General Motors' Word Not Its Bond

The U.S. taxpayer will become an investor extraordinaire by taking ownership of the 100-year old automotive icon. Not only that, but we're going to be funneling $30 billion in new financing to keep this jalopy on the road.

But don't think you'll get to ring the market's opening bell. After wiping out common shareholders, the Obama administration plans to have GM taken off the public markets for as long as 18 months.

The remaining carcass of the company is going to be carved up between the unions and the bondholders. The auto workers will get a 17.5% stake in Government Motors, while bondholders will get an initial 10% position with the option of getting 15% more down the road. And current shareholders? Buh-bye! You're going to be left with nothing, but then again, if you're still holding onto your stock at this late date, you were warned as to what was coming.

Don't worry, though, because as a U.S. taxpayer, you get to be an owner again. Lose your investment, but gain a tax burden.

Rocking chair speculators
But it's not such a smooth road as all that. Just like the Chrysler bankruptcy, there's a group of bondholders who don't appreciate Obama riding roughshod over their rights. Only problem is that they're not the evil hedge funds the president vilified as "speculators" for standing up for what's due them -- they're individuals like retirees, your neighbors, and your grandmother, who bought GM bonds for the safety, security, and income they represented.

Who's Obama going to hang in effigy this time? It's not the weak-kneed Wall Street financiers he rallied the masses against with Chrysler. Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), and JPMorgan Chase (NYSE: JPM) were only too willing to accept a third of what they were due.

Baseball and apple pie
No, these are Main Street bondholders, and he's going to have a harder time getting people to grab their torches and pitchforks against Granny and old Uncle Bob. They didn't "speculate" when they bought GM bonds decades ago. They weren't buying some fly-by-night penny stock. It wasn't the latest tech stock generating buzz. They were buying the bluest of the blue chips.

They bought the bonds to pay for their retirements and finance their grandchildren's education. They invested their life savings in a business they thought was as solid U.S. Treasuries, but with better rates. It was their investment in the automaker's debt that allowed it to finance its operations. Although we may question the wisdom of putting such sums into a single investment, this was no Bernie Madoff Ponzi scheme, it was a patriotic investment in an American car company. This was General Motors!

They understood that even if the automaker was forced to ultimately seek the protection of bankruptcy courts, they had rights that were superior to others in line. They just didn't count on contract law being flouted on their particular bonds.

The final lap
The Chrysler bankruptcy was simply a trial run for GM. It gave everyone an appreciation for the fact that the world wasn't going to come to an end when an automaker sought court protection. Now, with the groundwork laid, and the rights of bondholders run roughshod over, we can all sleep easy knowing that GM can make it through, too.

Yet that's just the problem. Even before the Detroit bailouts began last December, critics said that bankruptcy was the best option for these troubled automakers. They were saddled with loads of legacy debt, and they probably wouldn't be able to get out from underneath it. Whatever the reasons they found themselves in that position -- whether it was the perception that Nissan (Nasdaq: NSANY) or Toyota (NYSE: TM) made better cars, that the unions had extracted gold-plated benefits, or that management was simply asleep at the wheel -- bankruptcy courts were the best place to sort them out.

Now we'll be pitting Government Motors against its competitors. Ford (NYSE: F) will have to fight for market share against the bottomless pocket of the Treasury.

A dead end
If there's one takeaway from the sad demise of GM, it's a re-evaluation of how bondholder rights are treated. Investors are going to think long and hard about whether corporate bonds offer the protection they're seeking if there's no security in being a "secured bondholder."

© 2009 UCLICK L.L.C.