Confiscation of Bondholder Assets Dooms GM

Much has been made in recent weeks about the fact that the GM bankruptcy agreement moved the government’s claims to GM ahead of bondholders with secured debt. Had GM gone through typical bankruptcy proceedings the bondholders would likely have ended up owning more than half of GM, not the 10 percent they actually got.

Critics of the deal have had two major criticisms: first, that it is unfair to bondholders, and a confiscation of their wealth; and second, that this sets a bad precedent and will make it more difficult for firms to issue secured debt in the future.

Look at what it does to GM, though. First, it makes GM a government-owned company. Everybody sees that. Second, auto companies raise revenue during normal times through issue of a combination of equity and debt, and this deal means nobody is going to want to buy GM debt. So rather than helping move GM from public ownership to private ownership, GM is put in a position where it can only borrow from the federal government, meaning that GM will remain permanently dependent on the federal government for support. It can’t raise money in the bond market like other companies, because potential bondholders see the risk that their interests will again be shuttled behind the federal government’s.

There is no way out for GM. Even if it can start building cars profitably, like a private company, its bankruptcy settlement means it can’t finance itself like a private company. GM cannot survive.

GM has already found buyers for its Saturn and Hummer lines. The best policy at this point would be to sell off GM’s other lines while they still have some value.