How GM bankruptcy would hit investors
As GM considers bankruptcy, the company's stakeholders are worrying about losses on their investments. Some bondholders may see returns on their money, but others could be arguing over pennies. Jeremy Hobson reports.
The General Motors logo is displayed at the New York International Auto Show in New York. (Stan Honda/AFP/Getty Images)
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Kai Ryssdal: Shares of General Motors took a drubbing today -- off 16 percent on a report in The New York Times that brought fears of bankruptcy bubbling back up. There is speculation that GM and the White House might do something like what was being considered for the banks not too long ago. Two separate companies -- a good GM that includes everything that might make money, and a bad GM holding everything that doesn't. A lot of people lose if GM goes under. But Marketplace's Jeremy Hobson reports some losers are more equal than others.
JEREMY HOBSON: If GM goes bankrupt, there's an order to who gets repaid and when. Senior debtholders have collateral backing their investments, so they're more likely to get their money back. After that, you look to the bankruptcy code's absolute priority rule for guidance, says Peter Chapman of Bankruptcy Creditor's Service.
PETER CHAPMAN: The absolute priority rule would say no general bondholder recovers anything until all of the senior senior bondholders are paid in full.
Junior bondholders are further down the line. They're already looking at figures as low as 8 cents on the dollar for their investments. But they got paid a bigger interest rate for their unsecured debt when times were good. Stockholders come right at the end of the line. Chapman says they won't get a dime until the company has repaid its debt.
CHAPMAN: You can't go out and borrow a bunch of money and then steal it all and get away scott free. OK?
Well, at least not if you end up in bankruptcy court. Peter Gilhuly is a bankruptcy lawyer at Latham and Watkins. He says stockholders may be nearing a wipeout, but they had the most to gain when GM was doing well.
PETER GILHULY: They have the upside of a value of a solvent enterprise, but when it's insolvent, their equity is worthless.
Those junior bondholders hate the idea of bankruptcy as much as the stockholders do. Because if the company does the quick-rinse bankruptcy that's expected. Bondholders could be arguing over pennies in court for years, while the best parts of the company drive off into the distance.
In New York, I'm Jeremy Hobson for Marketplace.
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04/14/2009
Booo Hooo. Investors lose their money. it's expected.
GM killed the electric car. They had a EV1 back 10 years ago. They killed it for the sake of their SUV. Now they have no efficient cars to show for. I will have a party on the day of their demise.
04/13/2009
Once again, GM's soon to be biggest stockholder, the taxpayer, is getting fed the false line about a "good GM" and a "bad GM".
If you want to know how well this will work, take a simple look at history. GM was in this situation back in the 80's, and Roger Smith created a good GM to lead the bad GM back to health.
You know the good GM--it was called Saturn Motors. The advertising played down any connection to the bad GM, where too many people made a living showing up, not by making a good product.
So what happened to Saturn? It created a product with the same build quality as any GM car. Engines failed at the start due to bad coolant, they were noisy and vibrated when they did ran, parts fit poorly together.
When it came time to create a new product line, the money wasn't handed forth. Advertising convinced Americans that SUV's--the one thing the Japanese couldn't build with better quality to compete with Detriot, unlike minivans and luxury cars like Infiniti--were the next new thing. No reason, therefore, for Saturn to take business away from the bad GM.
Just like children, the good child was left alone to keep being good, and the bad child got all the attention to bring them up to level. The result? Saturn is now considered part of the bad GM, ready to be turned loose.
GM's problem is simple: it makes its money selling financing, not good products. Too many of its employees make their money showing up for work, earning the seniority that pays benefits, rather than making a good product and the company surviving on that fact.
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