Right now, for GM to avoid a bankruptcy filing, it has to get concessions or “sacrifice” from the “stakeholders”. In plain terms this means the union and the bondholders. The union has already stepped up to the plate. It has sacrificed and offered additional sacrifice contingent on the bondholders. So far, though, the bondholders haven’t agreed to anything. It is the bondholders who are blocking a “restructuring”. Ultimately, the bondholders will force the company into bankruptcy. Why?
To understand why, we need to look at the negotiation process. There are thousands of GM bondholders: some large, some small, some individuals, some banks, some are bondfunds like PIMCO, and some pension funds. But while there may be thousands (perhaps even millions) of seperate bondholders, the vast majority have no voice in the negotiations. Instead, there is a “bondholders’ committee”. Who is on the committee? The “experts” and the large bondholders: primarily banks and bondfunds. These banks and bond funds presume to speak for all bondholders. But their interests are not in line with all bondholders. We know that there are very large number of outstanding Credit Default Swaps (CDS) contracts on GM. So who likely holds the CDS’s? The very same large banks and bond funds that are negotiating. So, in effect, if GM goes BK, then the bondfunds/big banks are hedged and get full payment via the CDS. If they agree to a restructuring, they get less than full payout. So there’s no chance they’ll agree. Of course, the little bondholders (like Joe Retiree with his $10,000 of GM bonds) loses. He’s not hedged and he has no real voice on the committee. The little guy gets no voice until after the committee approves sending a tender offer. Not likely to happen.
This is doubly true since AIG, the likely writer of many of those CDS’s, continues to get full bailout from the gov.
The only chance of avoiding BK for GM is if the Obama administration either: makes a credible threat to stop bailing out AIG –OR– the administration decides to make CDS’s null and void. Neither is likely.
GM has a problem. It’s not the cars or the union. GM needs to get it’s costs down as required by the govt loan terms. The union has agreed to it’s share of the restructuring. Waggoner is now gone. What’s left and what’s blocking GM’s turn-around are the the banks and bondholders. They refuse to take a “haircut” to re-structure GM’s capital structure and debt costs. Why?
Because the big banks and bondfunds have already insured themselves against GM default (bankruptcy). So heads they get paid, and tails they get paid. The only way they don’t get paid fully is if they agree to a restructure now.
Ahh, but you say, isn’t AIG, the “insurer” of these bonds through it’s credit default swaps already kaput itself? Yes, but The Treasury has shown that it will make good 100% on AIG’s CDS.
GM (and all of it’s employees, dealers, and communities) is being held hostage by the banks and bondholders until the US govt pays full ransom to them.
Why, oh why, oh why won’t the govt just declare Credit default swaps null and void?
Now, with world leaders gathering this week in London to plot a response to the gravest global economic downturn since World War II, the fund is becoming a chip in a contest to reshape the postcrisis landscape.
via Rising Powers Challenge U.S. on Role in I.M.F. – NYTimes.com.
Yesterday the Obama admin forced GM CEO Rick Waggoner to resign as a condition of continued support for GM’s restructuring. Yet, the administration has not yet demanded any of the banks change management (except AIG & Fannie last Sept), despite the banks using 18-20 times as much bailout money.
Several folks have asked me why? Why the double-standard? The answer is that in the last 30 years, the banking industry has captured Washington. Our Treasury Dept officials are ex-bankers and when done in DC they return to banking. The leading economic advisors (Larry Summers now, Bob Rubin and Hank Paulson in past) are either bankers or have long career ties to banking. This is not a good thing.
Simon Johnson, ex-IMF chief economist, has written analysis of the problem that, while long, is very worthwhile read. He calls the financial industry’s capture of our government’s policy a Quiet Coup.
I have some key excerpts below the fold, but it’s worth checking out the whole article. Continue reading
Interesting article on economic crisis and changing corporate structures. For example, it describes how The Great Depression led to the creation of multi-divisional large corporations such as GE, GM, and DuPont (the corps already existed, the structure changed). Interesting to speculate how the current crisis will change corporate business organizations.
via Unboxed – How Crisis Shapes the Corporate Model – NYTimes.com.
Ralph Nader has made IMHO an excellent contribution to the discussion of what can be done to prevent future crises on Wall St such as the current one.
Here are seven avoidance indicators which outline what Washington is not doing to prevent another round of greed and misdeeds by the Wall Street few against the innocent many throughout the country.
via Nader: Seven Steps the Obama Admin is NOT Taking to Fix the Banking Crash, Why Not?.
I will comment further at LCC Global Perspectives Conference, but
All the idols of capitalism over the past three decades crashed. The assumptions and presumptions, paradigm and prognosis of indefinite progress under liberal free market capitalism have been tested and have failed. We are living the end of an entire epoch: Experts everywhere witness the collapse of the US and world financial system, the absence of credit for trade and the lack of financing for investment. A world depression, in which upward of a quarter of the world’s labor force will be unemployed, is looming. The biggest decline in trade in recent world history – down 40% year to year – defines the future. ...The ‘market’ as a mechanism for allocating resources and the government of the US as the ‘leader’ of the global economy have been discredited. (Financial Times, March 9, 2009) All the assumptions about ‘self-stabilizing markets’ are demonstrably false and outmoded. The rejection of public intervention in the market and the advocacy of supply-side economics have been discredited even in the eyes of their practitioners. Even official circles recognize that ‘inequality of income’ contributed to the onset of the economic crash and should be corrected. Planning, public ownership, nationalization are on the agenda while socialist alternatives have become almost respectable.
With the onset of the depression, all the shibboleths of the past decade are discarded: As export-oriented growth strategies fail, import substitution policies emerge. As the world economy ‘de-globalizes’ and capital is ‘repatriated’ to save near bankrupt head offices – national ownership is proposed. As trillions of dollars/Euros/yen in assets are destroyed and devalued, massive layoffs extend unemployment everywhere. Fear, anxiety and uncertainty stalk the offices of state, financial directorships, the office suites the factories, and the streets…
via Atheo News: World Depression: Regional Wars and the Decline of the US Empire.