GM bondholders resist U.S. takeover

Talked to an investor in New York who we've known for years. General Motors owes him a lot of money, so he's got a seat at the restructuring table. Here's the basics, from his position:

GM owes bondholders $29 billion, the federal government $20 billion, and its union benefit plans another $20 billion.

1) If GM files for bankruptcy reorganization, he and his fellow bondholders, the United Auto Workers (which runs the benefit plans) and the government would each get "pro rata" stakes in the reorganized company roughly equal to what they're owed. So the new GM would get split, roughly 42% for the bondholders, 29% each for the government and the United Auto Workers, which runs the benefit programs.

2) Instead, GM and Obama auto's task force -- headed by New York investor and Democratic fundraiser Steve Rattner -- want to restructure the company with the government holding a 50% stake; the United Auto Workers, 39%; bondholders, 10%; and 1% for GM shareholders. GM and the UAW would forgive part of what's owed them.

If you were a bondholder, wouldn't you rather GM go bankrupt? But given the anger at corporate America and Wall Street capital in Washington and in the country as a whole, how could you resist? "We're being demonized," the investor told me.

Sure, many of the bonds are owned by hedge funds, proprietary traders and other speculators who bought them cheap, accepting the risk, in hopes of making a killing. But "GM also has a much wider set of bondholders" than most companies, "including about $6 billion owed by average Joes, retirees and other investors who own GM bonds. There's a group of retirees called Sixty Plus, it's an alternative to AARP, they're organizing individual bondholders. They had that rally a couple of weeks ago in Warren, Michigan."

Plus, "pension and mutual funds own the great bulk of the rest of that $29 billion. They represent the rest of America, too. In Pennsylvania, your PSERS and SERS (public schoolteachers and state workers') pension funds own these bonds, too." Wouldn't governors like Pennsylvania's Ed Rendell go to bat for the bondholders, since state taxpayers will have to make up what the investors lose at the negotiating table? "We've tried to get some politicians interested. All I can tell you is, we're not finding many profiles in courage."

3) The bondholders made a counterproposal last week: "We said, the federal government shouldn't have much business running a car company. Let the government keep holding its $20 billion in debt. Don't turn that into equity.

"Then we, the bondholders, will take 58% of the equity" in the reorganized company, representing their stake in GM's private debt. "The unions will take 41%. The equity holders get the 1% from the initial proposal."

Does Rattner and Obama's other advisers like that? "The auto task force told us, 'It'll be weeks before we can get back to you.'" Stay tuned.