The Treasury is using all of its muscle in The Motor City. Bondholders in GM (GM) and Chrysler think they may do better if the companies go bankrupt than if they take the paltry offer of equity-for-debt exchanges that will bring them a few cents on each dollar of their investments.
The government does not have much of a case, but that is not keeping it from trying to strong-arm a restructuring of the two auto firms.
According to The Wall Street Journal, “At Chrysler, the U.S. wants banks and investors who control its bank debt to give up about 85% of the nearly $7 billion they are owed. In bankruptcies, such senior secured lenders typically get most of their money back.” The debtor program being discussed for GM is probably not much better.
The game won’t go on for much longer. The government’s deadline for restructuring the two companies is only a few weeks away. It is hard to imagine why senior creditors would take more of a haircut than necessary.
The debtholders in GM and Chrysler are about to call the government’s bluff. The Administration can’t afford to let the economy lose the number of jobs that a car company bankruptcy would cause.
Douglas A. McIntyre
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