PhillyDeals: Plans for GM could hurt its small investors

President Obama knew how to hammer the Chrysler bondholders who resisted his first plan for rebuilding the troubled automaker at their expense.

"It was unacceptable to let a small group of speculators endanger Chrysler's future by refusing to sacrifice like everyone else," Obama told the nation.

"I don't stand with them. I stand with Chrysler's employees and their families and communities."

It's tough to feel sympathy for "a small group of speculators." Hedge fund managers with yachts. Private-equity opportunists. Rich people who exploit the weak. Especially now.

But Obama ought to have a tougher time rolling the General Motors bondholders than he did with Chrysler.

Because some of them are actually middle Americans.

"We call them baby bonds," Mark Modica, business manager at Saturn, of Chalfont, and a father of five, told me Friday. "GM retail notes. They had a face value of $25, and they yielded 7, 8, 9 percent a year.

"They were rated 'investment grade,' but you could buy them for $20 each a few years back. I thought it was pretty solid."

Modica says he's lost half the value of his $150,000 investment as the bonds' value declined with GM's fortunes. His brother, a benefits manager in Long Island, has been buying the notes longer and has lost the majority of his retirement savings.

If the government's plan goes through, the Modicas stand to lose a whole lot more.

Of the $27 billion General Motors owes its bondholders, nearly $5 billion is in what GM calls "retail bonds and notes" held by people like the Modicas.

The rest is larger-denomination debt held by big investors - hedge funds, private equity - as well as mutual funds and pension plans, some of which represent middle-class and working people's retirement accounts.

On April 27, GM, with the U.S. Treasury in its driver's seat, offered the bondholders 10 percent of the reorganized company if they agreed to give up what the company owes them.

The government would get 50 percent in exchange for writing off some of GM's taxpayer subsidy. The United Auto Workers would get 39 percent, in exchange for writing off half the $20 billion GM owes UAW's benefit plans. Today's shareholders would get the last 1 percent.

GM was worth less than $1 billion on the New York Stock Exchange on Friday. That would leave the "baby bond" owners with pennies on the dollar and little say in the company's future.

GM is giving the bondholders until May 26 to surrender. Unless 90 percent agree, "we'll go to bankruptcy," GM spokeswoman Julie Gibson told me.

"They're asking us to sacrifice the most," trading $27 billion in debts for one-tenth of an insolvent company, Mark Modica said.

"If we refuse, they'll file for bankruptcy and blame us."

The bondholders are organizing. A group the Modicas joined, which calls itself Main Street Bondholders, backed by the 60 Plus Association, an Arlington, Va., group that calls itself a "conservative alternative to the AARP," held a protest near Detroit last month. Another is planned for 9:15 a.m. Tuesday at the National Constitution Center on Independence Mall.

They're backing a counterproposal that big institutional bondholders have made to the government.

They're not objecting to the UAW's claims. But they want the government to remain a creditor, not an owner, and for the bondholders, who have invested the most and have strong legal claims, to get the majority of shares in the new GM.

It would work this way: The bondholders take 58 percent of the equity in the new company. The unions take 41 percent. The equity owners still get just 1 percent.

How has Treasury responded? Bondholders say the Auto Task Force told them, "It'll be weeks before we can get back to you."

GM's Gibson said the company had no comment on the bondholders' counterproposal, since they made it to the government, "not to us." Treasury didn't respond Friday to requests for comment.

Mark Modica sees hypocrisy in the government's failure to protect "baby bond" savers. "The government talks a lot about predatory lending by banks," he told me. "This is predatory borrowing. By GM."