I Can't Tell You Why

I don't know what it is about the GM bankruptcy that investors and financial advisers don't understand. GM has filed for bankruptcy protection from its creditors. This means that GM will never make another interest payment on its current outstanding bonds. That is what bankruptcy protection means. Investors will receive an as yest undetermined sum of compensation. That compensation will most likely come in the form of new GM commons stock. What happens with current outstanding GM stock? For most investors it will be worthless. However, those who have physical certificates may fine a number of uses. Such uses include bird cage lining, fireplace fire starters or as toilet tissue.

The results of the bondholder vote was closer than what the government probably wanted to see. Only 54% of outstanding bondholders voted to approve a bankruptcy recovery of a 10% equity stake in a restructured GM plus warrants which could be exercised in seven to ten years which could give bondholders an additional 15% equity ownership of GM. Since GM is likely to be forced to build small cars or hybrids, which have low profit margins, in UAW plants (which are still more expensive than non-UAW plants in the American South or overseas), it is unlikely that GM will be flush with surplus cash any time soon.

Auto Task Force Chief Stephen Rattner stated the following regarding how GM would be run:

"No plant decisions, no job decisions, no dealer decisions, no color of car decisions," he added. "Those are all going to be left to management."

He makes no mention of what kind of cars GM would build. That is because car designs will be mandated by the government rather than the market. Some in Congress may want more control over GM than Mr. Rattner is intimating. House Speaker Nancy Pelosi and Majority Leader Steny Hoyer asked President Obama to prevent shipping car production off shore. This has British Leyland written all over it. I am still waiting for the new version of the Triumph Spitfire.

Readers of my blog will remember that I explained early on that bondholders wanted a GM bankruptcy (if they couldn't gain control of the company) as they had much to gain by way of CDS protection. I also wrote about how current bondholders were permitted to vote on bankruptcy compensation, but due their exchanging bonds to counter parties upon settling CDS contracts, many current bondholders are not the creditors who will receive compensation when bankruptcy is settled. For this reason, combined with the fact that the bondholder vote was not a clear mandate could result in a bankruptcy judge deciding to hear arguments from creditors in spite of the bondholder vote. Alas, that probably will not happen as the Obama administration will probably strong arm the courts.

Prices of long-dated U.S. treasuries fell sharply on "optimistic" economic data. If today's data had been released in 2008 or 2007 it would have been viewed as decidedly negative. However, compared to what data had been, it is an improvement. Although the recession may be winding down, a sharp recovery is unlikely.

How will housing rebound when borrowers must do more than fog a mirror to get a mortgage? Where are new jobs coming from? Weak dollar speculators are pushing oil prices higher (those speculating that oil should go higher on strong growth are foolish, but could benefit thanks to a dollar which should weaken. God protects fools and drunks).

The real question is will bond vigilantes (referenced previously in this blog) be victorious in pushing long-term rates higher as they vote no confidence on Mr. Obama's economic polices or will the Fed and Asian trading partners be successful in keeping long-term borrowing costs low? I am not one to bet against the Fed, but in the words of former Clinton adviser James Carville when referring to the bond vigilantes of the 1990s:

"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody. "

Mr. Obama should take heed.