GM Bondholders vs. UAW Retirees: False Equivalence 27 comments
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If you invest a large chunk of your 401(k) in the stock of just one company, your actions are fraught with peril. If that stock performs badly — which is always possible — then you could end up with a significantly diminished standard of living in retirement. But at least there’s a possible upside: if the stock does spectacularly well, you can end up in clover.
By contrast, there’s no reason whatsoever to invest a large chunk of your 401(k) in the bonds of just one company. You still have the same downside — the company can default on its debt — but there’s no upside at all: the best-case scenario is just that you muddle through getting your coupon payments until the bonds mature.
The WSJ editorial page today features a complaint from one Dennis Buchholtz, however — a man who did just that:
I am an American retiree. Like many small investors, I am relying on “safe” investments…
I purchased GM bonds in 2005 and own $91,000 worth. These bonds account for a very sizeable portion of my retirement income, and so it is absolutely devastating to watch GM’s problems bring the once venerable company to the brink of failure. My standard of living is truly in jeopardy.
It’s not easy, as a retail investor in America, to purchase individual series of corporate bonds. It’s possible, of course, and GM did make an attempt to target such investors. But thankfully most stockbrokers and financial advisors will tell you that if you want credit risk in your 401(k) then by far the best way of doing that is to buy a bond fund, which minimizes your exposure to any one credit. As a result, there are — happily — precious few people in Buchholtz’s situation. Most bond investors are large institutions which watch their portfolios carefully and make sure they’re diversified at all times.
Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure. As such, if you’re worried about the well-being of retirees, it makes perfect sense to treat the UAW’s retirees better than those who either have a small amount of exposure via their bond funds, or those who actively sought out GM exposure by buying its bonds. “The government’s proposed restructuring plans benefit one class of retirees at the expense of another,” complains Buchholtz — and it’s entirely proper that they do so. Buchholtz has no one to blame for his current predicament but himself: caveat emptor, and all that. That can’t be said of the UAW retirees.
Disclosure: No positions
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The rule of law on fiduciary justice has gone by the boards and is just a continuation of the seizing of private property by the Marxist party now in power.
In the future everyone will be much more wary of purchasing bonds because of the threat of confiscation by the Feds.
Free labor means the right to find an employer at any time.
UAW workers, like everyone else, are not serfs or slaves, as implied in this article.
Shills will argue otherwise, as will Mssrs. Bloom and Rattner, but this argument is a fallacy.
Since when does one type of worker (and retiree) "deserve" to effectively pillage property of another "class" of workers (many retirees, who have saved and invested their money) for unfair benefit at the expense of the other?
UAW, hard workers as they are, and known to me to be conscientious and dedicated, have been represented by a system that has demanded, in past, more than was economically feasbile, as it turns out. Why should this behavior be rewarded vs any other? Sad story, but with a core of truth that cannot be ignored.
Tiresome.
Bondholders who created this economic mess in the first place is crazy!!!
On May 27 05:00 PM Michael Wazowski wrote:
> Government Motors is only the beginning, a taste of things to come.
> Welcome to Socialism!
oh how stupid you are--for being investor in GM & trying to earn a few additional dollars. YOU should have known better, you jerk. After all, you did not speculate n real estate nor did you lever your investment. Stupid jerk, you believed what you read. Senior debt. Parri Pasu. Promise to pay. You idiot. Probably, you believe in 'justice for all." You--financial fool--are not too big to fail. You are dirt. A contract wth you means nothing.
It is sad to write this, but I suspect it's a sentiment felt by holders of ~$5 billion of RETAIL bonds
If you invest in junk bonds, there is a significant risk that the company will go bankrupt and the principal will not be returned.
GM bonds were downgraded to junk status in 2005. So.... who in the heck should still be invested in GM bonds? Only those investors willing to risk losing all of their principal. Companies with poor credit ratings pay much higher rates on their notes to compensate investors for this increased risk.
If you have a retirement investment portfolio which you have begun to draw down, you should have reduced your exposure to GM bonds significantly back in 2005. It was you or your portfolio manager's responsibility to react to the increased risk. If you continue to hold a large portion of GM bonds, then you are speculating.
This goes for mutual fund managers, personal investors, pension fund managers, etc. You can't reap the benefit of higher coupon rates without the risk. I personally own shares in a junk bond fund. I know this fund is a much riskier type of investment than an investment grade bond fund and I allocate it accordingly in my portfolio.
So here's the deal. As an informed investor, I don't think current holders of GM bonds have any right to their original principal. Who are these investors and what was their intention? As an investor, I can only conclude that they were speculating that the government would not allow GM to enter bankruptcy. Oh well.
> So here's the deal. As an informed investor, I don't think current
> holders of GM bonds have any right to their original principal.
> Who are these investors and what was their intention? As an investor,
Noone is asking for the original principal.. only a fair recovery not by an order of magnitude worse than other creditors with the same type of legal claim.
ANd what difference does it make to the investors right to get repaid if it was a big % of his portfolio or small....it makes no difference. America should be a right to work nation. What does the auth mean that a worker can't diversify his risk.....sure he can he can get an education and new skills.....just a bunch of crap. You have a job as long as you add value ....period.
the POINT of investing in bonds lame brain is NOT to have huge upside potential but to have limited DOWNSIDE protection......you remember the way it USED to be in america, when debt holders got paid first and weren't scapegoated for their passive investment role while the active participants the management and UNIONS killed the company.
On the former question, I would not have done it but it's not that uncommon for small investors to hold individual bonds. Bond funds are not automatically superior (just ask anyone who held Schwab YieldPlus). An investor tries to forsee future scenarios, including default scenarios but in this case there is no way an investor could have forseen the U.S. President intervening against them, as it is unprecedented.
At least the GM bondholders are being offered a better deal than was the case with Chrysler... it looks to me like the blowback from the administration's Chrysler moves has had some positive effect.
On May 27 09:17 PM babyray wrote:
> Bondholders who created this economic mess in the first place is
> crazy!!!
How in the hell did I by buying a bond create this mess???? Did I wake up this morning in an weird parallel universe where I am 180 degrees out of phase?
Since 2005 the risk description of GM bonds was "poor standing; such bonds may be in default or there may be present elements of danger with respect to principal or interest."
Neither bonds or equities assure investors that their principal will be preserved. Given the junk rating of GM bonds for 4 years, it is not reasonable to expect one's principal to be returned. If that is the expectation, then you need to sell your bond holdings once they turn to junk status.
GM is culpable for their financial performance. They are not responsible for investor risk-taking, nor is the government. It is capitalistic, not socialistic, for investors to take risks and sometimes reap the benefits (high returns relative to lower risk investments) and other times lose all of their principal.