GM and AIG: Why bondholders might want bankruptcy
Before we begin, let us state clearly that this is speculation by Karl Denninger at The Market Ticker. Examining the various stakeholders' interests in General Motors, Denninger has come up with a scenario that supposes GM's bondholders might actually want the automaker to file for bankruptcy.
The bondholders appear to be the biggest obstacle to restructuring. They're not allowing GM to reach its government-mandated target for debt reduction because they would lose much of their investment in the process. According to Denninger, however, the biggest and most savvy of those bondholders could get 100% of their investment back if GM files for bankruptcy. Those bondholders would have had their bonds backed by credit default swaps (CDS), which Denninger supposes would have been written in large part by insurance giant AIG. If that's the case, then we the taxpayers are on the hook to repay 100% of those bonds because the government has agreed to fulfill AIG's CDS collateral obligations.
Follow the jump for more.
Thus, these particular bondholders would have no reason to help GM stay afloat by reducing its debt obligations. If GM goes under, they would just wait for checks from the government to be made whole again. Denninger goes on to say that in such a scenario, these bondholders could make even more than 100% of their investment back because the government backing takes place "even if the bonds have a recovery in bankruptcy." The only way to stop this would be for the government to decline to back any more AIG obligations, which could then bankrupt the "too big to fail" AIG depending on its ultimate exposure, but would save GM. Decisions, decisions...
This theory relies on AIG being in the middle of things, yet it wouldn't be outrageous to think that the biggest and smartest institutional bondholders went to the best known CDS paper writer for protection. As if that weren't enough, Denninger suggests that government-backed warranty work could become "a monstrous inducement" for dealers to bilk the government, a version of Medicare fraud for the car industry. The next 57 days look to be as exciting as they will eventually be costly.
[Source: The Market Ticker]
Get a WordPress.com Blog
Reader Comments (Page 1 of 1)
Flea 11:39AM (4/03/2009)
do you KNOW how long it took me to get that picture out of my mind the LAST time I saw it, Autoblog??? DO YOU???
Reply
Sektor 3:48PM (4/03/2009)
It's awesome... LOL
alex 11:40AM (4/03/2009)
this is exactly what some bondholders tried with GMAC.
Reply
homunculus 12:00PM (4/03/2009)
that ol' cheatin' bulldog cracks me up every gotdamn time.
Reply
jamie 12:11PM (4/03/2009)
I have known about this from day one.
However, there is another way out. The government should form a Resolution Trust, like the S&L debacle a few years ago, with a $100 billion credit line to fix the auto industry from the ground up.
Next, the RT should purchase all of the outstanding shares ($1.2 billion) of GM.
Finally, the RT should bite the bullet and buyout the bondholders for $28-31 billion, then flip that into the common shares they previously purchased. This is what the bondholders are reluctant to do because they would only receive about 8 to 33 cents on the dollar. That is why they prefer bankruptcy because they would be first in line to collect on GM's $35 billion in assets. It's a no brainer! They lose nothing.
With the RT as the major shareholder; the reduction of debt now turned into equity; share prices would climb from today's $2.00 level to about $8.00.
A similar tact could be implemented to reduce the remaining $69 billion of debt on GM's books. That would increase share value to between $50.00 - 60.00 a share. Then the RT could liquidate its holdings on the free market for a handsome profit. (ie.. the taxpayer would see a healthy return on their investment).
Result: GM would be free of its burdensome debt load and completely viable on its own again.
Simple mind think of simple solutions...Doh.
Reply
Fady 12:34PM (4/03/2009)
If that's the case though, you're basically paying off the bondholders at the expense of all the common shareholders as all their shares would get dilluted with that many new common shares being converted at once...even if it was at a staggered rate, everyone would see it coming.
Not to mention, I like how this right up says that the CDS' "may" be held by AIG...how can this guy even confirm that the CDS were created on these GM Bonds (yes, I understand many bonds did have CDS') and if they were...to be written AIG. That's just a series of perfect storms....remember, at the top of the 'bubble' so to speak no one thought GM would collapse this way. Therefore, CDS' would have probably been more profitable to sell on other securities or junk bonds.
PS: I remember back before working in the corporate world I used to work sales at Best Buy and when people asked about our service plans in case Best Buy went out of business, we would say 'oh don't worry, they are underwritten by AIG.' I wonder what the sales pitch is nowadays hahaha!
PPS: Jamie's pic is cute, so just believe what she says and do it feds :-)
Julius 12:30PM (4/03/2009)
That is, if the goverment had ~$100 Billion to actually perform said buyout/swap. And the big issue of the UAW cost structure still remains.... unless you want to tack on a few billion more to fully fund the VEBA. It'd probably be cheaper for the government to force retirees onto Medicare and the pension guaranty fund instead.
And in the end, there still will be costs of downsizing the dealer network and shedding the brands GM should - and that leaves a company I'd bet noone would be willing to pay $50/share for - at least for years to come.
