SW Richmond's  Instablog

I present for your prerusal these extended initial excerpts from a filing by "The Unofficial Committee of Family and Dissident GM Bondholders".  The filing seeks to enforce their rights as unsecured creditors under the Bankruptcy Code, something that the Obama Administration's Car Czar, Mr. Steve Rattner, apparently seeks to avoid.

At issue is the accelerated sale of GM under the prenegotiated agreement; that is, the agreement prenegotiated by the Administration, the UAW, and other favored groups.  The administration is attempting to ramrod through an accelerated "363" sale of GM assets.  This desire reveals again the modus operandi of this administration: government by Blitzkrieg, achieving its dubious aims before any effective resistance can be mounted or appropriate questions can even be posed. 

A picture is clearly drawn of an admininstration with no regard for anything other than patronage, telling pretty lies in public while at the same time ruthlessly stealing from that same public to reward connected interests.  The filing opens with a salient quote from His Majesty's inaugural speech, its mendacity all the more chilling given the current context:

"Our founding fathers, faced with perils that we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience's sake."
- Inaugural Address of President Barack Obama, January 20, 2009.

The Unofficial Committee of Family & Dissident GM Bondholders (the "F&D
Committee") represents the interests ofover 1,500 bondholders, with bond holdings believed to exceed $400 million at face value (with some estimates approaching $1 billion). These bondholders consist mainly of family and non-institutional bondholders whose individual holdings and financial means are relatively modest. A substantial number ofthese bondholders invested in GM bonds at or near par values with their pension funds and life savings, with the
full expectation that the bonds had the same priority as GM's other unsecured obligations (which, as a matter of law, they do).

The $27 billion in loans represented in the aggregate by GM bonds were an important part ofthe Company's financial lifeblood, and helped to support the Company's liquidity, its operations, and thousands ofjobs. GM's family and non-institutional bondholders did not have access to federal bailout funds, and they are not professional investors with access or means to engage in hedging strategies. And importantly, unlike the institutional GM bondholders and certain favored groups of unsecured creditors, these bondholders have had absolutely no opportunity to participate in the pre-petition negotiations concerning the reorganization of GM.2

Many of these family and non-institutional bondholders are facing the prospect of significant losses oftheir retirement and life savings by the proposed GM restructuring, while simultaneously watching other unsecured creditors who by law are similarly situated receive disproportionately larger payments. The life-changing issue for them is not whether they will sustain some loss, but rather how much of their life savings will be lost - and how grossly disproportionate their loss will be compared to other similarly situated pre-petition creditors.  The effect that the transactions and allocations of ownership in the proposed GM restructuring would have on these bondholders certainly is not what the Bankruptcy Code intends; it is inequitable and offends basic notions of faimess.3 For these reasons, and the further reasons set forth below, it is vitally important that any reorganization ofGM be transparent and objectively fair, in accordance with the law, and accomplished through a process that respects the fundamental principles on which our bankruptcy laws are based.3

Footnotes:

2. For example, there have been reports that only a small number of institutional bondholders, many of whom may have acquired their claims at significant discounts to par, were permitted to participate in the pre-petition negotiations with the Government, the Debtors, and possibly a few other favored stakeholders, regarding the restructuring ofGM, and that those few bondholders agreed to support a fast track section 363 sale process which would grossly undervalue the general distribution to all bondholders and other unsecured creditors generally. The F&D Committee's belief is that the small group of speculators that support this scheme are willing to do so based on the enormous profits that they expect to reap given the steep discounts at which they acquired their bonds, their hedging strategies including credit default swaps, and the effect that the implementation ofthis scheme will have on their other investments and interests.

3. For example, the Debtors and the Government are seeking through the Asset Transfer Motion to force the "pre-negotiated agreement" that they made with the small group of special-interest speculators described in footnote 2 hereof on the entire class of bondholders - including thousands ofsmaller non-institutional bondholders and a total $27 billion of unsecured claims - without any transparency, without any meaningful opportunity for these bondholders to participate in the process, and without any ofthe material protections that the Bankruptcy Code is designed to afford them.

PRELIMINARY STATEMENT
1. Through a pre-arranged plan, conceived entirely outside of the bankruptcy
process, the Debtors and the United States Government (which for all intent and purposes controls the Debtors) have constructed a classic reorganization spin-off of assets to a new company, and they have divided the ownership ofthat new company among a few select favored classes, in a manner which is on its face disproportionate to the claims represented in the classes and which favors some classes at the expense of others. GM's bondholders appear to be the most disfavored and discriminated against class in this scheme. They are to be allocated approximately only 10% of the new company in satisfaction of $27 billion of claims. The equally unsecured claims of the Company's employee union, which in the aggregate face amount of $20.56 billion are approximately 25% less than the bond claims, are by contrast to be satisfied with 75% more ofthe stock (17.5%) ofthe new company, plus $6.5 billion of preferred stock and significant additional distributions including a $2.5 billion note. The allocations of equity among the governments ofthe United States, Canada and Ontario also appear to bear no equitable relationship to the post-petition financing each has provided. Nor does the United States Government's stake appear to reflect that over $19 billion of loans it provided from December 2008 to May 2009 should likely be treated as equity in Old GM.

2. In a chapter 11 plan process, one would expect a detailed disclosure statement to explain the valuation of the new company and the manner and reasoning for the allocations of equity. The proposed allocations and distributions would be subject to a variety of important creditor protections built into the plan confirmation process. For example, disclosures are mandated by section 1125. Plan voting and acceptance is governed by section 1126. And section 1129 contains various important creditors' rights protections including the proper treatment of impaired claims, the requirement that the plan be fair and equitable, the protections against cram-down on dissenting creditors, and the proper treatment of claim priorities and distributions. It may well be that the disproportionate allocations of this sub rosa plan could be justified and approved were the Debtors to pursue a plan process, as they should. Importantly, however, they would be subjected to the transparency of full disclosure, and the critical and
fundamental protection ofdue process.

3. Instead of according GM bondholders and all creditors any semblance of due
process, the Debtors and the Government want to have the allocations and  distributions approved without any real scrutiny as part of an allegedly urgent "sale" under section 363 of the Bankruptcy Code, which they ask this Court to approve on June 30. We may infer from this that the deliberate strategic choice ofa transfer of assets under section 363 over the filing of a plan reflects the Debtors' fear that their proposed allocations and distributions would not pass muster if subjected to the transparent plan process with the full creditor legal protections mandated by law. It seems clear to us that on any fair valuation ofthe various interests involved under the applicable plan confirmation requirements, the allocations would be changed and GM's bondholders would receive a materially greater and more equitable recovery.

Administration of a fair judicial system is the absolute foundational reason for the existence of any government.  What happens when the people come to realize that their rights are not secured by the government court system? 

Disclosure: I own no GM stock or debt.  As a property owner, though, I have a clear stake in the outcome of the GM bankruptcy process.