Wednesday, May 27, 2009

Did Bondholders Learn from Chrysler?

The Wall Street Journal ran a front page story on their May 27, 2009 edition titled "GM-Union Deal Raises U.S. Stake."

Although the piece deals largely with the U.S. government getting a 70% share of GM, with the UAW taking a reduced, 17.5%, it mentioned that bondholders could reject a debt-for-equity swap ($27 billion in unsecured debt for 10% of the company).

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It turns out that the bondholders did reject the swap and now GM is highly likely to enter bankruptcy on or around June 1, the government deadline for restructuring.

Although I have written about evils of the nationalization of auto industry here, here, and here, the GM bankruptcy process has been somewhat different.

In the now-failed deal, the senior creditors were to be made whole with $6 billion. Sounds good so far. The union, according to the Wall Street Journal, reduced their stake because they "...were concerned about GM's prospects..." also sounds pretty sane. However, GM's bankruptcy is more complicated because it is so large and has no single buyer in the wings. People who switched to Allstate saved an average of $396 per year. Quote Now!

These conditions will make for a good court fight. Why is this a good thing when the consequences are so bad for so many? It is good because it serves as a reminder to the current Legislative and Executive branches that government has no business trying to run the auto business. A good court fight will allow the stake holders to duke it out and have the market best decide the fate of a failing company. Try RingCentral Fax FREE for 30 days

Further, this bankruptcy will show all future lenders to U.S. companies that the business climate of the U.S. is transparent and operates under the rule of law. This concept has been put in grave doubt by President Teleprompter's interference with Chrysler and GMAC.

Finally, a long bankruptcy will put the brakes on the socialism express this country has been on since January, 2009. If free markets are to succeed, no company can be sacred, and no industry too important.

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