Monday, April 13, 2009

Obama Auto Team To Consider Converting GM Loans To Equity

Just hit headlines, not sure what the hell this means: they will equitize the loans?

Reading it so that the gov't will "agree" to get its uber-secured loan equitized, killing any negotiating power for all other unsecured bondholders.

Bondholders will be not be happy.

Time to bring out the equitable subordination lawyers boys.
By Linda Sandler, Rebecca Christie and Jeff Green

April 13 (Bloomberg) -- The U.S. government is consideringtaking an equity stake in a stripped-down General Motors a swap for some of the $13.4 billion the carmaker owes theTreasury, people familiar with the matter said.

A government stake would be part of an effort to cut GM’sdebt and would limit the payouts to bond owners as the carmakerapproaches a June 1 deadline to come up with a plan to becomeviable. Bondholders, who own $27.5 billion in GM debt, earlierwere offered 90 percent of the new entity’s equity.

“It’s hard to have negotiating leverage when thegovernment and the public opinion is lined up against you,”said Richard Hahn, co-chair of the bankruptcy practice atDebevoise & Plimpton LLP, a New York law firm.

Bankers and other GM advisers are working to estimate howmuch a restructured company, consisting of only profitable GMassets, might be worth in a debt-for-equity swap, said thepeople, who declined to be named because discussions areprivate.
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eh said...

Does the government have the legal authority to do that? If not why do they presume to?

Anonymous said...

has the govt had legal authority to do any of what its been doing since this crisis began? how about the stuff it did for the war on t? yeah, was that legal? see a common theme...

Aiden said...

This stuff is unbelievable. Do they want their claim to be subordinated?

I am not a lawyer, but I thought under 510(c) of the bankruptcy code, a secured lender can not cause (or even try to cause?) particular harm to a single creditor, or they may be equitably subordinated. I believe that a secured lender can seek to have a class of creditors (unsecured) to be crammed down as part of the company's plan of reorganization. This can cause general harm to a creditor, but it seems very hard to cause specific harm to one creditor.

The other thing that I question is the amount that the government loan is secured. If there were not sufficient assets to support the security of loan, when it was made, wouldn't it be considered unsecured or mostly unsecured?

Anonymous said...

Does the government have the legal authority to do that? If not why do they presume to?


The bankruptcy court doesn't have power to haircut overcollateralized secured lenders like this. Congress and Obama could pass legislation haircutting overcollateralized senior lenders, but the takings clause of the US constitution would force Congress / Obama to pay FMV compensation for seizing the secured creditor rights. The damages claim against the government arguably ought to be equal to what the creditors would get in bankruptcy, but for illegal interference by Obama and Congress. Obama is a constitutional lawyer. He ought to know this.

I expect this from Geithner since he seems to have violated title 12 of the banking code by refusing to seize troubled banks as NY Fed President. And proposing to make the Fed and FDIC make ultra vires gifts by making undercollateralized nonrecourse loans and guarantees thereof under Geithner's PPIP program. But I am surprised that Obama would propose the government take illegal actions. What happened to Larry Summers, Geithner, and Obama ranting about how the US is a country of laws? I guess they mean other people have to follow the law, but they don't. This is pure crony capitalist hypocrisy.