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Tuesday, March 31, 2009

GM Is now Obama's Problem

Now the GM is a wholly owned subsidiary of the Obama White House, some are saying the company's turnaround, or collapse, will reflect directly on the President. I'm not sure Mr. Teflon will see much of that stick to him. Much like the 30% drop in the stock market since he took office, he'll deflect criticism to those who came before him.

With GM though, Mr. Obama has put himself into a tighter spot than the economy in general. As he mentioned while pushing Rick Wagoner under the bus, there is a lot more restructuring to do at GM.

The problem is now the restructuring rests mainly with two groups, bondholders who are carrying billions in GM debt, and the UAW. Both are suspicious that the other isn't going far enough to help the company survive, and both are playing chicken with each other.

The major problem bondholders have is the UAW's unwillingness to see 50-60% of GM's outstanding debt to the UAW retirement fund be paid in stock. That would cause an immediate dilution of shareholder value, but at the same time would eliminate tens of billions of liabilities off the company books. Bondholders don't want to renegotiate their debt to better terms until they see that debt gone and feel GM can actually do something towards paying them off.

The UAW, on the other hand, doesn't want the stock, since right now it would be an embarrasement on a penny exchange. They want bondholders to renegotiate the terms of the debt, and even forgive billions of it to bolster share value before they even discuss such an idea as stocks to the retirement fund.

Since neither side seems willing to move on those two problems, which happen to be the two biggest impediments to making the company solvent, now Chapter 11 is back on the table. That would end up costing both sides much more than what Wagoner proposed, and they rejected.

This creates a tightrope for Obama's group. They've already said they are working on a way to "cushion" a chapter 11 filing. The question is for who? If it's the bondholders the UAW ends up a shell of itself, but the markets might react favorably to something from the White House. If it's the UAW the union vote stays strong, but they risk a huge tank in the markets as other institutional investors realize the White House cares little for them, or the billions in market capital they provide.

Welcome to the real world, Mr. Obama.

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