Federal Actions on GM Threaten Investors the Economy Needs

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Thursday, May 14, 2009

DESPITE a massive infusion of government cash, General Motors is slowly and almost assuredly limping toward bankruptcy. The company's stock has been hovering just above the $1 mark for the past few days, and chief executive Fritz Henderson has signaled that bankruptcy court may be the best -- or perhaps only -- venue in which the company can come to terms with its creditors. GM -- and its partner, the U.S. government, which could get as much as a 50 percent equity stake in the company -- have set themselves a deadline at the end of this month to decide what to do.

And therein lies the potential danger. The government's intervention in GM's financial affairs tilts the scales so dramatically in the company's (read: government's) favor that it risks shutting out the legitimate interests of some creditors in favor of politically connected players who are owed much less and have less of a claim to the company's money. GM bondholders, for example, are being pushed to accept a 10 percent equity stake in repayment of their $27 billion in loans to the company. The United Auto Workers, on the other hand, is being offered a 35 percent equity stake in exchange for its claim of roughly $10 billion -- a claim that would typically be wiped out in bankruptcy. It is hard to blame bondholders for refusing to cave in to the government's pressure, especially because some of them bought insurance against a possible GM bankruptcy; that insurance would pay them more than $2 billion in cold, hard cash -- instead of in potentially worthless stock should the company file for Chapter 11 protection.

There is reason for GM creditors to be uneasy, especially after the government's hardball tactics in the recent Chrysler bankruptcy. In that case, hedge fund investors who refused to accept the government's low-ball offers were demeaned by the president as "speculators" and all but blamed for driving the automaker into insolvency. Once in bankruptcy court, these creditors fared no better, in large part because the government's decision to provide operating funds for Chrysler gives it an outsized power to shape the reorganization. While the hedge funds are likely to receive less than 30 cents on the dollar, a health-care fund controlled by the UAW is being handed a 55 percent ownership stake in Chrysler. If bankruptcy rules had been strictly followed, the union would have been entitled to little, if any, return.

Extraordinary times call for extraordinary measures, and it was with this thought in mind that we endorsed the federal government's decision to pump billions of dollars into the automakers. But the spectacle of creditors being stripped of their legal rights in favor of a labor union with which the president is politically aligned does little to attract private capital at a time when the government and many companies need these investors the most. Investors' fears will only be compounded if the administration follows a similar blueprint with GM.

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