptcy.

They have brought their complaints to Congressmen, who have in turn raised the fundamental issue (bold is mine):

Four U.S. Republican lawmakers have complained to Treasury Secretary Timothy Geithner that a plan to restructure automaker General Motors Corp subverts the rights of bondholders, according to a letter from the lawmakers obtained by Reuters on Friday.

A proposed restructuring favors the claims of the United Auto Workers union “over the rights and claims of the company’s diverse group of bondholders, who collectively hold $7 billion more in General Motors debt than the UAW’s health trust and are equal members of the creditor class,” the lawmakers said.

“We are extremely concerned that in the name of restructuring General Motors, the Presidential Task Force on the Auto Industry … has begun waging what some believe amounts to a war on capital: contractual rights of investors are being trampled by the government under the rationale of ‘extraordinary circumstances,’” the lawmakers wrote.

So this must be just a front for a bunch of evil, greedy hedge funds, as with Chrysler, right? Wrong, twice. First, the Indiana pension litigation shows that real, everyday people, union and non-union, are getting unfairly and illegally hosed under the current deal at Chrysler. Second, GM’s unsecured bondholders are flesh-and-blood people too:

Calling themselves Main Street bondholders, the investors said they are ” average” Americans who purchased GM bonds “as a part of their financial planning for retirement, medical expenses, small business expenses, and providing for their children’s education,” according to a statement. The meetings in Congress, the group said, are intended to highlight their “interest in a fair and equitable solution to GM’s financial crisis.”

….. Jim Graves, a 58-year-old software developer from Celebration, Fla., said that under those terms, he and his mother stand to lose most of the $100,000 in GM debt they have been counting on for retirement.

When such a thing happens to an everyday person who is ripped off by a financial planner, the press is sympathetic, usually justifiably so. But when the government and the companies it has for all practical purposes nationalized do the same to large numbers of people, the media silence is deafening.

If you see anything about this large-scale fleecing of unsecured investors for the benefit of organized labor on the Big 3 evening news programs or on any non-business cable news channel besides Fox, let me know. I don’t expect a flurry of tips.

Cross-posted at



  1. Yesterday, Comrade O made a big deal about Constitutional adherence, particularly for the detainees, even beyond the scope of the Boumediene decision. He pointed ut his Constitutional acholrship. Here’s a quick quiz. Where did this come from? “Nor be deprived of life liberty or property, without due process of law, nor shall private property be taken for public use, without just compensatopn.” I’m syure “Constitutional schoilar” Comrade O KNOWS that’s the last third of the 5th Amendment. It appears that Constituional scholar Comrade O places a higher value on the “rights” of detainees than he does American citizen bedt holders of Chrysler and GM>

    Comment by john lorenz — May 22, 2009 @ 2:46 pm

  2. “When such a thing happens to an everyday person who is ripped off by a financial planner, the press is sympathetic, usually justifiably so.”

    Unless that everyday person happens to be “rich.”

    Comment by zf — May 22, 2009 @ 8:01 pm

  3. i work for gm and when bondholders who hold gm 1 2/3 stock, sold out, I lost over $65000 with no input at all so I dont feel sorry for the bondholders hope they get the shaft.

    Comment by dkim — May 26, 2009 @ 2:06 pm

  4. #3, correct me if I’m wrong. You had a chance to sell most or all of your GM stock before it tanked, and your ESOP or 401(k) didn’t force you to keep it.

    If I’m right, it’s your fault that you didn’t sell it when it became obvious that the company was dying. If I’m wrong, “fair” or not, you’ve learned the perils of forced ownership.

    Comment by TBlumer — May 26, 2009 @ 11:08 pm

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