GM bondholders vs UAW retirees: a false equivalence

By Felix Salmon
May 27, 2009

If you invest a large chunk of your 401(k) in the stock of just one company, your actions are fraught with peril. If that stock performs badly — which is always possible — then you could end up with a significantly diminished standard of living in retirement. But at least there’s a possible upside: if the stock does spectacularly well, you can end up in clover.

By contrast, there’s no reason whatsoever to invest a large chunk of your 401(k) in the bonds of just one company. You still have the same downside — the company can default on its debt — but there’s no upside at all: the best-case scenario is just that you muddle through getting your coupon payments until the bonds mature.

The WSJ editorial page today features a complaint from one Dennis Buchholtz, however — a man who did just that:

I am an American retiree. Like many small investors, I am relying on “safe” investments…

I purchased GM bonds in 2005 and own $91,000 worth. These bonds account for a very sizeable portion of my retirement income, and so it is absolutely devastating to watch GM’s problems bring the once venerable company to the brink of failure. My standard of living is truly in jeopardy.

It’s not easy, as a retail investor in America, to purchase individual series of corporate bonds. It’s possible, of course, and GM did make an attempt to target such investors. But thankfully most stockbrokers and financial advisors will tell you that if you want credit risk in your 401(k) then by far the best way of doing that is to buy a bond fund, which minimizes your exposure to any one credit. As a result, there are — happily — precious few people in Buchholtz’s situation. Most bond investors are large institutions which watch their portfolios carefully and make sure they’re diversified at all times.

Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure. As such, if you’re worried about the well-being of retirees, it makes perfect sense to treat the UAW’s retirees better than those who either have a small amount of exposure via their bond funds, or those who actively sought out GM exposure by buying its bonds. “The government’s proposed restructuring plans benefit one class of retirees at the expense of another,” complains Buchholtz — and it’s entirely proper that they do so. Buchholtz has no one to blame for his current predicament but himself: caveat emptor, and all that. That can’t be said of the UAW retirees.


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And let’s not forget that if this gent bought in 2005, he probably bought at a 25% discount — because GM was already a junk credit in 2005. Sounds to me like someone who wanted to trade on the likelihood of a government bailout.

Posted by Anonymous | Report as abusive

You post is a very empathetic interpretation of the law.

Posted by Marc | Report as abusive

Please explain why GM’s white collar and non-union employees don’t have their retirement and other benefits guaranteed. Perhaps you could do an expose on all the opportunities they had to diversify their GM exposure.
There is no law, no contractual clause, nothing measurable that you can use to justify this distribution of wealth. Other than consulting your feelings, is there any way someone can objectively determine their position in the capital structure?

Posted by John Omeara | Report as abusive

The employees/ union choose to set up their scheme in contracts . They were aware of unfunded liability.This will encourage other strong political groups to set up and continue their Ponzi scheme since Uncle Sam will send in the St Bernard .To be just, we should be willing to right other similar situations (union,nonunion,small,large groups).

Posted by Lowrie Glasgow | Report as abusive

Perhaps this investor bought GM bonds 10 years ago, and owns what is now a 20-year maturity. Misguided perhaps, but I’d question the veracity of anyone taking the other side of his argument. Perhaps he thought to himself…GM makes vehicles, GE makes light bulbs & washing machines, Wachovia is a bank: what could ever go wrong ?

hindsight makes us all a 20/20 judge, that’s all. Maybe he should be warned of being screwed by the UAW…something they do quite well. Include a completely inept management & board…there you go

Posted by Griff | Report as abusive

Hasn’t the government also favored some bond investors over others? The feds will have put in $45B for their share and to aid GM – how much aided Circuit City or other recently bk’d firms?

How much Mr. Buchholtz’s bonds be worth without the government’s assistance? The UAW has also reworked some of its contracts, granting concessions. How has that impacted his bonds?

Did GM’s problems just start? Couldn’t he have unloaded the bonds earlier, while retirees didn’t have that option, which is pretty much your point.

