Obama Motor Company

The mauling of GM's bondholders reveals Treasury's political hand.

Excerpts:

The feds have decided they should own a neat 50% of GM, yet that is not the natural outcome of the $16.2 billion that the Treasury has so far lent to the company. Nor is the 40% ownership of GM that the plan awards to the United Auto Workers a natural result of the company's obligations to the union.

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The biggest losers here are GM's bondholders. According the Treasury-GM debt-for-equity swap announced Monday, GM has $27.2 billion in unsecured bonds owned by the public. These are owned by mutual funds, pension funds, hedge funds and retail investors who bought them directly through their brokers. Under Monday's offer, they would exchange their $27.2 billion in bonds for 10% of the stock of the restructured GM. This could amount to less than five cents on the dollar.

The Treasury, which is owed $16.2 billion, would receive 50% of the stock and $8.1 billion in debt -- as much as 87 cents on the dollar. The union's retiree health-care benefit trust would receive half of the $20 billion it is owed in stock, giving it 40% ownership of GM, plus another $10 billion in cash over time. That's worth about 76 cents on the dollar, according to some estimates.

In a genuine Chapter 11 bankruptcy, these three groups of creditors would all be similarly situated -- because all three are, for the most part, unsecured creditors of GM. And yet according to the formula presented Monday, those with the largest claim -- the bondholders -- get the smallest piece of the restructured company by a huge margin.

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Certainly the bondholders deserve to take a haircut like everybody else. But squeezing them in such a blatant fashion has other consequences. Who would be crazy enough to lend GM money in the future? The Treasury also says it wants banks that do poorly in its "stress tests" to try to raise private capital before putting in more public money. The mauling of GM creditors tells investors not to invest in TARP banks because everything this Treasury touches turns to politics.

Monday's offer is so devoid of economic logic or fairness that it confirms the fears of those who said the original bailout would lead to a nationalized GM run for political ends. This fiasco will in part go down on George W. Bush's copybook, since he first decided GM was too big to fail.

But rather than use his early popularity to force hard decisions through the bankruptcy code, President Obama has decided in essence to have the feds run GM and Chrysler. This inevitably means running them for the benefit of the UAW that is so closely tied to the Democratic Party. Next up will be tax changes and regulations intended to coax, or coerce, Americans to buy Gettelfinger Motors cars. This tale of taxpayer woe is only beginning.

Comment: Who will lend to GM again? Who will buy stock in them again? Who will buy a GM car again? (Not me!)