Wednesday, May 27, 2009

Am I missing something here?

GM tries to make a deal with the bondholders but the bondholders turn it down. Maybe I'm not following or understanding the bankruptcy laws. If GM goes to bankruptcy won't the bondholders be stuck with worthless paper? They were after all offered a 10% stake in the company which sounds far better than walking away with nothing. The workers were offered a 17.5% stake which they took. If you ask me the worker should have gotten a bigger piece because nothing turns a company around faster than workers who have a vested interest in making a profit for the company.
For GM to cut it's dealer base made no sense to me. The dealers were indepentant of GM so why would GM care? If a dealer wasn't doing well he'd go out of business anyway.
And what ever happened to Lee Iacoca the great savior of Chrysler?


BBC said...

I sure am not up on bankruptcy laws. And the truth of the matter is that American's prefer foreign cars for the most part. America's car greatness is a done deal and they will just have to get used to it and find something else to do.

Reading news about the Seattle area just reminds me to be thankful that I don't live there. Parts of it are okay to visit though.

an average patriot said...

I could not understand them saying that. All I could think is maybe they thought something else might come up. I do not think they realize the brevity of the situation. They better take it. A tenth of a loaf is better than no loaf at all.

S.W. anderson said...

It depends on the type of bonds. Bonds are loans to the company, so bondholders are generally the first or among the first to be paid from the proceeds if a company's assets are liquidated. Stocks are shares of ownership in the company. Stockholders stand to lose most or all their investment if a company goes belly up. Some junk bonds are as bad as stock in that regard.

Bankruptcy of the type contemplated for GM involves getting protection from creditors and reorganizing the business under court supervision. That means creditors go through a period where they receive partial payments and don't completely cut supplies or services off to the ailing company.

I don't know the the particulars of the deal bondholders turned down. I do know bondholders are typically risk averse and tend to be more pessimistic than stock investors. They evidently see a 10 percent stake in GM's future as a risk not worth taking.

Demeur said...

I see where you're coming from S.W. but if the company started to sell off the assets who's going to buy it? Most auto companies around the world aren't doing much better than GM.

S.W. anderson said...

I don't think most of GM's assets would languish long for lack of interest and ability to buy them. But that's neither here nor there because bankruptcy and reorganization are in the works, not liquidation.

BBC said...

I love liquidation, good buys there, I once got a brand new 40 HP Merc outboard in the box for a hundred bucks. I wouldn't mind picking up a small GM car for a grand.