Steve_S 12:33PM (4/03/2009)
Interesting idea although without chapt 11 GM is still saddled with to many brands and too many dealers. The only need Chevy and Cadi and can't afford to close the rest with the ensuing lawsuits.
sledge 1:36PM (4/03/2009)
Sounds interesting, but where do you get the $8 and $50-$60 numbers? I can see the equity buyout and the bondholder buyout working. However, I don't see how you would ever get to those $50 a share level and how the tax payer actually comes out ahead.
I think James Kwak did a better analysis of this situation and one I suspect Denninger took "inspiration" from quite liberally (their arguments are practically identical, but Denninger is less technical and posted at a later time).
http://baselinescenario.com/2009/04/01/the-new-masters-of-the-universe/
Tony 8:07PM (4/03/2009)
All those in favour of Jamie taking over the North American auto industry say "AYE". Seriously.
Level 12:34PM (4/03/2009)
"The bondholders appear to be the biggest obstacle to restructuring. They're not allowing GM to reach its government-mandated target for debt reduction because they would lose much of their investment in the process." I thought Mr W CEO of GM got fired because he wasnt able to come up with a plan??? great way to make an example lol
Reply
harlanx6 12:37PM (4/03/2009)
It just doesn't matter what they want. GM is bankrupt, and with it, we can surmise the demise of the UAW. The phrase " dead, but hasn't fell over yet" comes to mind.
Reply
Rob 2:02PM (4/03/2009)
How is this different than a person taking out an insurance policy on someone else then killing them to collect? Near as I can tell it is illegal under that scenario, Oh yes, I forgot that credit default swaps only "looked" like insurance...
Reply
BigWill 2:54PM (4/03/2009)
Or it could be a lot simpler. Debt for equity swaps only work if the equity is or is expected to be worth something , which is why Ford's swaps are working. If debtholders are almost certain GM will be in bankruptcy - the only unknown is time - then why bother with the swap? As debtholders, they have some hope in bankruptcy; as equity holders they'd have virtually none.
Reply
autorescue 9:13AM (4/04/2009)
Is GM Vehicles are wolf in sheep clothing?
WASHINGTON - As the Obama administration crafts a rescue plan for Detroit’s auto industry, it
must weigh demands from several players pushing to limit how much taxpayer aid gets spent on
vehicles and parts made outside the United States like Automotive Panasonic Radio for 3.5 billion
just this year.
"Buy American" rules played a key role in the debate over the federal stimulus plan and the
financial industry rescue, with many members of Congress calling for barriers to keep aid in the
U.S.
Main reason for Auto failure are due to GM’s Rick Wagner and Chrysler management’s poor decisions
to use foreign suppliers like Panasonic in the Vehicle over American suppliers. GM is preaching
we are American made Vehicle. Then why is GM using Japanese Panasonic Radio in the Vehicles? Why
is now Chrysler choosing to use Panasonic Radio in its Vehicle? It is expected that approximately
1.5 billion revenue from GM to Panasonic and same GM’s radio modified to sold to Chrysler for
another 2 billion this year. So what percentage of American Tax payer bail out are going to Japan
approximately whopping 3.5 billion just this year alone. Why not we just buy Toyota instead of
these cars like wolf in sheep clothing? Now you know the reason for the high unemployment rate in
Michigan. Here GM and Chrysler are close to Bankruptcy while Panasonic is sitting on huge amount
of American Cash. Investor community criticized Panasonic for sitting on too much cash and
outsourcing American jobs to overseas. Panasonic reported some loss only due to purchase expense
of the Sanyo not due to auto loss, there is no real loss for Panasonic. Interesting the only
company Ford that does seek rescue from Taxpayers also does not outsource Automotive Radio
manufacturing to Panasonic.
Most of the jobs are in the parts which come from Japan. Think of a radio. At the assembly plant
a few screws and wires are attached. Most of the jobs are related to the complex internals of the
radio (circuit boards, switches, displays, programming, etc). Even if the radio is assembled by
Panasonic US, the parts are brought over in bulk assemblies with very little work in US. GM
created the market place for Panasonic in America and Chrysler paying more to buy same GM Radio
at GM’s cost. Now with out effort Toyota get to use same technology at the expense of GM and
Chrysler for their vehicle. Foreign supplier like Japanese Panasonic Radio in GM and Chrysler
limits must be made in auto industry rescue plan. Instead more focus should be made to American
made suppliers
Majority of the bailout are indirectly supplied to foreign suppliers like Japan Panasonic in GM
and Chrysler Vehicle for whopping 3.5 billion this year alone. These unjustified contracts are
made due to indirect financial perks to the executive at GM and Chrysler. Now you know the reason
for Panasonic Priority over other suppliers. These contacts must be renegotiated mostly to use
American suppliers.
The Obama administration unveiled a $5 billion plan to help the suppliers of GM and Chrysler LLC,
which would only apply to parts made in the United States. But that plan is limited to direct
suppliers, and the administration has told automakers there were no rules under their federal aid
requiring them to buy a set number of parts from domestic firms.
Reply
bakka 8:12PM (4/03/2009)
The government has the money, it is called the Federal Reserve.
Reply