Market Responds to GM Bankruptcy with a Ho Hum

No real news on GM Monday. The market largely anticipated the event, as it had been wholly telegraphed by the Obama administration (see Finally a Sensible Approach).

Moreover, as I stated on several occasions, if handled properly, there would be no reason to fear a GM bankruptcy (see Could GM Survive Bankruptcy?). Back then I concluded:

YES, GM could survive bankruptcy, and we needn’t be frightened by the prospects, …no matter how much GM tries to convince us that it would spell the apocalypse.

So here we are post bankruptcy, and as far as I can tell, the world has neither come to an end nor has the economy ground to a halt.

In a broader sense, the market’s lack of response to GM’s bankruptcy sends a signal that the economic future of the United States is no longer dependent on, or inextricably tied to, firms like GM. This is not to say that manufacturing is not important to the prosperity of the United States; rather, simply that the manufacturing future of the U.S. is not about the manufacture/assembly of automobiles. But that’s another story for a different day.

For now then, I’ll simply share GM’s official bankruptcy press release. It was sent to me from our new employees - the kind folks from the new GM, the firm in which you, me, and the rest of the American taxpayers will become majority shareholders. Click here to view the full release.

Now back to the fascinating part of the bankruptcy - the impending battle between GM bondholders and the U.S. Government. I would not be surprised to see this battle play out in much the same fashion as the battle between creditors and the U.S. Government in the Chrysler case (see Chrysler Bankruptcy: Anything but Surgical, Legal Issues Affecting Chrysler, and Lessons for GM for background). Nevertheless, as I suggested in my post Lessons for GM:

Although the debt restructuring problems they both face are the same in theory, in the case of Chrysler, it was much easier for the federal government to get Chrysler’s lenders to accept a haircut because the majority of its first lien debt sat with banks that accepted TARP money (e.g., Citigroup (C) and JP Morgan (JPM)). The government could therefore exert tremendous influence over these lenders.

Not so in the case of GM. GM’s bondholders are a much more diffuse bunch with disparate interests. Moreover, the government has much less of a direct influence over GM’s bondholders.

Although GM was able to reach an agreement, in principle, with many bondholders (see US Strikes Deal with Bondholders), it will be interesting to watch how those who remain opposed to the deal ultimately play their hand.

Disclosure: no positions

Comments

[casey00001:]

I think the real question will be when it finally comes time for the Gov't to cash out. This of course will be after the 2012 election, NEVER before. Then the Gov't/GM now synonymous will try to float a bond issue? With the way the Old GM bondholders got screwed, who is going to buy the bonds? How about a common stock issue? Who wants to own that when the majority of control will still be the Government and the UAW? Forget about the Common Stock paying a dividend, remember all the Preferred Stock is owned by the Gov't and the UAW and they must get 9% annual return and preferred dividends have to be paid before common.

IMHO this is a toxic mess all smart investors in the future will avoid.

Jun 02 11:47 AM