Let’s hope that the US Treasury is a brilliant contrarian investor. It seems to be the only investor willing to boost its stake in ailing GM.
GM is likely headed to bankruptcy court now that unsecured bondholders scuttled a plan that would have asked them to exchange $27 billion in debt for a 10% stake in General Motors. They want greenbacks not stock certificates. Meanwhile, the UAW, worried about GM’s prospects, renegotiated its deal with Treasury to reduce the union’s stake in the hobbled carmaker even while making more retirement concessions. As a result, UAW would slice its GM share to 17.5% from 39% in exchange for the steady interest on preferred shares and a $2.5 billion note. But the new deal would boost the taxpayer stake in the carmaker to 70% from 50%.
Secured lenders like JPMorgan and Citibank — can you believe this — will be kept whole. And why not? The TARP firms have turned double-dipping into a fine art: Get money direct from Treasury and then again through AIG or GM payments. Beautiful. Chrysler secured lenders, which include a number of pension funds, are slated to receive 29 cents on the dollar.
When the US first announced plans in March to force GM and Chrysler to restructure, I warned that bondholders were likely to push the car companies into bankruptcy where they were more likely to find a bigger pot of gold. Bondholders have more than one route to making money — and the deal the US offered is the least attractive. Unlike Chrysler, GM has thousands of creditors and Obama can’t strong-arm them into compliance. In a recent Moneybox column, Daniel Gross observes that the GM bondholders will get more cash if GM goes into bankruptcy court in part because they have hedged their stakes with credit default swaps worth about $2.4 billion. He calls this set-up the “empty creditor syndrome” — and it doesn’t bode well for struggling companies.