When the president's auto task force meets today to begin trying to fix the broken U.S. auto companies, it must balance dozens of competing demands.
High on the list will be placating General Motors' gm bondholders, who've been asked to take 30 cents on the dollar in new bonds and GM shares in exchange for the cash they lent the automaker by buying its earlier bonds.
The task force also needs to get the United Auto Workers union to agree to restructure payments to its retiree health care trust (at perhaps 50 cents on the dollar), discover how to get Americans to buy cars again and determine whether a court-supervised bankruptcy would be a worse — or better — way to restructure the troubled companies.
GM and Chrysler have been operating in a state of virtual bankruptcy since December, when the government agreed to give them $17.4 billion in loans to help them survive. On Tuesday, they asked for $21.6 billion more.
A key condition of GM's loans is that it lower its crushing debt load by persuading bondholders to take less than they're owed. But the bondholders have made clear they're not going to be treated unfairly and are willing to push GM into a bankruptcy filing to try to prevent that, says a source familiar with the negotiations who wished not to be identified because talks are private. Under a court-supervised bankruptcy, bondholders' claims would be among the first to be repaid.
About 20% of the $27 billion in outstanding bonds are held by retail investors, such as in private IRA funds or college funds. Institutional investors, such as pension or non-profit trust funds, and international investors make up the rest.
The bondholders are "being asked to bear a lot of pain for other people's benefits, and that's a difficult pill to swallow," says the source. The bondholders "would prefer a quick, consensual, out-of-court transaction where everybody got fair treatment, but we're not going to pursue that at the expense of doing a transaction that's unfair."
GM opposes a bankruptcy filing, arguing it would cost the government more than the loans and cause shoppers to flee. Chrysler has said bankruptcy would lead to its liquidation.
Stephen Spivey, an analyst at consultants Frost & Sullivan, says he thinks the task force will take great pains to make sure GM doesn't end up in bankruptcy court. "The political support is there to keep them out of bankruptcy and to make the restructuring work."