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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

May 27, 2009 at 10:12 AM

On GM, bondholders finally say “No”

Top of the News: The frantic improvisations of the Bush and Obama administrations finally crashed against the bondholders of General Motors. They won’t accept a deal exchanging $27 billion in debt for a 10 percent stake in the revamped company.

If the move pushes GM into bankruptcy reorganization, we should be cautious about blaming the bondholders. They include institutions representing Main Street pensioners as well as big investors. Unlike shareholders, they didn’t own GM — and were thus liable for its corporate governance. They made GM loans by purchasing its bonds.

To accept the government deal, which would have given most of the equity in GM to the feds and the United Auto Workers, could have set a bad precedent for the rights of those who buy corporate bonds. Enough bad precedents were set with the controlled demolition of Bear, Sterns and Lehman Brothers.

Still, there’s no happy ending possible. The bondholders line up first in bankruptcy court, but GM’s condition and Washington’s correct interest in trying to preserve jobs and a manufacturing base may mean they get little. The changing auto industry and American debt levels may work against GM recovery. GM’s executives have yet to inspire any confidence.

All this from a company that not long ago had the safest corporate bonds in existence.

The Midweek Briefing: Fed officials are betting the ranch, and the country, on the idea that recovery will be so slow that inflation will be containable. Investor Marc Faber vehemently disagrees, telling Bloomberg that the U.S. could see Zimbabwe-like hyper inflation from all the trillions printed to fend off the crash.

USA Today finds another casualty from the recession: American’s credit scores. They’re falling as people struggle to pay bills in the face of falling house values and job losses.

–Wired has a fascinating piece on the elusive U.S. job numbers. One braino crunched the data and found that even digging deep into such areas as underemployment, the current crash doesn’t come near the Great Depression. Yet. The scary thing about the data: The potential for much higher unemployment in the future.

–The next meme may be “creditless recovery” — the challenge that the U.S. and many other places face in restarting their economies with historic debt burdens. Economists Stijn Claessens, M. Ayhan Kose and Marco E. Terrones check it out, concluding such a recovery is possible, but will be slow and shallow.

Today’s Econ Haiku:

A license to kill

Issued when the name is bond

Ask the General

Comments | More in Auto industry

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