For What It's Worth

There's something happening here.

Another retail-unfriendly development comes from GMAC (the people who brought you Rescap, Ditech and the low-documentation mortgage. GMAC is offering an exchange of certain senior debt issues if investors accept new bonds, preferreds, etc. Many news stories have correctly noted that GMAC Smartnotes are eligible for the exchange. The has caused the press to criticize GMAC for favoring institutional investors over small investors. However, it goes beyond Smartnotes. Retail investors who own eligible bonds are not able to participate in the exchange either. This really leaves Mom and Pop out in the cold. Although retail investors will get par if their bonds mature on schedule, if GMAC would file for bankruptcy protection, retail investors could receive very little in the way of recovery as the new bonds being given to investors by way of the exchange are senior to existing senior bonds.

As if the auto industry needed more negative press, screwing Mom and Pop will not help its cause. If GMAC files for bankruptcy, retail GMAC bondholders could receive less than current trading levels. Investors should at least monitor this situation closely and may want to consider selling their GMAC bonds with maturities beyond the next few months.