By on March 22, 2009

We’ve been hearing a lot recently about GM bondholders’ unwillingness to take the haircut offered by The General—a precondition for federal loans. Ha! Got you! It was supposed to be a precondition. Uncle Sam blew through the first deadline as if that check box didn’t even exist. As the The Presidential Task Force on Automobiles (PTFOA) prepares to dish-up a second helping from the bailout buffet, GM bondholders are tooling-up for next week’s PR war. The “unofficial committee’s” letter to the PTFOA [full text via Reuters] kicks off with the Cerberus defense: ” . . . many of these bonds are owned by average citizens, who purchased them to support their own retirement and college expenses and other critical needs.” As we said when Chrysler’s owners assumed this position, bullshit. As the letter acknowledges, 80 percent of this debt is held by institutions. Meanwhile . . .

The bondholders would like the PTFOA to know that it’s not simple greed at work here (i.e., give us a better deal or you can file Chapter 11, bub). They’re holding out because they’re skeptical of GM’s new new new new new new new turnaround plan. Well, yes. I mean, no. Why would the bondholders (or any other rational person) have faith in GM’s turnaround plan? But the bondholders want us to think they’re primary motivation is, again, the little people.

We do not know if the plan would, in fact, keep the company out of bankruptcy (in which case the securities received by the bondholders in an exchange would likely be worthless and the retirement funds and other who counted on these securities would be left with nothing.

True, but please. [See: above] And then, the bombshell. (Ish.) The bondholders report that they presented an offer to the PTFOA and never received a reply. So much for negotiations, then.

Is the PTFOA about to launch a PR campaign against the bondholders, hoping to beat them into submission using the greedy Wall Street bastards meme that’s gripped the MSM? it sure looks that way.

I almost forgot: the bondholders have turned down an offer of 33 cents on the dollar on about $27B in GM debt. If GM went C7, they’d bank over 50 cents on the dollar. And it’s worth noting that the bondholders have suggested—publicly—that they’d be far more amenable to the 33-cent offer if Uncle Sam (that’s you) guaranteed 100 percent of the debt. Yeah, no NSFW.

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20 Comments on “Bailout Watch 451: GM Bondholders’ Letter to PTFOA...”


  • avatar
    crackers

    What? NOW they’re skeptical of the turnaround plan? How about all the previous plans? Where was the pressure applied to the GM BOD? These people should have done their due diligence before buying the bonds in first place.

  • avatar

    Crackers:

    There are no good guys in this debacle.

  • avatar
    tom

    I don’t know about the specific laws in the US, but I guess it’s pretty similar all around the world, and for all I know, bondholders are first in line when it comes to a liquidation.

    And right now, the main interest of the bondholders is to get as much money out of this pithole as possible.

    Looking at the balance sheet, as of 2008-12-31, GM had total assets of $91 billion and total liabilities of $177 billion. Now that already is way beyond redemption under any feasible scenario anyway, but it also means that under a C7 liquidation the bondholders would get roughly 51 cents on the Dollar. So why should any bondholder settle for less than that?

  • avatar
    lw

    This is going to be bloody.. Like AIG except more political and more emotional.

    As any system/organization grows it becomes exponentially more complicated. A large company (GM, IBM, GE, etc.) can hold things together because the employees have a common goal.. Make the company profitable and keeping their jobs.

    The government doesn’t have this common goal. The government is political by definition and the employees are either there due to a sense of duty or marking time until the pension kicks in. Getting fired / laid off from the US Government really doesn’t enter into the equation.

    Now put the government in control of multiple large corporations and you have a real mess.

    The ONE thing you can count on from here on out is that the government will become less competent as it takes on more and more responsibility. No other option.

    My personal investment strategy is based on the fundamental truth that Congress and the Prez will NOT be fiscally responsible. Doesn’t matter which party is in charge… It simply is a truth.

    I have yet to be let down.

  • avatar
    psarhjinian

    As any system/organization grows it becomes exponentially more complicated. A large company (GM, IBM, GE, etc.) can hold things together because the employees have a common goal.. Make the company profitable and keeping their jobs.

    So what’s GM’s excuse for not having a supposed common goal even before the government got involved?

    GM’s problem is the same as was faced by IBM pre-Gerstner: poor leadership, fragmentation into fiefdoms, no strategy, no consideration that a) they’re no longer leaders and b) that worthwhile ideas can and were coming from outside.

    The difference between IBM is that they brought in Lou Gerstner and he kicked ass and took names, turning IBM from an on-the-ropes has-been to a terrifying competitor. GM is doing nothing of the sort, instead trying to coast on as if nothing’s really wrong.

