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  • Is GM Stock Going To Experience A Triple Whammy? [View article]

    I thank you for your comment. Yes, I agree that the key issue is the dilutive effect. At this point, the article is too old to alert the Seeking Alpha editorial team to make the appropriate modification. In any case, I'm planning to write a follow-up.

    Too many people get caught up in the minutiae, while forgetting the main point-that GM's old bondholders were taken for a ride, and in some cases, lost their retirement income. Hence the ridiculous comment made by one individual that the bond market is a "secondary market" and thus the "old bondholders" were not affected. They were being caught up in the rhetoric of the proponents of the "shakeout" of bondholders that, was, in effect, the net result of the bailout. So what if the holder of the bond is a little old lady or some Wall Street leviathan? The result is the same-a fundamental attack on bankruptcy laws and property rights, in general...
    Nov 25 06:36 AM | 1 Like Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Agree on the issue of diluted EPS. And that is the point I was making about the warrants-that presumably everybody was happy in the original settlement-that, magically, the bonds were transformed into warrants. But it turned out to be a sleight of hand, independently of the troubling legal issues of dealing with bondholders this way. And now we're paying the price, in continued diminished EPS. The gentleman in the comment prior to mine was making the classic mistake of confusing the inherent riskiness of bonds with the necessary UNriskiness of bonds in a one-time, "black swan" event such as a bankruptcy. Two separate kinds of risk, not to be conflated. And yes, higher share prices will make the dilutive effect more pronounced, and we will continue to see this effect.

    And I'm not arguing for the sake of arguing on the issue of shares outstanding. I agree that the company did include Treasury stocks as outstanding shares-no doubt about that. Probably I did not bring this point out clearly in the article-and that was my mistake. The issue is whether, independently of whether GM does include Treasury shares or not, from an investor's point of view,(and it's clear that they do) whether these stocks SHOULD be included in shares outstanding. And that involves an analysis of how the by-laws changed around bankruptcy, and, as I said, whether these shares WERE in fact really "issued" anew. They were "created", but not "issued". There's a crucial difference, as, say, when shares "issued" are never really traded, say to corporate insiders in the form of restricted shares. These should never be included in shares outstanding.
    Oct 11 04:47 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Yes, but the question is how to define shares outstanding in a company that went through bankruptcy. So consider this, normally outstanding shares are equal to total issued shares, which are normally less than authorized shares plus par.

    Now, when companies issue new capital, that increases issued shares or outstanding shares. When there's continuity in a company, that's not a problem.

    But a bankruptcy would, I imagine change the by-laws of the company. Even assuming that authorized shares plus par would be equal to what was stated in the old by-laws, when the bankruptcy occurred, the old shares must have been liquidated, since everything starts out fresh.

    The next question is whether the shares held by the Treasury would be counted part of the issued shares post bankruptcy or just part of the authorized shares, since they may never have been "issued" in the first place. They probably were issued, but it's not clear. If the Treasury shares were part of authorized but not issued, then they wouldn't be used to deflate normal EPS.
    Oct 10 04:48 PM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    And from a legal point of view, it doesn't matter, in reply to the commenter above, who the holder of the bonds were. At bankruptcy, the bonds should have been redeemed at face value if the traditional hierarchy was respected. Because bondholders are supposed to bear none of the risk, traditionally. And instead, these same bondholders, whether the original holders or not, DID bear the risk of the bankruptcy by being forced to exchange their bonds for risky warrants, even with a relatively low exercise price.
    The point should not have been to save the taxpayer's money-since the government shouldn't have gotten involved in the first place. Once the government did, the traditional hierarchy of bankruptcy should have been respected and wasn't, leading to the messy situation now, where GM will have low diluted EPS for a while due to the presence of the warrants foisted on the bondholders.
    Oct 10 09:38 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    I guess the point is whether the Treasury shares were part of "authorized shares" subsequent to the bankruptcy, or were part of authorized shares prior to the bankruptcy.
    From a legal point of view, it isn't clear whether the by-laws that were part of the original incorporation have changed the number of authorized shares post and pre-bankruptcy.
    My point-outstanding shares are, legally and financially completely equivalent to "authorized shares" and "par shares", if there were any.
    I just don't know what happened to this value post and pre-bankruptcy, and if the government held shares were part of that.
    Oct 10 09:33 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Yes, sir, I do know the difference. The question is whether the shares that the Treasury holds should be considered part of "shares outstanding". I assume that in the earnings results so far, GM has, in fact, used those shares to calculates shares outstanding. I assume they have.
    I would argue that those shares should NOT be considered part of shares outstanding, and in a sense, that EPS stated so far would then be actually higher.
    These shares are neither "freely available for sale", not part of "restricted shares" which, are shares generally held by insiders in the company.
    However, once the Treasury divests, then they should/would be considered freely available for sale.
    My point, again-the government is not like any other institutional investor, given that the decision mechanism it uses is entirely different than any other investor.
    That was my point. Shares held by the Treasury are not "shares out there".
    Oct 10 09:11 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Comments on the above:

