Not A Threat But A Promise

bAs I see it, the point of President Obama's plan for GM, at least, is to force the bondholders and the dealers to take losses by offering the prospect of a "quick-rinse" bankruptcy. The bondholders are decidedly unhappy.

During the next 60 days, G.M. and its stakeholder have the last opportunity to save the company — or risk letting a bankruptcy judge do it for them. To do so, G.M. will almost certainly need concessions from two groups: workers and bondholders.

The workers, represented by the United Automobile Workers, have made concessions already. And the president said they need to make even more, as painful as it will be. The workers — despite often appearing recalcitrant — have the most to lose. If G.M. falls into bankruptcy protection, they could lose not only their jobs but also much of their retiree health care plan.

Then there are the bondholders. Their motivation is very different. For them, this is not about keeping their jobs or, frankly, about patriotism. It is about dollars and cents. And, according to some analysts, there is a chance they would actually do better in bankruptcy court than they would negotiating against G.M. or the government, which is seeking to reduce G.M.’s debt by two-thirds.

“If I’m a bondholder, the best forum for me is in front of a judge,” said Daniel Alpert, a founding managing director of Westwood Capital, an investment bank. “Let’s face it: the biggest problem at G.M. is still its cost basis, and that’s chiefly labor,” he added, suggesting a judge would look at the situation dispassionately.

80% of these bonds are held by large investors and hedge funds, and the hedge funds at least have been doing quite well of late. They want the best deal, and if they have to drive GM into bankruptcy to do it, they will. In fact, the new head of GM seems resigned to it.

General Motors's new chief executive told CNBC that filing for Bankruptcy may be the best option for the struggling automaker.

In a taped interview to be aired tonight on NBC Nightly News, Fritz Henderson said that because of greater demands from the Obama administration to restructure, GM is considering the bankruptcy option. The auto giant previously had ruled out such a move, saying it would discourage people from buying GM cars [...]

Henderson told reporters that the company would still prefer to restructure outside of court, but the level of support Washington is offering would help the company quickly restructure through bankruptcy.

In the event of a quick bankruptcy, the bondholders would certainly get paid at a higher rate than, say, the pensioners. The legacy contracts would probably be ripped up (but I thought contracts were sacred!). The good news about that is that most of Rick Wagoner's $20 million dollar pension could be wiped out; only $833,000 is protected. The bad news is that everyone else wouldn't have a pension, and keep in mind that the PBGC just gambled away a fortune on Wall Street at precisely the time when they would be a backup on these funds.

I think the White House views the 60-day window before bankruptcy as a threat; the bondholders might see it as a promise.

Just One More Fill-Up?

The government had until March 31 to assess the restructuring plans for GM and Chrysler and decide whether or not to give them more loans until they can sustain themselves. Obviously, the Obama Administration didn't much like what they saw.

President Barack Obama is sending a blunt message to Detroit automakers: To survive — and win more government help — they must remake themselves top to bottom. Driving home the point, the White House ousted the General Motors chairman as it rejected GM and Chrysler's restructuring plans.

Obama is set to elaborate on that message Monday when he announces what his White House told reporters over the weekend: Neither GM nor Chrysler submitted acceptable plans to receive additional federal bailout money [...]

Frustrated administration officials, speaking on condition of anonymity ahead of Obama's announcement, said Chrysler has been given a 30-day window to complete a proposed partnership with Italian automaker Fiat SpA. The government will offer up to $6 billion to the companies if they can negotiate a deal before time runs out. If a Chrysler-Fiat union cannot be completed, Washington plans to walk away, leaving Chrysler destined for a complete sell-off [...]

For GM, the administration offered 60 days of operating money to restructure. Officials say they believe GM can put together a plan that will keep production lines moving in the coming years.

There's a lot to unpack here.

First of all, the most high-profile fallout is that GM CEO Rick Wagoner was forced out. Michigan Gov. Jennifer Granholm described Wagoner, who was with GM for 31 years, as a "sacrificial lamb." He admittedly was at the helm when American automakers failed to adjust over the last decade, making SUVs and losing market share to Toyota and Honda. The company has lost $82 billion over the past 4 years.

And obviously, bailouts of any kind are unpopular at this point, and must be met with major concessions. However, one must be struck by the dichotomy of the President and bank CEOs making nice-nice on Friday, and forcing Wagoner out today. As Atrios put it, "apparently the real economy is less important than the paper one." Josh Marshall digs a bit deeper:

Citi does not have the same CEO it did at the start of the crisis. And the government installed a new CEO at AIG after the initial bailout. Another rejoinder might be that the automakers' plight is of a much more longstanding vintage than that of the finance barons, though I suspect, as we learn more, we'll be revisiting those assumptions. And even after getting substantial government aid, I think Wagoner's the first auto industry CEO to get the boot. So perhaps we should be asking why it is that something like this hasn't happened sooner.

All that said, though, after that meeting of the major bank CEOs at the White House last week, it's hard for me not to think that, for all that has happened, their clout in Washington is just on a scale where they are accepted as peers of the realm. And simply immune to certain sorts of treatment.

The White House may believe that anger over the initial auto bailout, and bailouts in general, force them to be tough. And certainly the government should not throw good money after bad if there's no hope of viability. But with millions of jobs at stake, certainly a good bit of people are going to notice that the auto industry is being forced into concessions that practically no bank has had to make.