Ch-Ch-Changes

Last week, the Detroit Three CEOs flew into Washington DC (in comparative style) to beg for money. To justify federal aid, Detroit executives were prepared to do, well not much of anything. The CEO consensus was that the Detroit Three are teetering on the brink of bankruptcy because of the credit crunch. Boys, boys, no one is going to buy that. Yes, the credit crunch may have accelerated your demise, but Detroit has been losing market share for 35 years. Few will contest this fact, not even pro-union politicians.

Since last week, Democratic legislators, including Nancy Pelosi and Harry Reid, have called on the Detroit automakers to come back with restructuring plans if they want federal aid. This may not sit well in the Motor City, with management and labor alike. Even President-elect Obama's adviser, David Axelrod is telling Detroit CEOs that plans to return the former "Big Three" to profitability are needed in order to receive taxpayer dollars. This does not bode well for Ron Gettelfinger and the UAW. It may not bode well for GM bondholders either.

There may be a revolt at General Motors. In spite of CEO Rick Wagoner's statements that bankruptcy was not an option, GM's board of directors said that it will consider all options including bankruptcy. This is a vote of no confidence in Mr. Wagoner, in my opinion. Truthfully, it is not likely for GM bondholders to be made whole, regardless of the restructuring plan. Whether it is a Chapter XI filing or a government-led restructuring, bondholders will likely suffer. Bondholders may not be completely wiped out,but will receive (yet-to-be-determined)cents on the dollar. This compensation my not be in the form of cash. New bonds and / or new shares will likely make up most if not all of bondholder recovery.

GMAC bondholders could be made whole, but it is tricky. A GM Chapter XI "could" lead to a GMAC bankruptcy filing, but GMAC could receive TARP funds if it is approved as a bank holding company. If GM is to survive and emerge from bankruptcy, a viable finance unit is a must.

Remember, GM NEVER guaranteed GMAC bonds or vice versa. The same is true of Ford and Ford Motor Credit. Also, all GMAC and Ford Motor Credit Preferreds are actually $25.00 par bonds and rank pari passu to other bonds of equal seniority. Conservative and moderate investors may want to consider exiting GM, GMAC, F and FMCR bonds. Aggressive investors (speculators) should consider the auto finance companies rather than the manufacturers. Equity investors may want to consider swapping into the $25 par bonds to climb higher on the capital structure.