Tuesday, April 14, 2009

Demonizing Bonds

One of the most interesting issues (in my partially-informed view) about the slow crawl to nowhere that is this (hopefully not last) U.S. automobile industry chapter is the issue of the bondholders - specifically with respect to General Motors. The issue is quite simple - GM owes about $70B in debt to bondholders and the government is requiring the bondholders forgo a gigantic portion of this debt (somewhere around 80% or so) in exchange for equity (stock "ownership") that may or may not be worth anything weeks or months from now. (At this point, I have noticed that I have used more parentheses than even I typically use in a post, and I typically use a lot of parentheses. My apologies, but not really.) This seems like a good deal, right? If I owe you $70 and I say to you "here's $15, and then you own a small part of me, maybe my two big toes" I would say that I definitely come out ahead on that transaction. How are you supposed to recoup the value of my very valuable big toes? You can't, and that is kind of the situation bondholders are being asked to accept.

This group of debt holders almost entirely holds the key to GM's immediate bankruptcy or non-bankruptcy. If they accept this deal, along with the UAW and similar concessions, the government has indicated they will continue to support GM financially to keep it out of Chapter 11. Because they seemingly hold so much power and have mostly seemed entirely unwilling to compromise, they're kind of coming across and being portrayed as a bunch of huge dicks. I've felt my anger and resentment toward the bondholders growing exponentially as I regularly read articles that say that those with the debt holdings are not budging at all. The pro-GM side of the argument seems obvious as well - if GM does go into bankruptcy, it is likely that the bondholders will end up with even less value from their bonds than GM is currently offering to them. Why not just take the deal and save everyone a little heartache?

Today, I came to the conclusion that while I want nothing more than for the bondholders to take the deal and GM to stay completely out of bankruptcy (everyone loses, but less than in the alternative), this group is getting a little bit of a bum wrap - at least from me. If I give you $5, I sure as sunshine want you to give me back my $5. If I give you $5B, I will handcuff myself to you until you pay me back with interest and maybe a nice big hug because of my benevolent generosity. We're in one of the biggest, craziest, scariest, most ball-bustingest games of chicken of all time, and I fear that neither of these lumbering steamboats are going to swerve. This is a pleasant and unplanned segue into a quote from the brilliant but dead (don't do drugs kids) Mitch Hedberg.

"I wrote a letter to my dad - I wrote, 'I really enjoy being here,' but I accidentally wrote rarely instead of really. But I still wanted to use it so I crossed it out and wrote, 'I rarely drive steamboats, dad - there's a lot of shit you don't know about me. Quit trying to act like I'm a steamboat operator.' This letter took a harsh turn right away... "

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