Yet when Recamier pleaded for a modest government loan to bail out the bank, Napoleon was unapproachable and unforgiving, writing from Austerlitz within days of his triumph (December 7, 1805), “Is it at a time like this that I must be obliged to make advances to men who have got themselves involved in bad businesses?” and, more brutally, “I am not the lover of Madame Recamier, not I, and I am not going to come to the help of negociants who keep up a house costing 600,000 francs a year.”
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.
Excellent but long post by Edward Harrison at Naked Capitalism.
This post describes what’s happening with the “Geithner Plan” for revised bailout of banks/ dealing with toxic assets in the context of an earlier bailout: the Mexican currency crisis in 1994-95. It”s many of the same folks involved: Summers, Geithner, and a populist sentiment in Congress that the powers that be decided to go around.
Good read for both the current crisis and to review the Mexican currency crisis.