    a) The fact that bonds trade just like stocks does NOT mean they are equivalent, as any student of Modigliani-Miller knows all too well. The commenter above who made such a comparison was all too facile in his analysis, as a moment's consideration will reveal. Legally, financially and in every other way, a bond in an investor's portfolio is NOT the same as a stock. To the commenter above, please go back and reconsider this. I don't have the space here to enter into the theory and analysis behind the non-equivalence of bonds and stocks, but, again, I would suggest you reexamine the issue. The fact that they trade in the open market (I am well aware of this) looks at the issue in the most simplistic of ways. So yes, GM bondholders got shafted, and the company is still paying for this in the calculation of its diluted EPS, which DOES take into account outstanding warrants, in the hands of the old GM bondholders. And, this, independently of any consideration of fairness and bad legal precedent that such a maneuver set for the future.
    b) Thanks for the commenter who picked up the factual mistake on the number of Treasury shares. This has been corrected.
    c) On the issue of whether the Treasury sales should affect outstanding shares, suffice it to say that the issue is complicated. A priori the government should be considered like any other institutional investor, in which case these shares ARE part of stocks outstanding, and Treasury sales, a priori will not change this. However, whether GM did or did not count these shares as "stocks outstanding", a more important question is whether these shares are "freely available", and thus outstanding from this definition of "shares outstanding". Consider this-when the Treasury bought these shares, could any investor buy these shares if he so desired? No, so, although GM probably already counted these shares as "shares outstanding", they shouldn't have, since the government is not like any other private institutional investor. Or at least so I would submit.
    Oct 9 08:54 PM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    To reply to several of the above comments:

    a) How does the Treasury sale affect EPS? Well, it might increase the amount of stocks outstanding-the denominator of EPS-it's not evident that these Treasury stocks are included in "stocks outstanding" as stated in the earnings releases. More importantly, it will increase supply while not necessarily increasing demand. Simple supply/demand perequation, most probably decreasing stock prices, absent other considerations. My last Table was a simple thought experiment to understand the impact of this.
    b) On the quality of GM cars, I realize this is a sore point. There are probably experts out there who are willing to debate the point. I do note that revenues from GM NA and GM Europe, four years after the bankruptcy reorganization, are in the doldrums. I find it hard to believe how that will realize in a 35-44% growth rate. That's pushing it, even with a complete turnaround.
    c) My main idea behind the article was to highlight the importance of these warrants, which, again will increase the denominator if "diluted EPS", has so done and probably will continue to do.
    d) Even beyond this point, I wanted to emphasize the manifest unfairness of forcing a class of bondholders, who were probably holding GM bonds as a safe investment, out into the stock market, since now all they have are the warrants issued in exchange, which may or may not be worth that much.
    e) If GM turns around in the future, which is a big IF, then they will still be faced with what the extremely unorthodox way their bankruptcy was negotiated, jettisoning the legitimate interests of a whole class of bondholders.These bondholders normally had first place in the queue, under normal bankruptcy procedures. I would not be surprised with class action suits, and if they don't occur, they certainly should occur. A warrant is in no wise equivalent to a corporate bond in an investor's portfolio. I don't think it would be too harsh to state this was the equivalent of a Madoff like scheme to hoodwink these bondholders.
    f) I am not interested in "GM bashing", unlike what some commenters have alleged. I personally have ties with Detroit, and the whole culture there. I would be infinitely saddened by the demise or even the weakening of this company. It's just that I don't see how, even after a sweet bailout, the company can turn around. I wish they would. I personally would never buy a GM car, but that's just me, I guess. And I've done my research, believe me. It's a sad day when open discussion and questioning of the way a company is run is equivalent to "bashing".
    Oct 8 01:31 PM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    I am absolutely not a GM hater. I do believe that the way GM bondholders got shafted was kind of shocking, and now with the unequal treatment given the creditors of the new Nova Scotia stocks, and that the whole bankruptcy was not done fairly.

