Courtesy of Karl Denninger at The Market Ticker
Told ‘Ya So (GM: ZERO!)
Mr. Koch, a managing director at the advisory firm AlixPartners LLP, will be named to the post when GM files its bankruptcy papers at 8 a.m. Monday at the U.S. Bankruptcy Court in New York’s Southern District, these people said. He will be the highest-ranking outsider in GM’s officer ranks and oversee about 60 Alix employees working for the auto maker.
Hope you sold whatever common stock you had into the ramp job the last few weeks.
Now here’s the bad news:
Assuming a New GM emerges from Chapter 11, Mr. Koch will then sit atop a new, separate management team winding down the "Old GM" that remains in bankruptcy court. In this role, he’ll likely report directly to Old GM’s board, which will be different from the New GM board.
As the steward of the Old GM, Mr. Koch will help negotiate contracts between the New GM and Old GM for certain services. He’ll also lead efforts to spin-off or liquidate Old GM’s assets, including the Saturn, Hummer, Saab and Pontiac brands, and as many as 20 factories.
Odds are that if you’re a general creditor (e.g. a supplier) you’re going to get zero for whatever is outstanding on your book in receivables from GM.
Sorry.
This will produce bankruptcies up and down the supply chain.
Count on it.
Oh, and you have to love the report that was on Bloomberg earlier, then disappeared.
Apparently, about 975 of GM’s bondholders agreed to the restructuring they sought, holding just over 50% of the debt.
The other one hundred thousand+ bondholders, including individuals who had their children’s college funds and personal retirement savings in this debt, had no say, did not vote for this action, and in fact oppose it.
They will be wiped out, recovering about ten cents on the dollar.
Under bankruptcy law it is generally true that a "significant" majority of the debtholders must agree to restructuring, not a razor-thin majority. Of course the law doesn’t seem to matter any more in this country when it comes to bankruptcy (or any other kind of law for that matter) so long as the government wants things to go a certain way, and neither Democrat or Republican parties can take the high road on this matter – they both stink.
The really ugly part of this mess is that had GM been forced into bankruptcy last year when it started reporting monstrous (integer-level) negative earnings recovery would have been decent. It was only through the profligate lies and fraud promulgated by "propping up" the company that the remainder of the value that could and should have been recovered by the bondholders was squandered.
My view of this entire mess is that GM had no business operating past last summer. In the 2nd quarter of 2008 GM reported a loss of more than $27 dollars a share, a number that exceeded their share price at the time by nearly twice.
The equity value in the business was at that point declared gone more than twice – period – and there was absolutely no excuse of any sort for any institution that held their debt to allow them to get away with continuing to operate for so much as one more day.
They should have had an involuntary bankruptcy petition filed against them; instead GM went on to lose $7.35, $15.71 and then $9.78 in the next three quarters.
There are 610 million (roughly) shares outstanding. If my math is correct this means that by refusing to perform their fiduciary responsibility to the beneficial owners of these bonds the "major holders" caused to be dissipated over $20 billion dollars of recoverable monies in the form of destruction of the recovery value of those notes!
The total outstanding debt at the present time is listed as $54.40 billion.
This means that had the bondholding companies that have this debt as part of a portfolio where the ultimate beneficiary is other parties (e.g. your grandma’s retirement that happens to in part hold GM bonds through a bond fund) they have, through malfeasance, dissipated approximately 37% of the face value of those notes – funds that were recoverable as recently as last summer!
I don’t care who the government thinks they have the right to bully and push around. You, as a bondholder if you held those bonds in some sort of fund, had every right to expect the managers of those funds holding that debt for your benefit to act in a fiduciary capacity. They did not and you got screwed as a direct and proximate consequence.
In my opinion if you’re one of the debtholders you need to seek counsel NOW.
This is what I wrote in July of 2007, nearly two years ago:
GM is a company that is functionally BANKRUPT. Right now and here! Look at their balance sheet. They have a negative net worth, negative free cash flow, and negative sales trends! This is a stock that should be upgraded?! Oh hell no.
But – they’re a DOW component so if we pump them, the Dow doesn’t go down (as much.) Oh wait – we got a problem here; its called Chucky crapped in the bed and the stink has become overpowering! GM and Ford eh? You want a conspiracy theory? Tell me how JP Morgan justifies that call. I don’t see it and I ain’t buying either of these swirling turds. In fact I have a bear PUT vertical on GM. Bite me JP Morgan; may you drown in your own subprime sewage! Betcha this attempted pump game doesn’t last long enough to keep my PUTs from being profitable; I’ve got a while – longer than GM does!
That PUT vertical paid to the tune of five figures – before the decimal.
Do not expect GM stock to open for trading tomorrow; it should be halted before the premarket trading session opens. With luck it will trade on the pinks for a while before it is canceled; any new issue will be 100:1 diluted as previously noted in my article of about a month ago, meaning that at Friday’s closing price it will be worth just under one cent a share when re-issued.
If you hold PUTs what you get for them will depend on how many daytrading fools there are on the pinks, assuming the old issue re-opens there. In any event any thoughts you might have had about "grand designs" for the stock’s value are nonsense.
The real damage to the economy, however, is going to come from the suppliers – this is a whack that nobody is really prepared for. Everyone expects GM to lay off more people and close plants, but the ripple effect for suppliers who are owed money by the "Old" GM, and who will not get paid, is going to be particularly severe.
Disclosure: No GM-related positions at the present time; I made my money on that dying pig over a year ago.