Posted by winstongator | Report as abusive

Interesting article. The author concludes that bondholders are less entitled to their full legal privilages than UAW employess. Why? He cites not one legal statement about the issue.

Does the author mention that ‘secured bondholders’ get paid out before unsecured bondholders? Does the author forget we live in a land based upon the rule of LAW?

Instead, let us have emotions rule the day.

Both employess of GM and GM bondholders are ‘victims’ in this case. Now, which victim has the legal right to get paid out first. That is the issue and only issue.

Posted by Tom | Report as abusive

“Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure.”

I never liked this argument. They picked this occupation and company. They could of switched companies or broadened their skill set. Or, they could of moved from Detroit as the house prices were sending a giant signal for years that the auto industry would not survive. But, instead they chose to buy political power…and they were right.

Since you are chastizing average investors, why not mention that on the day of retirement the GM pensioners could of bought puts or sold the stock short. Why not apply the same sophisticated investment analysis to the union bloke?

Posted by von Pepe | Report as abusive


This statement is false:
“It’s not easy, as a retail investor in America, to purchase individual series of corporate bonds.”

Many GM bonds are exchange traded on the NYSE in $25 par value amounts, so these are just as easy to buy as it is to buy as any stock that trades. There are also other exchange traded corporates bonds that individuals can buy that have similar small par values. Buying institutional class corporate bonds is more difficult than buying stocks but that does not mean that it is not easy.

“Now the UAW retirees, it’s worth noting, do not have a similar way of diversifying their GM exposure.” In their 2007 settlement VEBA agreement they agreed to accept a unsecured note from GM, they did not have to do that, so it is their fault for not diversifying their risk. From the beginning they also could have set up their own pension and healthcare funds so that they wouldn’t have to worry about the insolvency of any of the automakers, so there should be no sympathy for these workers and their representatives who made poor decisions from the beginning. They let their workers down by bankrupting these companies and not protecting themselves from the downside, they should not be bailed out of their poor decisions and should receive an equal recovery as those who took those same risks no matter who they are.

Posted by Aiden | Report as abusive

we live in a land based on the rule of law, until those rules are circumvented to acheive a sufficient end to political means. applies to whomever rules in DC…left or right or left-center or right-center or far left or far right.

In the rule of law, unsecured creditors of any “ilk” should get equal treatment, either from the bankruptcy court or following the senior-secured creditors being paid. In the Chrysler chapter 11 case, that did NOT OCCUR. It’s pretty easy to understand why the retiree / GM bondholder is just a little worried.

Why the intervention? Why the punishment of retirement funds (individually and/or cumulative by pension / retirement systems, endowment funds) ?

Posted by Griff | Report as abusive

Why are there 2 sides to the GM situation?
On one hand we have the bondholders of GM and on the other we have the UAW employees.

Sholuldnt they both be treated equally or at least in way and manner that is fai and equitable ?

Apart from political expediency, why should the bondholders be treated differenttly (lesser or better) than the UAW workers ? The only solution is the one that is fair and equitable to both sides.

‘Fairness’ has nothing to do with this situation. It comes down to whether GM’s secured bondholders and more legal rights, under the law, than the unsecured debt issued by the UAW.

Simple as that. Case closed. This is no different than if XYZ company went into bankruptcy and secured debt holder W is entitled to get paid out before unsecured debt holder U.

Fairness, by the way, would be treating every bankruptcy proceeding the same. If the law says the small guy is supposed to win, then the small guy wins. If the law says the big guy is supposed to win, then the big guy wins. Treat everyone, every group, equally under the law.

Subverting the law to ‘acheive’ fairness reduces our legal system and Constitution to a mockery.

Posted by Tom | Report as abusive

I’m in two minds about this.

On the one hand, I can see the points about the rule of law and strict priority in bankruptcy. Undermining, or even just introducing a little uncertainty into this process could make it harder for all companies to raise funds.

