I recently received an email from an old friend who retired to manage his money about 20 years ago. He is a very astute and conservative investor. The majority of his money goes into municipal and corporate bonds and with the remainder he often takes positions in the stock market which might last for a year or two, based on a trend he perceives as inevitable. He has done very well with his money and lives comfortably.
Upon reading his email however, I discovered he was somewhat less than happy about his long-standing position in GM debt. He reads widely, and is aware of the state of GM, and fully understands the ramifications of bankruptcy. What prompted his email wasn't the pending GM collapse, but the attempted rescue effort.
In case you don't know, when a corporation is liquidated in bankruptcy the assets are sold off and the proceeds received are used to pay off secured creditors and debt holders (based on the priority of their debts). What is left over is used to repay unsecured creditors. Anything remaining after that is divided among the stockholders.
It seems my friend has recently received his GM "Debt for Equity Swap" offer and looked it over. Here's what he saw that turned his face purple:
GM is currently authorized to issue 2,106,000,000 shares of common stock, of which it had already issued 610,505,273 shares (roughly 1.5 billion more shares are currently authorized).
Under the "Deal" he was offered, the company plans on issuing an additional 60 billion shares. Yes. That's BILLION, with a "B". Thirty times more shares than currently authorized.
After rejecting a counter offer by debt holders GM CEO Fritz Henderson said GM couldn't accept because they had been told by the Treasury Department that they can't give more than 10 percent equity (total shares) to the bondholders.
You can bet your bottom dollar that a very similar result will be crafted in bankruptcy court if things go that far. Bondholders will get something like 1.5 billion shares of a stock which will then be watered down by a factor of 10 to 1, because that's what Obama wants, to give most of the shares to the gub'mint and the UAW (which is an unsecured creditor).
The great experiment in self-governence is finally winding down. It looked good for a couple centuries, but is now in the midst of a complete collapse into cronyism. The pre-existing laws are ignored in favor of politically chosen winners (US gub'mint and UAW) and losers (GM bondholders).
I'm sure stong-arm tactics like this are exactly what will convince people with money to buy corporate bonds in the future (NOT!). Nothing inspires confidence in the market like theft and fraud imposed by gub'mint edict.
Welcome to the Brave New World, Comrade, where Big Brother knows what's best and tells everyone what to do with 'their' money.
I don't know what others might think, but it sure looks like this will end badly at some point in the not too distant future.