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General Motors And AIG

The Obama administration has given General Motors 60 days to come up with a plan to justify another round of tax payer infusions that would ostensibly stave off a bankruptcy filing. As Steve Priestap has written below GM belongs in bankruptcy for a lot of reasons. Arguably the most important reason is that federal bankruptcy court is uniquely suited to sort through the maze of conflicts and claims between interested parties to arrive at a result that is as fair and just as possible.

Yesterday brought news that the government likely would not let GM use any additional tax payer money to pay off existing creditors such as bondholders:

"President Barack Obama's auto task force told the biggest U.S. automaker it doesn't want taxpayer funds used to repay debt maturities, said the person, who declined to be identified because the talks are private. Detroit-based GM has $1 billion of 1.5 percent convertible securities coming due June 1."

A payment default on these bonds would most certainly precipitate a bankruptcy filing but that fact, in and of itself, is not startling. Bondholders have known this for months. However, there is an interesting twist to the story about these bonds and other GM debt obligations held by large US financial institutions. Many of these bond holdings have been insured against default, which means that the bondholders, in the event GM goes bust, will collect their money anyway because they have insurance to protect them from loss.

Guess which company probably wrote most of that insurance? That's right, AIG. So now tax payers are presented with the conundrum that they have already bailed out GM bondholders (who should be losing their shirts at this point) by pumping massive amounts of cash into their insurer, AIG. (This is another reason why more people everyday are coming to see AIG as the financial Death Star.)

Do taxpayers really trust the Obama administration (with its unstaffed Treasury Department) and Congress (with its multitude of conflicts of interest) to unwind this convoluted scheme they are already into in the amount of $200 billion dollars? This is yet another reason why GM belongs in bankruptcy today.

H/T Clusterstock


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Comments (6)

Good points Hugh. But this... (Below threshold)

Good points Hugh. But this whole ordeal makes me wonder about the future of long-term investment insurance for financial instruments issued by organizations that are "too big to fail".

Perhaps the insurance industry should consider terminating these lines of coverage. Such a move might temporarily lower the value of certain investments, but the current system -- bonds/derivatives sink, then companies fail, then insurers go broke, then Uncle Sam gets stuck with the bill -- certainly doesn't seem to be working.

"Do taxpayers really tru... (Below threshold)
JLawson:

"Do taxpayers really trust the Obama administration (with its unstaffed Treasury Department) and Congress (with its multitude of conflicts of interest) to unwind this convoluted scheme they are already into in the amount of $200 billion dollars?"

Well, if they can't handle simple stuff like DVD country codes, if they can't seem to get Russia and Iran to play well with them, and NK's getting froggy, they think proper diplomatic gifts can be bought at Wal-Mart, have managed to FUBAR GM, has run up a defict three times the amount Bush overspent in 8 years within two months, they've put us on course for incredible inflation, and are doing their damndest to FUBAR the American energy infrastruture for 'green' purposes while ignoring the energy under our feet...

OF COURSE WE TRUST THEM! WHAT COULD POSSIBLY GO WRONG?

Obama has had 60 days and H... (Below threshold)
914:

Obama has had 60 days and He has shown such great promise. if He can do it, so can GM/AIG.

Bankruptcy does not fit int... (Below threshold)

Bankruptcy does not fit into Obama's political agenda or serve any of Obama's interests, therefore, it will NOT happen.
http://www.rightklik.net/

This article makes no sense... (Below threshold)
MikeC:

This article makes no sense. So, instead of giving GM 10B more and forcing cuts out of court, they should put them in BK and have AIG pay out $50B on the CDS?

This article makes no se... (Below threshold)
jpm100:

This article makes no sense. So, instead of giving GM 10B more and forcing cuts out of court, they should put them in BK and have AIG pay out $50B on the CDS?

HughS has a hard on to punish people in the auto industry. So he disposed to the option that punishes them the most even if it punishes the taxpayers the most.

For example, in addition to US taxpayers being indirectly on the hook for the bondholders if they go bankrupt, the Pension Benefit Guarantee Corportation which is already operating in debt would be totally smashed. They could quite likely seek a government bailout. That would be true even if it was 30 cents on the dollar. Except most of the workers have a lot of years and qualifies them more towards the full amount covered which is about 80 cents on the dollar. Although they could wiggle that down, I'm sure.




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Section Editor: Maggie Whitton

Editors: Jay Tea, Lorie Byrd, Kim Priestap, DJ Drummond, Michael Laprarie, Baron Von Ottomatic, Shawn Mallow, Rick, Dan Karipides, Michael Avitablile, Charlie Quidnunc, Steve Schippert

Emeritus: Paul, Mary Katherine Ham, Jim Addison, Alexander K. McClure, Cassy Fiano, Bill Jempty, John Stansbury, Rob Port

In Memorium: HughS

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