The chinese carmakers desperately need first world engineering and design, which GM has; and we the taxpayers need to unload GM pronto to recoop our investment. I think several of the chinese carmakers should just form a conglomerate and buy up GM while it's still alive.

We, the tax payers, do not own GM and have no right to sell it. The federal government made GM some sizable loans, but does not own it and cannot sell it to anyone. GM is a private company and shall remain so until Obama gets his communinst government firmly establsihed and takes over all private industry in the People's Republic of Amerika.

Ease up on the paranoia Americafirst. Obama is not a communist. He is not even a socialist.

He is pretty left-leaning, likely a protectionist, and he does support increased government command over economic acitivity, which is bad enough.

He also has demonstrated some mildly kleptocratic tendencies, and GM happens to be a perfect example. GM is not a private company anymore; its original equity ownership has been completely wiped out. During the government-run capital structure reorg, the bondholders--who had a first lien on the assets of the company (and should have gained 100% control)--got completely screwed in favor of the unions, their pensions, and the government itself (in pretty open violation of contract law).

It's not a minor issue because it will serve to undermine lending to companies with unions in the future (an ultimately be detrimental to unions). Would you ever participate in a unionized company bond offering knowing that your writ-in-stone, first-in-line claim on the assets is worth whatever the politics of the day say it is?

As for whether GM should be sold to the Chinese, I'm trying to figure out what the Chinese would gain from that deal.

I think it is obvious that the contracts with the union covering benefits due to retirees who were union workers are, in many cases, decades old, and are obviously the senior debts.

Oh, it's plainly obvious now. And good luck with that next bond offering.

If GM would have went through a normal bankruptcy filing, maybe the unions would have gotten nothing. and maybe there would have been no company left, so those bondholders would have gotten 100% of nothing. The disappearance of GM itself wouldn't have been catastrophic, but the disappearance of its suppliers, the jobs of the people who worked in the towns around the suppliers, the GM dealers, and the lost sales tax revenue (especially for those states that don't believe in income tax), would have been catastrophic.

People will still buy bonds from unionized companies, but probably not if they are as badly managed as GM. Well, at least not for a few years, people have pretty short memories when they think they're going to make a killing.

Bentoniani:

....

He is pretty left-leaning, likely a protectionist, and he does support increased government command over economic acitivity, which is bad enough.

...

You don't like government command over economic activity, yet you want the taxpayer to make good your stupid investment in GM bonds! What a laugh!

Hilarious isn't it. The shareholders allow a company to be so badly managed that it needs to be bailed out by the government, and then complain that the bailout money has diluted their equity and been used to cover the company's contractual liabilities rather than going in to their own pockets. Too bad.

As for the Chinese, they probably would like to buy some first world car design and engineering expertise but unfortunately the European arm of GM has already been sold off.

I have never, ever owned GM bonds, mostly out of my visceral disdain for American manufacturing, but if I did, I'd expect to maintain my first lien on the assets after the equity was wiped out.

To say that the bonds would have held "100% of nothing" is absurd. Once the equity is wiped out, the bondholders would own 100% of the assets of GM, which are worth a good deal more than zero. The operating cash flow (taking out the interest expense) was positive; the debt service (i.e. payments to bondholders) put GM under. The government preemptively forced a highly dilutive loan and the reorganized the capital structure in such a way that makes no sense and has no precedent in finance outside of maybe South America.

The fact that the union reps stupidly allowed for an underfunded and mismanaged defined benefit pension fund is both not surprising and their own damn fault. The only people "bailed out" by this deal were Obama's own constituents.

Btw, C-tips, the shareholders (to whom I was not referring) got nothing, unless you consider this <link> something.

the company couldn't continue to operate, so there wouldn't have been any cash flow at all. If ALL of the bond holders would have agreed to a debt for equity conversion, then they could have continued operation, but there was no way for that to happen, as there is always a few holdouts who would let 90% of the bondholders convert, and then leave the company liable to pay 100% of the remaining bonds face value. Those holdouts usually bought the bonds at ten cents on the dollar, hoping for some kind of bailout that would result in a killing. They gambled and lost.

A normal bankruptcy would have resulted in a liquidation, and you can see what Detroit area manufacturing plants might be worth on the open market by looking at all of the foreclosed houses for sale in that area for $15K or so. there might have been some assets that would have generated a penny or two on the dollar for the bondholders, but if you think any would have been left after the liquidation was completed, then you probably have never heard of "attorney's fees".

the assets would only have value if more capital was injected into the company, and the only way that could happen is if creditors and existing shareholders were wiped out - effectively the assets of the company were bought by the government to keep it alive, because nobody else was going to step up and do the same (can you blame them?). The government's purchase of GM's assets only makes sense from a national economic perspective, as it prevented a cascading series of bankruptcies that would have surely occurred, at the worst possible time.

kgsbca, a normal bankruptcy would not have resulted in liquidation--chapter 7s are very rare. A normal bankruptcy would have looked like the scenario you are citing in your first paragraph. Additional capital could have been raised through exit financing after a bankruptcy proceeding (in which case a judge would have ordered those bondholder holdouts to convert to equity). A normal, austere, letter of the law bankruptcy would have looked a lot like Calpine's (bondholders get everything, some liquidations, operations continue)

The gov't decided that a normal bankruptcy proceeding would have taken too long and had too many other negative externalities (all those suppliers going bankrupt, loss of confidence), so it injected capital quickly, which would have been fine except that during the reorg that it strongarmed, the bondholder claims were basically stolen and given to the unions--Obama's chief consituency. Hence my accusations of kleptocracy.

As you say, the govt thought (as did I, and still do) unless they got a pre-packaged bankruptcy, the process could have taken a year or two. In the meantime, sales would dry up, suppliers would go out of business, and nobody would advance them any capital. Customers would have stopped buying their cars.

Yes, the govt injected capital, on terms that seemed unfair to creditors, but that's the risk they take when they lend money to incompetent managers. The govt could have done nothing and let the entire GM ecosystem die, or make this deal to keep it alive long enough for the economy to be able to absorb a slower death, if that happens. In either case, the bondholders were going to lose just about everything. Both Plan A and Plan B result in bondholders getting nothing, but plan B keeps the company and its suppliers and dealers alive for one last try.

The unions aren't big enough any more to be anybody's core constituency. Sure, Obama wants to keep them happy, but he also has other supporters (environmentalists, wall st., and big businesses that all compete with labor for preferential treatment). Just keeping unions happy isn't going to get anybody elected any more (except for union leaders).