Tuesday, March 31, 2009

G.M. and Chrysler

Yesterday President Obama announced a 2 month sentence for GM, and a one month sentence for Chrysler: get a workable plan together, or go into bankruptcy. The howling is loud, and widespread. There is also praise for his making a tough decision.

A news analysis: For U.S. and Carmakers, a Path Strewn With Pitfalls.

In essentially taking command of General Motors and telling Chrysler to merge with a foreign competitor or cease to exist, Mr. Obama was saying that economic conditions were sufficiently dire to justify a new level of government involvement in the management of corporate America.

To the extent, a news story in the Journal had it this morning, of telling Chrysler it will have to build a hybrid car.

His message amounted to an inversion of the relationship that had helped define the rise of American manufacturing might in the 20th century; now, Mr. Obama seemed to be saying, what is good for America will have to be good enough for General Motors.

Nice turn of a phrase that is over half a century old (uttered by GM CEO Charlie Wilson, as I recall reading), denoting how much things have changed.

In presenting the automobile plan on Monday, Mr. Obama suggested just how tricky it can be for Washington to wade into the marketplace: He declared that the government would back up warranties on Pontiacs and Buicks and the rest of the G.M. and Chrysler product lines, so that consumers would have no fear of buying those cars. It may have been a necessary step, but it means that the government now is not only the ultimate guarantor of savings accounts and insurance policies — it will also cover that blown transmission.

From Andrew Ross Sorkin's article:

Not three hours after the president spoke on Monday I received an e-mail message from a group representing G.M. bondholders — people who are likely to have an enormous influence over the future of the Detroit carmakers.

These are not people who are awed by their President. Spin began quickly.

The e-mail message, from advisers for an “ad hoc committee” whose members collectively hold G.M.’s $28 billion of debt, started by suggesting that they wanted to be part of the solution.

But by the end of the e-mail message, they were complaining that they were “very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan.”

So, they want to be part of the solution, but were not consulted. Or, were they?

The e-mail message came from the same group that two weeks ago grumbled that “G.M. bondholders have been asked to make deeper cuts than other stakeholders,” and threatened to send G.M. into bankruptcy. “Unless the framework we suggested is utilized,” the group said, “the restructuring currently contemplated will not achieve the required level of acceptance to succeed on an out-of-court basis.”

Were they?

During the next 60 days, G.M. and its stakeholder have the last opportunity to save the company — or risk letting a bankruptcy judge do it for them. To do so, G.M. will almost certainly need concessions from two groups: workers and bondholders.

The workers, represented by the United Automobile Workers, have made concessions already. And the president said they need to make even more, as painful as it will be. The workers — despite often appearing recalcitrant — have the most to lose. If G.M. falls into bankruptcy protection, they could lose not only their jobs but also much of their retiree health care plan.

Then there are the bondholders. Their motivation is very different. For them, this is not about keeping their jobs or, frankly, about patriotism. It is about dollars and cents. And, according to some analysts, there is a chance they would actually do better in bankruptcy court than they would negotiating against G.M. or the government, which is seeking to reduce G.M.’s debt by two-thirds.

So far, bondholders have been offered 8 cents on the dollar in cash, 16 cents on the dollar in new, unsecured debt, and a 90 percent stake in G.M. G.M.’s bonds closed Monday at 16 cents on the dollar. Hoping to apply some public pressure to the bondholders, Senator Carl Levin, Democrat of Michigan, said Monday that if G.M.’s bondholders “refuse to work out a deal, they will likely end up empty-handed.” (That is not exactly true.)

Hoping to attract a bit of public sympathy themselves, the ad hoc committee has said, “G.M. bondholders are not a collection of Wall Street banks. Many of these bonds are owned by average citizens, who purchased them to support their own retirement and college expenses and other critical needs.”

That’s a bit of misdirection, however. While it is true that there are some “retail” investors that own G.M., about 80 percent of the bonds are held by large investors and hedge funds, many of which play in distressed debt markets. Some of them would less politely be called “vultures.” Indeed, G.M. bonds have been changing hands rapidly, suggesting that some hedge funds have been plowing into them, gambling that these investments soon will be worth even more.

Emphasis added.

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