GM’s investors and bondholders have taken their lumps. The value of their investments have plummeted and they’ve been blamed for enabling GM’s mismanagement. Hedge fund managers and institutional investors are not the most popular people in the wake of the financial meltdown so it’s easy to forget that many investors are not Wall Street wheeler dealers, but regular folks with investments.
Patricia St. Pierre is a nice lady. She and her husband Cliff worked hard, raised a family, got their kids through college and retired on their investments. They live on Grosse Ile, a comfortable island suburb downriver of Detroit. She’s 70 now and she’s worried about having to go back to work because their life savings may be wiped out in a GM bankruptcy.
Mrs. St. Pierre and her husband have what she calls a “large amount” invested in unsecured GM bonds. The St. Pierres attended a meeting at Warren’s town hall, across the street from GM’s Tech Center with other individual bond holders on Thursday as the President was announcing the bankruptcy of crosstown rival Chrysler. When I asked her how she came to own the bonds, she said that they had moved to bonds during a downturn in the stock market with their mutual funds. They wanted to try “something that was safe”.
They initially did well with Ford bonds but moved to GM debt three years ago when Ford seemed to be at greater risk than GM. As their broker told them, “you don’t think they’ll ever be out of business.” That same reason is why they haven’t sold before now. They also didn’t know at first that the debt was unsecured. Then the bottom fell out last fall. “Everything turned on a dime.”
Though neither has worked for the company in years, the St. Pierres have ties to GM. Her father is a GM retiree and she worked for GM right out of high school for seven years. Cliff St. Pierre graduated from the General Motors Institute. LIke GMI grads back in the day he worked as an intern at GM and then started his career there.
The St. Pierres live off the income from their investments and Patricia acknowledged that they’ve earned interest since owning the bonds, but they face losing all the principal since the bonds are unsecured. GM has offered debt holders 225 shares of stock in a reorganized GM in exchange for $1000 of the $27 billion in debt GM owes, plus whatever accrued interest the bonds have at this point. If they don’t accept the deal, GM will declare bankruptcy and they’ll get nothing.
The stock offered to bondholders will represent 10% of GM’s equity. Stockholders, punished for enabling a feckless board of directors, will own 1 percent of GM stock. The government will own 50 percent of GM, and the UAW’s VEBA will own the remaining 39 percent.
One thing that troubles the St. Pierres the most is that they are being left completely out of the loop and not informed by either GM or the government. While the large bondholders are negotiating with and in constant contact with GM and the Presidential Task Force on Automobiles (PTFOA), the St. Pierres haven’t heard a thing except for the most recent prospectus from GM.
There is nobody in the process representing their interests. They’ve contacted Senators Stabenow and Levin to complain but their elected officials haven’t been very reassuring. They feel pretty helpless. Their broker doesn’t really know any more than they do. The St. Pierres aren’t destitute, but you could hear the worry in her voice. “I’m glad my kids aren’t about to graduate (high school) and go to college.”
While it can be argued that they took a risk and lost their bet, the government cutting in line ahead of other prior creditors creates a huge dilemma for investors, investors that may be you, your neighbors and your family members. As Cliff St. Pierre said, “who will want to buy bonds?” Who will want to invest if the government is going to step in and declare your investment virtually worthless?
Some say that GM’s stakeholders, management, the UAW, shareholders and bondholders, all deserve blame for the company’s decline, but the bondholders and stockholders, while perhaps giving management too little oversight, played by well defined rules, the rules and laws we’ve used to become the wealthiest society in the planet’s history. Now the President is rewriting the rules.
When I asked her who she thought would protect her interests more, the administration in Washington or a bankruptcy judge, Patricia laughed ruefully and said the bankruptcy judge. She’s not happy about the government owning GM. GM’s bondholders, after all, do have a bigger investment in the company than the government. “It’s not a good situation,” she said.