Monday, May 11, 2009


The CEO of GM, Fritz Henderson, spoke this morning at press conference, and said that GM is likely to find itself in a chapter 11 proceeding even though there is still a slim chance of staying out. One of the questions out there is "will the US Government follow the same 'we are providing the financing so we are calling all the shots' play as it did in Chrysler?"

The US Government decided what answer it wanted in Chyrsler and as the lender of last resort forced that answer on Chrysler. It is likely to do the same with GM. Afterall, GM is unlikely to be able to obtain financing from any other source. And after all, if you are the only lender willing to finance GM then you get to call the shots.

The Treasury is jamming a recovery of 10% of the equity on GM's bondholders. And, it is probably not negotiable. The GM bondholders have $27 billion of unsecured debt. The UAW has claims of $20 billion for its VEBA accounts (workers health benefits). The Treasury is reported to have agreed to let the UAW get 55% of the equity and $10 billion of debt. In summary, GM bondholders get 10% of the equity for $27 billion of claims and the UAW's VEBA gets 55% of the equity for $10 billion of its claims and $10 billion of debt. This is not even close to similiar treatment for claims that rank the same in a bankruptcy which would usually provide that these claims get generally the same treatment.

So, what's going on? Here is a take on it. First, as one government official said, 'we need autoworkers to build cars, we don't need bondholders.' Bear this in mind as you follow this matter over the next few weeks. Second, the government has already lent billions to GM. It will have a large claim in the bankruptcy that it looks like it is forgiving. Said another way, the Government is giving whatever recovery to which it is entitled to the UAW. Third, the Treasury will be lending billions more to GM in a bankruptcy (or an out-of-court restructuring) that should be paid in full before other creditors are paid. Instead, it looks like the Treasury is going to give some of its recovery on its future financing to the UAW. Fourth, the Treasury may be saying, 'All the funding we are putting in is more than the value of GM, therefore, we effectively own it. And, if we own GM, we will decide who gets what."

This is just a view. I am sure shortly after the GM bondholder fight with the Treasury is over, we will hear from the participants, anonymously no doubt.

Cheers, Mike


  1. This is crazy. There is supposed to an order by which the creditors get paid before the shareholders. I am shocked at the government's audacity.

  2. While I can make a case for the Treasury's actions based on the financing they provided pre-petition and post-petition in each case, it is clear that Treasury is being ruthless toward the lenders and bondholders. Basically they are saying no one else but we have money to finance this, so here is what everyone gets. If you don't like it, no problem, get the money from someone else.