Editorial: General Motors Death Watch 220: My Kingdom For Your Debt

Ken Elias
by Ken Elias

Rick Wagoner lost control of General Motors this week. Forget about his title; game over for the embattled former Duke basketball wannabe. There’s a new sheriff at GM – and it’s a bunch of Wall Street guys that few on Main Street can name. It’s the hedge funds that have been acquiring GM’s bonds. So here’s how these guys will play The General to make a killing on the pending government bailout:

First, they’ve been reading TTAC. The money men know GM can’t possibly turn the business around without a major restructuring. That means fewer brands, dealers, a busted UAW and a balance sheet that looks healthy, rather than one destined for the emergency room. They know that one of two things has to happen. Option one: bankruptcy. It’s the most obvious choice, but one to be avoided at all costs (as per GM management).

Option two: a non-C11 cram-down on all the creditors, the unions and anyone else to whom the GM monster owes money. Either way, every one of these creditors will end-up with a bunch of paper (new equity or new debt), but no cash for the credit already extended.

The bond market sees this coming. GM’s non-bank debt– mostly unsecured obligations– trades between 10 and 20 cents on the dollar. Translation: anyone holding GM paper has very little prospect of getting paid in full when the debts come due. Right now, GM’s attempting the cram-down on those bondholders (and the United Auto Workers). GM CEO Rick Wagoner hopes to trade debt for equity– or perhaps arrange a debt exchange– with GM’s bondholders. That’ll show Congress that he’s “making progress.”

But Red Ink Rick seems to have forgotten that Wall Street “hedgies” control GM’s debt. And they want to make money soon rather than never later. And the plain truth is that the hedge fund playas are going to win this game with or without a GM bankruptcy. Either GM gives them the terms they want, now, or GM will have to file. The hedge fund boys don’t care which way GM goes. In either scenario, they’ll end up controlling the company.

Their terms are simple: give the hedge funds enough new shares now so they can control the General’s Board of Directors. All indications are that GM’s bending to their demands. At the same time, the bondholders are demanding that Wagoner show them the rest of the plan he’s going to present to Congress that proves GM can avoid C11. That means better terms from the UAW labor agreements and the VEBA health care program, killing some brands and dealers, and making even more cost cuts.

And if GM files? No big deal. The government won’t let GM be liquidated. Nor will it nationalize the automaker. The reorganization will happen fast. Again, the bondholders will get to call the shots– right behind the $5b or so of secured bank debt. It’s a pittance in the scope of GM’s total liabilities; the automaker’s bond debt totals nearly $36b or so.

Assuming the hedge funds have been acquiring GM’s bond debt for pennies on the dollar, their total outlay might be around $4 to $8b. That’s not a lot of money, considering that the Feds are likely to put in another $12b or so of your hard-earned taxes. And that’s AFTER the group haircut.

The hedge funds will end-up calling the shots at a company that does $150b in sales with a global franchise and a new balance sheet financed by the taxpayers. Better yet, it’s a company that must be structured in a way to make money. The government wants to get paid back; the Feds will be sure that everyone gives enough so the company can be profitable. And that works for the hedge funds too– they got in on the cheap for a company guaranteed not to fail. (Ish.)

But don’t expect the hedge fund guys to show-up at the Capitol this week. In fact, they’ll stay well out of the limelight while Congress worries about Rick’s mode of transport to D.C. All the hedge funds want is a plan that works, and money from Congress. And then they can steer the wheels at a new GM, one that’s got a new balance sheet, a new management and a slimmed down North American business that makes money. It’s a good bet to take.

How much would a newly profitable GM be worth?

Ken Elias
Ken Elias

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  • Geeber Geeber on Dec 01, 2008
    olddavid: In the worldwide car business, the only country that requires the private sector to assume crushing debt costs in health care is the good old USA. Please show me the federal law that requires any company to provide health care insurance to employees. Hint - there isn't one. The automakers and the UAW have been free to renegotiate the benefits coverage for employees and retirees. For years, the UAW refused to even consider this, and management never pushed it. Now it may be too late. But that is not the federal government's fault. If the UAW really believed in nationalized health care, it would have simply proposed shifting retirees to Medicare. It didn't do this because it knows that Medicare coverage isn't nearly as generous as the benefits its retirees currently enjoy (one reason why the domestics are staggering under a cost disadvantage), which makes its calls for nationalized health care disingenuous at best. Please note that the transplant operations provide health insurance for active employees, but seem to be doing well. Ronnie Schreiber: Indirect spending through salaries for fed emps and armed forces members (Norfolk is home to the Atlantic fleet) and for the operation of military bases and defense plants, means more income and sales taxes flow into state coffers. As I explained before, two of the biggest drivers of federal spending are Medicare and Social Security. Both of these programs are aimed at senior citizens. The South and the West, with their milder weather, attract a disproportionate number of retirees, so those federal dollars will follow them. Regarding all of those federal employees - yes, they are paid very well. But the simple fact is that neither candidate ran on a small government platform, and the candidate who won is the one who wanted to do more to expand the federal government. Michigan went handily for him, and a large part of the reason he won the state is because the UAW worked to get out the vote for him. Of course, most of those new federal employees are likely to be based in Rockville or Timonium, Maryland, and Alexandria or Vienna, Virginia, not Ann Arbor or Detroit. But Michigan (not to mention the UAW) is only getting what it voted for, so my sympathy is quite limited.
  • 50merc 50merc on Dec 01, 2008

    Mr. Screiber, thank you for the additional information about Michigan. It seems sensationalistic doom-and-gloom media have again misled us, and that my longtime image of the state as one of great wealth and resources still holds true. Southern states are still far behind in high-value-added industries. Flint and the inner city of Detrot may not be prospering, but in general it appears Michigan's economic muscle should be ample to meet whatever challenges may come its way.

  • Bkojote I'm so glad I bought a Kia Telluride instead of a Toyota Tacoma given all these recalls. I wanted an off roady looking vehicle so I could impress the secretary we hired but instead my wife left me when she saw my phone messages and now I'm stuck making the $1200 monthly payment until I can refinance at a lower rate than 28% even though I lost my job last month. I'm hoping the Kia dealers will let me trade to the new one with the bigger infotainment tooFunny enough the secretary's new boyfriend is driving a Tacoma but with the recall maybe I'll have a shot.
  • Buickman Stop the Invasion. Boycott Envision.I am the top Buick salesman in history, bar none.have never sold this Commie Car and will not until they are built stateside.BuickmanFounderGeneralWatch.com
  • SCE to AUX Nice car for a nice price. I'd replace the headlights.
  • Fred Of course they will retaliate. Expect things to worse before they get better.
  • GBJT I think there are still non-turbo cars.
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