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