The Joker

Some people call me the space cowboy, yeah
Some call me the gangster of love ~ Steve Miller

GM announced its equity for debt swap and it is a joke. As per GM's S-4 filing, GM Bondholders would receive approximately 45 cents on the dollar, all in common equity. Although this may appear generous to those who were fearing news reports of 10 to 20 cents on the dollar could be reality, but if it appears that these terms are generous, the joke is on you.


Although 45 cents may appear relatively attractive, agreeing to such an exchange would leave bondholders in a bad situation. As the result of such an exchange bondholders would own 10 percent of GM. However, the UAW owns 30 percent and its government masters (or enablers) would own 50 percent. Gee, in whose interest do you think GM would be run?

Former Labor Secretary Robert Reich made it very clear in Saturday's Wall Street Journal when he stated:

"Suppose we tell General Motors Corp. -- now partly ours -- to shift its fleet to more fuel-efficient cars. Yet its executives know that as long as gas prices are low, Americans remain infatuated with highly profitable SUVs and pickup trucks? GM executives would have a perfect right, if not a duty, to disregard what we as citizens tell them to do in favor of what shareholders want them to do."

So let's get this straight. The government will exercise its authority as controlling shareholder to do what "citizens" want, not what the other shareholders want? The other shareholders want to build cares that consumers (citizens) will buy. Mr. Reich appears to be confused. He is far from confused. His "citizens" are not traditional automobile buyers, but the green lobby and other liberal groups. Trust me, if comsumers demand hybrids, electric cars or micro-cars, Detroit will build them, unless they would be unprofitable given their labor agreements. Here comes the punchline to this very bad joke.

A government-run GM would be run like a government program. It would provide jobs and build vehicles its political masters, not consumers demand. Any revenue shortfalls would be picked up by the government through tax dollars. Think of this as another WPA. Cars will be built purely to provide jobs. The types of vehicles will be chosen to appease liberal political supporters. Why would bondholders agree to this?

The simple answer is they won't. Bloomberg News is reporting that an ad hoc group of GM bondholders (the steering committee) is calling the proposal "unreasonable". Shelly Lombard, an analyst an Gimme Credit believes that bondholders could do worse in bankruptcy court. It is not certain that bondholders would receive any more in the way of numeric compensation, but bankruptcy could have some advantages for bondholders.

First, the bondholders would have a realistic chance of restructuring UAW agreements to reflect some semblance of reality. Secondly, the may receive compensation other than common equity. Maybe bondholders would receive new debt as partial compensation giving them a higher claim than the UAW or he government. Thirdly, by forcing GM into bankruptcy, shares issued to creditors would be new shares as existing shareholders (including the UAW and government) wiped out. This last point is the real reason the government and UAW want to avoid bankruptcy. Sorry Shelly ol' gal, That last point was an easy one.

Look for the bondholders to push for a bankruptcy and for Steve Rattner and Ron Gettelfinger to soil their undergarments.