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.
EconProph 
You may very well be right, but there there are two big, handwaving assumptions here: big bondholders have bought CDS’s and those CDS’s have the implicit government support of being issued by a bailed out AIG. It would indeed be very interesting to see the extant to which both of those are true, because they would certiainly highlight an agency problem. (the negotiators are supposed to represent all bondholders, but have differing interests from many)
Agreed. Right now, I’m going on probabilities. There are reportedly a very large volume of GM CDS’s outstanding. It’s certainly reasonable to think that very few of those CDS’s are held by small bondholders – most of whom don’t even know what a CDS is. It’s possible some of the outstanding CDS’s are naked and held by non-players. But I think it’s probable that banks (Citi, etc) and funds like PIMCO would have hedged themselves.
Likewise, I’m going on the probability that the writers of the CDS’s are most likely recipients of big TARP, esp AIG. Since we already know much/most of AIG’s bailout $ has gone to pay-off CDS’s and clear them at 100 cents on $1, it seems likely to me.
If I’m right, I would think there should be huge class-action suit waiting somewhere here.
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