On the other, there is the fact that GM has been propped up with soft loans for a long time now from friends in Congress (or rather, from the taxpayer), which other companies have not received. I’m not sure you can accept the politicians’ money and then expect them not to hang around.

I would always worry about political meddling when investing in hot potatoes such defense companies, Fannie/Freddie, airports etc. If there is political meddling then it is fairly predictable that the politicians will choose to avoid having a large regional pool of indigent seniors over avoiding pissing off bond investors.

Felix is one of the few bloggers I follow who seem sympathetic to this move. I think I remember him posting that he used to do coverage of South American bonds, where political considerations and “willingness to pay” are everything. Maybe that is why his take on the situation seems different? To an investor used to the strong, effective US legal environment you almost never have to consider “willingness to pay”, but in other parts of the world this situation would seem routine.

Posted by JH | Report as abusive

The vast majority of GM bondholders are institutions, and most of these institutional investors have CDSs insuring against GM’s default. GM’s bankruptcy will likely be a windfall for the insured bondholders who purchased these bonds at a large discount. With this in mind, it is hard to say that GM’s retirees are being unfairly favored.

Posted by Ryan | Report as abusive

One also has to see that the government has obligations to pensioners through PBGC that it does not have to bondholders so it is no surprise they would offer them more. Priority wasn’t violated because it never applied; the value paid was more than anyone else could or would offer. Bondholders want to be made whole for their mistakes. Madoff’s investors would too, but that is not the obligation of government.

Note that ten year employees are being offered $80,000 and a 25,000 car voucher to “voluntary quit” GM.

No wonder GM needs to stiff the bondholders.

Posted by AndrewDover | Report as abusive

This aritcle is completly specious reasoning.

The investor’s penalty for ignorant or foolish nondiversification is whatever loss ensues. The investor still retains whatever rights or powers he bought to enforce collection of whatever he can, even if that means there is less left for others. If we feel sorry fot he workers, go to Congress and get Congress to give them some more help– don’t ask or expect the investors to go away and die so that whatever theyown can be handed ove tot hemore needy.

(Personally as a taxpayer and small GM shareholder (diversified luckily) I would gain if the bondholders would go away and take scraps, but I still have to try to be be intellectually honest on this rather than self-serving as so many advocates have become.)

Posted by J Flory | Report as abusive

This gent should check out the current fair market value (FMV) of his GM bonds at the FINRA web site — ter/AdvancedScreener.aspx.

Both equities and bonds are a forms of speculation — not to be confused with “savings.” The belief that bond holders should be protected (by Big Government) from their losses – while share holders should have to go punt – is absurd on its face. There’s a reason bonds are rated, why those ratings are periodically updated and why the FMV value of those bonds change with rating changes!

Posted by Major | Report as abusive

Yea, I think he was just gambling pretty hard. Also, diversification is important at all times, especially if you are not sure what you are doing. It didn’t seem like he was certain about his action aside from ‘GM is big, so it got to be a safe investment’. It be a disaster if equity traders would start thinking like this.

- L Berstein

The UAW did exactly the same thing as Dennis Buchholtz:
They made a VEBA deal in 2007 in which they obtained promises by GM to be paid in the future.

And their current situation is not so bad. I would ask the fair minded reader to check out the UAW VEBA terms at dreports09/UAWGM2009May-1to15.pdf (Page 11)

where it states the terms for VEBA recently agreed to by UAW and GM + Auto Task Force.

They are:
10 billion in cash at Jan 1, 2010.
1.384 billion in cash 2013
1.384 billion in cash 2015
1.384 billion in cash 2017
6 billion in prefered stock paying 9%
17.5% of all equity in the restructured GM.

Plus warrants for another 2.5% of equity in GM.

And how much did GM owe them ?