    All told, I like a lot of people I imagine would never own a GM car-but that's just a personal preference.

    And yes, when the Treasury does eventually sell their outstanding stock, it will depress GM prices and dilute the EPS, as the warrants issued to the old bondholders, thrown as a bone in exchange for their bonds, have already depressed the diluted EPS over the past two earnings cycles. Please look at the earnings releases and verify.

    I guess GM still evokes a visceral reaction from some folks. As for me, I wish the company would have recovered on their own steam and would make good cars that people want to buy. No evidence of that yet, but hey, who knows what will happen.
    Oct 7 09:05 PM | Likes Like |Link to Comment
  • The Good The Bad And The Ugly Of The Excess Reserve Policy Of The Fed [View article]
    It doesn't matter of they are new mortgages or not. The securities are fundamentally flawed in design. Even if the mortgages are not sub-prime and based on prime real estate, with homeowners in great financial shape, the possibility of default makes these securities highly suspect.

    Because once there is a possibility of default, there is raised a specter that no-one knows who owns the notes. Furthermore, the deed is not necessarily owned by the trustee.

    Trust me on this, the legal battles over these securities are just being waged, and the law underlying them (the UCC) is very murky and provides little guidance.

    In addition, the cash flow of these securities have been swapped ad infinitum, further raising questions about who really owns the cash flow from these securities, even if the cash flows are not in question.

    In short, it wasn't the greatest idea to link such a fundamental right as ownership of real estate, whether commercial or private to a highly leveraged product such as these securities. Not to speak of the human suffering which entails when people are deprived of clarity regarding the ultimate owner over something like their home.

    It wasn't a good idea then and it continues to be a bad idea today even if the real estate market is completely healthy, which is not the case.
    Oct 4 11:21 AM | Likes Like |Link to Comment
  • The Good The Bad And The Ugly Of The Excess Reserve Policy Of The Fed [View article]
    I can only reiterate the issues concerning the mortgage backed securities which were the driving cause of the 2008 crisis. It doesn't matter how well you "build up" these securities. It's not a matter of financial engineering-the value of these securities are ultimately driven by the character of the mortgages underlying them, and no amount of "guarantees" can wipe out that fact. The character of the mortgages have not changed-if anything they have gotten worse. I guess no lessons have been learned from the past if investors keep demanding these flawed securities. I guess keeping on saying the same thing is a waste of time-the way these securities are structured- and I've had the opportunity to examine this in detail- both from the legal and financial point of view-well, suffice it to say, that people call them, tongue in cheek, "Frankensecurities", and for good reason. Ignoring this fact does no-one any good. One can buy defective securities, but only with full awareness of the fact, and investors got a raw deal when they were labeled triple AAA, while the underlying basis was full of mortgages which, if not defaulting, were on the verge of defaulting. This still remains true.

