The GM bondholders’ “legal rights” meme

By Felix Salmon
June 1, 2009

A new website popped up last week called GM Bondholders Unite, and kicked off aggressively:

May 28, 2009 – “The latest GM ‘offer’ sends a chilling message to all individual bondholders, not just those, like us, holding GM bonds: contracts in America are no longer worth the paper they are written on,” said GM Bondholders Unite, a grassroots organization representing individual GM bondholders across the country.

Neil Collins picks up the meme today:

The big holders have delivered a slim majority in favour of a deal which bears no resemblance to the legal rights enshrined in the bonds’ trust deeds.

But for all the indignant assertions about legal rights, it’s far from clear what exactly is meant to be illegal here. After all, the GM bondholders (unlike the banks holding Chrysler loans) are not secured creditors, so there’s no issue about them being senior to other stakeholders like the UAW.

According to the annoyingly-anonymous website, the government has used its control over the bondholders “to promote its political agenda over the rule of law” and “has proposed a restructuring scheme that disregards and would overwrite contractual rights of lenders and the statutory protections afforded them through the bankruptcy code’s priority rules”. But I still haven’t found anybody actually spell out what those contractual rights are supposed to be, whether they’re “enshrined in the bonds’ trust deeds” or otherwise.

The GM bondholders do have a PR representative, Tom Vogel. When I asked him about this, he replied by giving me some “comments on background”, which means that he was asking me, weirdly, not to repeat what he said. So I’d just ask this: the next time that somebody claims that the treatment of GM bondholders in any way violates their legal rights, can they be specific about exactly what legal rights are being violated?

As far as I can make out, the main legitimate complaint of the GM bondholders is that they’re getting paid out less than other unsecured creditors (specifically the UAW) with whom they’re pari passu. But I don’t think there’s a legal right anywhere for all pari passu creditors to receive exactly the same treatment. If you owe money on four different credit cards, there’s no law saying you have to pay them all the same proportion of the total amount outstanding.

But if there’s a more substantive complaint, I’d love to see it spelled out explicitly, rather than just referred to in a vague and hand-waving manner.


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Bondholders rights have been steadily removed by bankruptcy courts for years–dating back at least to the acquisition of Time-Warner by Chris-Craft.

Looking at bondholder rights as they currently stand legally, they know there is no LEGAL basis for complaining.

(Side note: the UAW is hardly an unsecured creditor; see the last Labor Agreement which, if it was as reported at the time, makes it clear that bondholders are not pari passu with the UAW obligations.

Is it possible that the issue being confused because the speed of the reorganizations are so fast? I’m not a bankruptcy attorney, but given the size of these bankruptcies I suspect these reorganizations are occuring at an unprecedented pace. Maybe the bondholders feel they are not getting proper consideration. I’m not sure that time equals consideration, but I’m guessing it equals frustration. Also, since some of the debts are owed to potential TARP recipients, certain non-TARP bondholders might feel slighted. Again, not sure about the legality, but I can see how this is a source of frustration.

Posted by chappy | Report as abusive

Let’s all band together and dump the UAW, which will force GM to build vehicles that America wants, rather than building junk and having it shoved at us at astonomically high prices simply so we can pay virtually uneducated UAW people $80/hr. to screw mirrors on cars, and 100% retiree health care costs. Stakeholders need their investments to pay off, and not to pay off UAW thugs. Americans are finally fed up with this type of elitist behavior.

Posted by Frank | Report as abusive

This is politics, not bankruptcy procedure. The bondholders usually get paid off at something from 0 to 100 cents on a dollar, partially or all converted to equity, partially (rarely all) carried over as debt for the new company. (I say usually because as you know sometimes creditors can force liquidation.) That’s what happened here: conversion plus warrants plus retaining some debt status. Now if the bondholders brought something to the party, they’d have received more, but they didn’t offer new cash to support any reorg plan.

People with a political agenda are trying to claim the government is stealing property. They’re wrong.

Posted by jonathan | Report as abusive

I’m always reminded of the words of Kim Stanley Robinson: “Libertarians are anarchists who want police protection from their slaves.” Conservatives (and that’s who we’re talking about here) seem to think “the rule of law” means that their interests are fully protected and everyone else can go take a hike. This becomes perfectly clear when point out that the law does not, in fact, make them whole before anyone else gets so much as a kind word.

That’s when they start quoting Karl Popper and Ayn Rand, as if the _real_ law were that 60-page speech in the middle of _Atlas Shrugged._

The sense of entitlement and lack of personal responsibility out there is just breathtaking. Are these people mad at themselves for buying and holding unsecured GM debt 20 years after “Roger and Me?” Mad at General Motors for running itself into the ground? No–they’re mad at the government for applying the law.

Posted by Craig | Report as abusive

Additional issue that might be causing pain. Does anyone know the details of the “good” versus “bad” GM? While other bankruptcy restructurings may have gone this way for all I know, might bondholders be mad about which entity their converted debt-to-equity might be placed? Without any details, I suspect this “good” versus “bad” delineation has everything to do with how stakeholders are treated. My suspicion is that the “bad” entity is just a roundabout way to do a Chapter 7 for a portion of the company while allowing the viable assets to go Chapter 11. Is there an anaylsis that looks at how these entities have been proposed to be divided? I’d be very interested in seeing it.

Posted by chappy | Report as abusive

Great comment from another blog, another politicized bankruptcy battle:

rea says: May 13, 2009, 12:56:44 PM EDT

>The framers could have stopped the federal government from “impairing the obligation of contracts.”