Posted by AndrewDover | Report as abusive

I am one of the unfortunate GM Bondholders who bought in 2002/2003 and paid close to par for the bonds. Everyone is debating whether bondholders should be treated as speculators or creditors. By their vary nature, corporate bonds are far from speculation (under normal conditons). They are sold at a fixed price, paying a fixed interest rate, for a fixed period of time. Holders of these bonds are not speculators but creditors of GM. GM borrowed this money for capital investment, expansion, R&D, etc with the promise of paying this money back with interest at a pre determined time. To now say the bondholders are just “out of luck” is worse than criminal – it is illegal. I’d rather see GM liquidated. At least the bondholders would fair much better than under the proposed exchange.

Posted by R Axon | Report as abusive

maybe these old men should’ve just assumed they were buying subordinate debt instead of the senior unsecured they presumed to be owning. Buyer beware is always the rule…but if the system screws you over, primarily NOT based on legal precedent then what’s the recourse to the investor ?

GM was downgraded to junk (< BBB) in mid-2005, I think.

Speculating in senior-unsecured, investment grade debt is also called Investing. Oh, and now with the facts in hand it “just looks like speculation”. 12 months ago, I guess investing in a 12-mo CD at Wachovia or WaMu would also have fallen under “speculation”.

Posted by Griff | Report as abusive

i think they are equivalent because UAW could have negotiated the retirement plan so they weren’t exposed to GM risk. but they didn’t because i think they believed they could get a higher return by letting GM float the benefit money and they probably also believed they would be bailed out by the government if GM failed.

Posted by drscroogemcduck | Report as abusive

I can’t believe you guys are falling for another Joe The Plumber style astroturf campaign.

30 seconds on Google: ontributions/dennis-buchholtz.asp?cycle= 08

The author donates thousands of dollars per cycle exclusively to Republican candidates for nearly a decade, lists his occupation as “Self-Employed Real Estate Investor”, and yet has people crying over his “poor retiree about to take a loss on his GM bonds” sob story.

Posted by RTD | Report as abusive

his personal circumstances or political affiliation shouldn’t matter…I’m not surprised if that’s indeed the case though.

investing in senior debt should follow contractual rights and rule of law, when and if applicable. Political leanings matter not, or they shouldn’t

kinda like TBP and his push for “wind energy”…oh yes his firm stands to benefit on those tax credits but that’s just minor details.

Posted by Griff | Report as abusive

A good point was made earlier – the white collar workers at GM don’t even have company paid medical insurance when they retire.

Another interesting note: none of the concessions that the UAW made, except for bonuses, don’t reduce operating expenses and therefore have no effect on profitability. How does this make GM more competitive? Do the hourly Toyota retired employees get their medical benefits covered?

Posted by ubdkjrb | Report as abusive

Im a widow of a GM retiree. My husband left me 40,000 in GM bonds. If GM files bankruptcy what becomes of my money? What are the scenarios? Can someone explain in plain english please? thanx

Posted by Widow | Report as abusive

An exceptional situatuon, the demise of a company like gm is unprecedented in modern history. Never has the end of any one company affected the rest of the world like it does in our time. We should be horrified and thrilled at the same time. Change is growth in our times, the alternative to change being destruction. This lends no confidence to the thousands of people who have had or will have their livelyhood stripped from them. The mob rules mentallity will rear its ugly head. Cooler heads must prevail. Are we eveolved enough to avoid a third world war? Do we have the right to avoid a third war? I am of the opinion that human beings kick ass and that we have the power to make our own destiny. Take that and make of it what you will.

Note to self: Hopefully this makes sense when I am sober.

Posted by Jason | Report as abusive

I realize I am in a unique position for many members but, quite frankly, I don’t need any insurance from GM or VERA. I want to know what you’re doing to my monthly pension checks. Without those I am finished and I do mean FINISHED like off the membership list for ever.

Posted by Gary McDougall | Report as abusive

No one seems to put much importance on what the federal government threatened to do. (They threatened to withhold further funds)

No one seems to put much importance on the power of a Federal Judge. (He makes the hard decisions)

I don’t like any outcome that gets crammed down your throat, but the Judge decided that the Federal Government was not bluffing and the Judge surely felt there was no choice.

Bondholders can sue the Federal Government in Court. I hope they win something.

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