Tomorrow is another day

James Glassman, who was an Undersecretary of State for Public Diplomacy under the Bush administration, wrote in a NYT op-ed that government intervention in the GM bankruptcy is undermining the bond market.

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There is no escaping the long-term damage that has been inflicted on credit markets by the Obama administration’s attempts to reward the United Auto Workers, one of the president’s strongest supporters in the last election, while trampling decades of legal precedent regarding owners of corporate debt.

The G.M. debacle is déjà vu all over again. In the Chrysler bankruptcy arranged by the government in April, bondholders also got short shrift, while the union, which might have received little or nothing in a normal bankruptcy, was awarded 55 percent of the company.

What’s my interest in this? I head a nonprofit group that encourages developing nations to adopt policies that will lead to prosperity — starting with transparency and the rule of law — and hold up America as a model. Yet in its high-handed dealings with Chrysler and G.M., the Obama administration reminds me of an irresponsible third-world regime, skirting the law and handing economic prizes to political cronies.

Just a few hours ago, a narrow majority of bondholders agreed to a government equity for debt swap after the Treasury sweetened the deal. The WSJ reported that:

An ad hoc committee representing major bondholders agreed to support the offer and encouraged other big investors to back the deal. A group of dissident bondholders represented by Thomas Lauria, also a lawyer for holdouts in the Chrysler case, fought against the deal. He argued that small, individual bondholders were left with no voice as the Treasury negotiated directly with GM’s large institutional holders.

It was up to Treasury, which brokered the deal, to determine whether enough bondholders agreed for the offer to stand. A spokesman for the bondholder committee said approximately 54% of the bonds have indicated their support and that 975 institutions either sent support letters or gave us indications of support.

The government sweetened the offer last week after bondholders overwhelmingly rejected an earlier proposal that would have left them with 10% equity in the new GM.

Analysts’ estimates have bondholders coming out of the new deal with around 10 cents on the dollar, compared to as little as nothing under the old offer.

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Take-it-or-leave-it doesn’t mean you get what you want; it simply means you get while you can. The interesting question is what this maximin strategy implies for other bondholders. By agreeing to less than they were entitled to in order to get what they could, the GM bondholders may have been replaying a common scenario in the Tragedy of the Commons, in which their own use decreases the subsequent value of the resource for others. Whatever they get as individual bondholders must be set against how much they’ve undermind the claims of all bondholders in the future.


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