But of course, that would leave us without any bankruptcy law. The whole point of bankruptcy is to impair the obligation of contracts.

Source: ml

“This is politics, not bankruptcy procedure.”
Oh boo hoo. WTF did finance think was going to happen? That they could just keep screwing the 99% of the country that does not belong to the plutocracy forever and there would never be any sort of pushback?
Turns out, no surprise, these people are not just idiots about economics; they’re also idiots about history, human psychology, and politics. Which makes one wonder, once again, what exactly IS their value-add to society?

Posted by Maynard Handley | Report as abusive

Bondholders are those who pay their own money to support the company.
UAW are those who took money away and make the company go down. Obama surely pick the right group for GM’s future.

Posted by john | Report as abusive

It’s simple: the BK process has been inverted, it’s now all about the debtor. archives/bankruptcy-in-the-news-chrysler -files-bankruptcy-part-ii-testing-the-li mits-of-section-363-sales.html

As far as GM goes it’s really a question of the degree of disparity between UAW “recovery” and money holders. Of course they will get more and, of course the govt. will get more. But the latter has 2X the money in the company and is getting 6X the return; the former, lemme choke here, really half the money and, little in the way of sacrifice, gets cash, and secured note at 4X the money. Additionally without a serious common equity holding the UAW once again has little interest in the financial performance of this company.

I’m a bondholder; I’m cool with it. I want to see a vialble company even though my recovery would’ve been much greater had we Chapter 7′d last fall and thrown America’s biggest single pensions, healthcare and umemployment onto you taxpayers in the first place.

Salmon, you are focusing on word games to avoid the truth. I’m not a legal expert on bankruptcy, though I have invested in several, so I can’t say what “legal rights” the GM bond-holders are losing. But I know what is customary, and it seems grossly unfair that the treasury is ramming through a pre-pack that treats politically connected unsecured creditors dramatically better than other unsecured creditors. 9610364475.html

Let’s look at the updated deal.

Bondholders exchange a $27B claim for 10% of the new GM’s common stock, plus the opportunity to buy 15% more of GM if it’s still alive in 7-10 years.

The UAW will exchange a smaller claim ($20B) for $10 billion in cash, $6.5 billion in preferred stock paying a 9% dividend, $2.5 billion in debt, 17.5% of the common stock and warrants to buy another 2.5% in five years.

I can understand the government driving a hard bargain for itself as the DIP provider, but why is the UAW getting package worth several times what the bond-holders are getting, when the UAW is owed less? The simple answer is, the UAW is the presidents most important political supporter. The entire deal is driven by the administrations desire to make the UAW as whole as possible. And that’s pretty disgusting.

It would be just as disgusting as if the Bush administration tried to protect executive pensions and bonuses at the expense of other creditors, just because those execs were important fund raisers and contributors. It doesn’t matter which party you belong to, you should be appalled when your party’s leaders use political privilege to pay off their backers.

Your credit cards comment makes it sound like you doesn’t understand the bankruptcy process at all. You can’t go into bankruptcy and say I want to pay off this credit card in full and the others pennies. I’m sure there are exceptions in the case of pensions like the UAW has, but the unfairness of the administrations proposal is reflected in the reactions of bondholders, and investors who understand the normal process.

Also to the person who commented that the UAW is hardly an unsecured creditor, labor agreements can and will be rejected in any bankruptcy, so what the UAW agreement says is meaningless, and unless the UAW becomes secured debtors, they are in the same place of line as the bond holders.

In the end, bond holders loan money to companies at a certain cost because they believe they have some sort of protection in bankruptcy, that they’ll be pari passu with other unsecured creditors, and ahead of stockholders. Because of this they can reasonably assume they’ll get some of their money back. The administrations willingness to subvert this means that bondholders in the future have to consider their rights in bankruptcy to be damaged, and they should demand significantly higher interest and security from any business that can possibly fall under government control.

It’s almost a self fulfilling prophecy, do you feel comfortable with Citi bonds after this?

It seems this deal is so wrong-headed that GM is doomed, liquidation will ensue, and the UAW will lose everything. The reason for bankruptcy was to reject the awful UAW contracts so GM could finally be competitive, not protect them, and there is no way the “new GM” can be successful when it’s owned by the treasury and UAW. The next CEO will spend his time catering to two constituencies that are incapable of letting GM make the right economic decisions.

Posted by Randy Hill | Report as abusive

This is not a political issue. This is a legal issue. Unless bankruptcy has changed since I sutdied it in law school, the bankruptcy courts are govered by laws. Corporate bonds (while not secured interests) are preferred creditors. That means that if there not enough money to pay all debts (the reason companies file bankruptcy), preferred unsecured creditors are paid before general unsecured creditors. Stock holders (like the UAW) are the lowest unsecured creditor, unless they own preferred stock (although this would still be junior to a bondholder).

Even if you could assert that both the bondholders and the UAW have the same footing as unsecured creditors, your argument still fails. You asked what law mandates that all unsecured creditor receive the same treatment. The answer is the laws in the bankruptcy code enacted by Congress and signed into law by the president. Under the Code, all creditors which have equal footing (as you assert the UAW and the bondholders have) receive a pro rate share of the funds if the debts for those creditors cannot be paid in full. There can be no preference.

Sorry that the rule of law gets in the way of you politics. Actually, the way this turned out, I guess the current administration just got in the way and disregarded of US law.

Posted by Chris | Report as abusive