    The shame is that government ownership could have been the impetus for getting GM their own Gerstner. Where the government is falling down is in not being interventionist enough; something they’re doing because they’re too balkanized and too cowardly to do more.

  • avatar
    McDoughnut

    Sure the Gov’t will try and vilify the GM Bondholders in the media – but where is the leverage? They have not been given any handouts so if I owned a ton of GM Bonds and got a call from the Treasury to “reconsider” why couldn’t I just say No Thanks.

  • avatar
    lw

    @psarhjinian

    I completely agree. Gerstner came in and fixed IBM. What created the opportunity for Gerstner?

    The shareholders, bondholders and board of directors wanted a return on investment.

    We may never know why the GM stakeholders decided to not care about profits or preserving their jobs / investment, but they did.

    Imagine if GE or IBM had lost $40B in one year? Heads would roll.

    So the real question, why did a majority of GM stakeholders just stop caring?

    Did they all just assume that the US Government would make them whole? If so, they are right so far.

  • avatar
    psarhjinian

    So the real question, why did a majority of GM stakeholders just stop caring?

    Fascinating question, because it asks so many others.

    Generally speaking, this is what boards of directors are for: to ask the kinds of questions that management is too myopic, cowardly or incompetent to ask themselves.

    Of course, the modern BoD is more often than not an old boys club, comprised of executives and luminaries who owe more to the people they should be overseeing than to the shareholders and bond-owners they represent. That, though, begs the question of why the shareholders and bond-owners haven’t been screaming blue bloody murder for years. It’s not like GM was making money in any kind of sustainable fashion, or that the signs weren’t there. Near as I can tell, the closest anyone got to asking serious questions was Kirkorian/York, and they were effectively shot down by the rest of the BoD.

    I’ve heard of some very, very bad directorships, but what’s going on at GM is going to be grounds for some fascinating legal action in a year or two. The best—the only—theory I can come up with is that the directors are in it so deep in terms of liability that their only hope of getting out of this with their hide is to stay the course until things are, if not rosy, at least tenable.

    The corporate governance model is not a bad one, and I think it would be worth a TTAC article or two on why and how oversight broke down so thoroughly at GM. This isn’t a quick collapse a la Enron, it’s a long, slow and painfully obvious decline. I can’t think of another player of this size where this happened. IBM is perhaps the closest, and they were nowhere near as sick as GM is.

  • avatar
    barely.working

    Taking a look at the BoD…

    http://www.gm.com/corporate/investor_information/corp_gov/board.jsp

    One quick observation is that for a company the size and scale of GM, you’d expect some pretty heavy hitters on the board. People who’d be sitting on boards of other multi-national corporations.

    In reality, there isn’t. Out of the 11 BoD members from outside of GM, 3 are chairs of either Universities or Foundations and 3 are execuatives in companies which, well don’t have a great track record. How great is Eastman Kodak doing? Didn’t Sara Lee file for bankruptcy just recently? I also saw that several of the directors also sit on the board of Home Depot. Go figure…

    Not knowing anything about the skills of the BoD members, it seems like to me that most them aren’t that well suited for the job at hand. In reality, they probably aren’t exactly the A-Team when it comes to saving a company on the brink.

    In the incestuous world of corporate directorships though, if you’re known as someone who rocks the boat so to speak, you might just kill your chances of being a director at whatever sexy industry will come out of this recession and be able to make a pile of dough on stock options.

    As is said many times, the inaction by the BoD can be considered to be pretty much illegal. Heads will spin in the near future.

  • avatar
    lw

    I worked directly for / with GM for 10 years.. Still don’t think I could come up with a rational explanation for why the stakeholders just quit caring. Kirkorian/York was an amazing event. Publicly proved that the GM stakeholders had checked out.

    My best guess to explain this….

    GM is such a storied brand.. An amazing company when you look at the long history and the amazing accomplishments. Everyone figured that GM would continue to function for longer than they needed in order to accomplish their individual goals.

    A bondholder says.. well I get paid in 10 years.. Surely GM will be around for another 10 years…

    A pension fund says well I know the stock isn’t doing great, but the dividends is what I’m after and there is no way GM will go bankrupt.. That wouldn’t help them at all.

    An employee says, surely GM will survive another 7 years until my retirement.

    Everyone drinks the Kool-Aid and anyone who says differently is a GM hater..

    Eventually all the people who see the train wreck coming cash out and the only stakeholders that are left are Kool-Aid addicts.