    The interest on reserve policy was explicitly driven by a desire to put a floor on rates. Of course, it had other effects, and did, indeed cut the link between the monetary base, inflation and bank lending. Maybe this was a good thing all told, and I agree that rates shouldn't be driven too low. Again, my interest in writing this article was not to question whether the reserve policy was bad-I think all told it was necessary-but just to highlight the risks when this policy does come to an end.
    Oct 4 07:09 AM | Likes Like |Link to Comment
  • The Good The Bad And The Ugly Of The Excess Reserve Policy Of The Fed [View article]
    a) Calling them "GSE securities" doesn't remove the basic problem associated with these securities. These MBS's were the immediate origin of the crisis, and in my opinion if you closely examine the drastic legal and financial consequences of owning these securities, well, any investor who ventures to buy them again, all I can say is CAVEAT EMPTOR. These securities have multiple pitfalls associated with them, which is the reason the Fed decided to evacuate them from the system in the first place.
    b) On the hypothesis issue, I'm willing to indulge in your scenario of excess capacity. It's one amongst many. In fact, I believe it will partially hold up, given a weak recovery and almost double-digit unemployment, Obamacare, and other factors. This might be the one thing that saves us from a repeat of a 70's stagflation.
    c) Sure there would be pent-up demand for safe securities. And even assuming that Treasuries remain so, the question is what will happen to bank lending when the Fed starts to undo QE. The point is that the reserve policy of the Fed has kept an artificial lid on inflation, a floor on rates and has stymied bank lending. When they stop, the question is will banks participate in an eventual recovery? Will rising mortgage rates quelch any recovery in the housing market? Those are the more important questions, not whether banks can park their money somewhere. They can always do so, whether in the US or internationally.
    d) Pursuant to c), the ultimate question is whether the Fed, by vigorously pursuing QE for so long, buying MBS's and paying interest on reserves will pay a heavy price later on. You can't compare the 80's to the present situation-there you had classic demand-pull inflation, resulting in stagflation, and no QE for 5 years running. That left the Fed with plenty of weapons in its arsenal. Probably no longer-or at least some economists are so worrying.
    Oct 3 10:51 AM | Likes Like |Link to Comment
  • The Good The Bad And The Ugly Of The Excess Reserve Policy Of The Fed [View article]
    a) Size does indeed matter. However, the nature of the securities in question will vitiate the net effect of the taper. Look at how the BOE does ITS QE-I already wrote an article about that. The securities they chose to buy were gilts with the full faith and credit of the English government behind them, not dicey securities that no-one will eventually buy, such as the MBS. Remember that no-one guarantees these securities. It's the nature of the securities, not the quantity in the Fed's balance sheets that is at issue here.
    b) OK, that was badly stated. What I meant to say was that your hypothesis was just that-a hypothesis. And a pretty strong one at that.
    c) Yes, I can. Inflation CAN be determined by both monetary policy and other factors. One can have inflation hitting some items one way and other parts of the economy in an another wau.
    d) But of course the interest policy on reserves was designed to put a stopper on inflation and undue credit expansion. No problem there. The question on everybody's mind now is what's going to happen when the whole process starts to unravel.
    e) Again, a little sloppily expressed, agreed. The point here is that when the Fed starts to undo QE as will inevitably happen, and decreases currency in stock, and furthermore stops paying interest on reserves, that yields will rise faster than expected, keeping a lid on any possible recovery. But that doesn't necessarily mean that inflation will be controlled, because inflationary pressures may still arise from other sources. So we might be facing the worst of all possible worlds-a heavy price to pay for QE since 2009.
    Oct 3 10:04 AM | Likes Like |Link to Comment
  • The Good The Bad And The Ugly Of The Excess Reserve Policy Of The Fed [View article]
    Appreciate your comment on the taper. However, (and I believe that we've had some prior discussions and disagreements on the dangers of the Fed's purchases of MBS's), whether the Fed releases the MBS's it has or just buys fewer of them, the effect will be somewhat equivalent-the price of these securities should fall, and yields should rise.But the fate of these ambiguous securities still remains the same and the dangers they present to the banking system unchanged.

    Agreed that the concern about the MBS's is a separate issue. I agree that when and if a taper takes place, loan volume will more directly correlate with the monetary base, as it should. However, I disagree that inflation is not a present threat at that point, since your hypothesis about excess capacity is just that-a hypothesis. Even if what you say about wages were true, inflationary potential might arise from energy prices, a demand shock, war, or whatever.

    It's just that from the point of view of the money supply, the Fed will allow loan volume and currency in circulation to play a part in determining inflation, as is classically the case.

    My point, and (Fama's a long time ago) was only that the interest policy on reserves just keeps inflation at bay artificially-current inflation doesn't determine the realities, and once the current policy starts to unravel, we'll be facing a whopper of a situation, with currency sloshing around, and the Fed with little wiggle room at that point to control things.
    Oct 3 08:16 AM | Likes Like |Link to Comment
  • Is The Rupee About To Hit Some Hard Rocks? [View article]
    Sorry, stand corrected...
    Sep 24 11:19 AM | Likes Like |Link to Comment