It only takes opposition by 10% of the bondholders to stymie an out-of-court restructuring of GM. The FT believes that there are enough bondholders who, via being net short GM bonds via credit default swaps, have good reason to block a negotiated outcome and force the automaker into bankruptcy. And that poses risk to the economy, since there are meaningful odds that the fast track solution of a 363 sale will be opposed successfully, producing uncertainty as to when GM will exit bankruptcy and putting further strain on the supply chain.
FDL was way ahead on this one. The NYT says it will be harder to demonize the CDS holders like the President did with Chrysler’s lender hold-outs, because most GM CDS holders probably bought long ago, before GM and its debt got into serious trouble.
Who wrote the protection and will have to pay? Representative Elijah Cummings asked Edward Liddy today if AIG wrote protection for GM debt. Jane captures the exchange:
Cummings: Did AIG write swaps to any creditors of Chrysler or GM?
Liddy: Beats me.
That’s what people mean when they say that the CDS market isn’t transparent. We also don’t know the holders of CDSs on GM debt, who stand to profit from bankruptcy at the expense of the workers and suppliers, and the taxpayers who have dumped billions into GM.
So, what should President Obama and Steven Rattner be doing? They need to know who wrote protection for GM bonds, and those entities need to be at the table right now, involved in the discussions. When GM files, the bondholders with CDSs will tender their bonds to the protection writers, and those holding naked GM CDSs will buy bonds in the open market to tender with their CDSs. The protection writers will be the new bondholders, and will have a seat at the table in the negotiations over the fate of GM, but in the very expensive and risky bankruptcy setting. Only negotiations right now give them some chance to protect themselves from the problems of a bankruptcy.
Somehow, I think Rattner can find out if he wants to know. The Wall Street Journal says he headed up the negotiations with Chrysler debtholders. His leverage was straightforward:
And if Chrysler had to liquidate, they and other lenders would have to try to recover their money by selling closed auto plants and other assets that are little in demand.
Mr. Rattner forced the issue during the spring negotiations. More than once, he told Mr. Lee: "You can have the company and run it or liquidate it."
In the following days, the lenders began to realize their leverage was small and dwindling. Only the government had the ability or willingness to finance a bankruptcy reorganization of Chrysler, while also supporting its warranties and suppliers and recapitalizing Chrysler Financial. None of the lenders, some of which had consumer operations in the Midwest near Chrysler plants, had any desire to take over and liquidate the company.
Good to know Rattner is on the taxpayer’s side in this one.