    So they just keep refilling each others cups…

  • avatar
    DrX

    Why don’t the stakeholders seem to care? It certainly seems like many of them have been asleep at the wheel. The letter referenced makes a point of saying that most of these bondholders purchased the bonds when they were investment grade. These bonds have probably been rated as junk for years now, so why are they still holding them? I mean, tough NSFW…investing isn’t just free money, you’ve got to pay some attention to your investments.

  • avatar
    Cynder70

    The (mis)information bubble has popped. Continued investment without accurate and factual information is foolish in this climate.

    GM doesn’t have a plan and the internet exposes the “truth about (their) cars” in a way they cannot control.

    No one wants to be left holding the bag.

  • avatar
    Cynder70

    BTW, where is proof of this letter and what did it say?

  • avatar
    Cynder70

    Follow up… I read the letter linked to the article. What I meant to ask was about the “five year” restructuring plan. Where is it and what did it say? My bad.

  • avatar

    the Board is comprised of representatives from Morgan, Goldman, Deutshche, Merrill, and BOA. together these entities control two thirds of the stock. (not to mention big pharma Astra Zeneca, Pfizer, and British Petroleum…what’s that MPG thing anyway?) since Red Ink Rick is doing the job of eliminating employees, cutting wages, dropping benefits, and shifting production overseas, they continue to support him. meanwhile he has emptied the asset shelf thereby funneling capital to those same banks through investment banking fees. and don’t forget those mounds of commercial paper that pay gobs of interest to said lenders.

    is there any other rational explanation for backing Wagoner? keep in mind these are not stupid people.

  • avatar

    This is hard money negotiation, boys. My guess is that many of the bondholders are the same players who got bailed in the banking fiasco.

    If you cry, and mom gives you the popsicle, you know that you can cry for another one.

  • avatar
    PeteMoran

    @ lw

    So the real question, why did a majority of GM stakeholders just stop caring?

    In Australia, many in the low/middle class have their investments in pooled “superannuation” which is similar to the US 401K. Those fund “managers” then slice/dice those pools in many directions, so there is less direct investment and stakeholder intervention in the management of companies. There are huge ‘managing’ companies that didn’t even care enough to check out Bernie Madoff for local municipal authorities in Australia.

    Hedge funds are a different world – you just don’t get a say, but Australia pooled funds have invested in hedge funds. Funds investing in other funds means the abstraction from your $1 investment is complete. You can’t follow it or take an interest even if you wanted to.

    The fund “manager” (gambling) geniuses created more and more financial “instruments” (of destruction) that they felt, in a rising market, would work on auto pilot. All they ever wanted was the money-changer fees on the trades. They did lots of trades, so they’re still due their bonuses.

    @ RF

    Bond holders are nervous on the should-they/shouldn’t-they C7 or C11 because they’re the same people that will be wiped out in other investments by the default-swap credit ‘event’ that is yet to come.

  • avatar
    wsn

    And we were talking about the AIG bonus “contracts”?

    Bonds are the highest form of financial contracts. I am in fully support of the bond holders here. They are fully entitled to make the most out of their investment.

    If I were a bond holder of GM, I know that:
    1) The government is determined to save GM
    2) Someone is going to make big money after my bond is bought out at 30 cents for the dollar

    So, I would say, screw it. Liquidate the company. I won’t allow anyone else to take advantage of me, even if my bond goes to zero.

    Disclaimer: I don’t hold bonds of any kind.

  • avatar
    MikeInCanada

    Re:WSN

    You sound a little bitter “I won’t allow anyone else to take advantage of me, even if my bond goes to zero.”– however you do have a point……

    There is a reason GM bonds trade at approx 30 cents of face value – they’re risky.

    The moment the Gov’t steps in and removes that risk (by way of a loan guarantee) said risk is reduced/removed and the their value will rise significantly.

    I – like many here at TTAC – have little to no doubt the Gov’t will do exactly this. The rationale being “Guarantee’s don’t cost any money – for now…”

    So yes, I agree. If you bought GM bonds @ 30-50 cents on the dollar you are going to make a killing. Hookers and Coke for everybody!

    BTW. Does anyone know what the various GM bonds are trading at right now?

  • avatar
    njdave

    It is the shareholders own fault. I actually read the annual reports from the companies I own stock in, and if I am dissatisfied with the BOD, I vote “no” on the election question on the proxy ballot that comes with it. Sadly, most shareholders do neither. Since an absent vote counts as a yes vote on most proxies, the shareholders that don’t bother to read or vote continue the same BOD and policies year after year. If the average person got more involved, and actually VOTED, the BODs in the various companies might get nervous and change things.

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