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Stuart Whatley Headshot

Grand Theft Automaker

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General Motors bondholders are issuing a counteroffer in response to the debt-for-equity proposal issued on Monday of this week by the Obama administration's auto task force (under the supervision of Steven Rattner). The Monday proposal seeks to furnish the United Auto Workers union (UAW) with $10 billion and a 40 percent ownership stake for the $20 billion debt it is owed. Likewise, the Treasury Department would receive $8.1 billion and a 50 percent ownership stake for its $16.2 billion slice of the pie. The remaining 10 percent of the company, under the administration's proposal, would go to GM's bondholders in exchange for their $27 billion -- the largest debt share of all three players. It will require an unlikely 90 percent of bondholders to be on board in order to go forward. We'll call this anti-math proposal the "Jimi Hendrix plan" ("If 6 was 9").

By contrast, the bondholder counteroffer naturally seeks to give bondholders an ownership stake more reflective of the debt they actually hold, and happens to keep the government out of the automaker-ownership business. This proposal would divide ownership stakes with 58 percent to bondholders, 41 percent to the UAW and the remaining 1 percent to common equity investors, according to the New York Times. However, according to the Wall Street Journal, the counterproposal is likely to "meet stiff resistance from the Obama administration's auto task force, as administration officials have said the GM deal as proposed is more than fair, and have told bondholders they would likely see less under bankruptcy."

The administration's proposal -- which arbitrarily singles out bondholders as the sole losers and divvies up the winnings between itself and the UAW -- is yet another righteous, ceremonial statement to appeal to taxpayers' and laborers' populist sentiments, at the expense of balanced treatment. The Jimi Hendrix plan triple-dog-dares bondholders to call the administration's bluff -- the threat that they will lose even more in bankruptcy -- and take the whole mess to court. However, at this point, bankruptcy court seems advisable; at least there are rules and precedents to lend some structure rather than farcically wanton ex cathedra dictates. If the administration was serious about avoiding Chapter 11 for GM, it would approach these negotiations far more diplomatically and with at least the semblance of objectivity.

The Jimi Hendrix plan reveals a troubling tone deafness in the current economic era. It demonstrates abject under-appreciation for the delicacy needed in dealing with the private sector and bodes ill for GM's future, as well as Treasury's salvage efforts elsewhere in the economy, such as Geithner's PPIP plan for toxic assets. Who would possibly want to invest in GM or any other government-overseen plans with such capriciousness running rampant? Investors can appreciate a risky bet, but nothing will send them scurrying away faster than uncertainty. The administration's auto task force is basically telling a slew of hedge funds, pension funds and individual investors -- crucial participants in any financial revival -- to go screw themselves.

Predictably, the Wall Street Journal has reacted to the plan by renaming the Detroit automaker "Gettlefinger Motors", after UAW President Ron Gettlefinger. Unfortunately, this actually seems rather appropriate at this point. The UAW enjoys disproportionately special treatment in basically every proposal that's hit the table, creating an unwelcome sense of political favoritism that could undermine the administration's credibility. By all means, give the autoworkers their fair share of the pie, but not at the expense of thousands of other investors who play an equally integral role in the economy.

Of course, the administration has also been rightly criticized for exhibiting favoritism with regards to Wall Street, on the other side of the spectrum, in its efforts to fix finance. While pro-labor in Detroit and pro-bank on Wall Street, the common thread among the administration's critics is that there constantly seems to be the perception of unequal, disproportionate handling. When Rick Wagoner was ousted, many called for bank CEOs to suffer like treatment. This time around, it is the bondholders who are getting screwed, and the Wagoner affair is all but forgotten. This perceived imbalance is the quickest way to provoke backlash, and it risks hamstringing larger efforts.

Nobody expects the administration to right the world economy in a day, week, month or even year; but what it can do is approach these mucky issues more delicately to make sure each who is owed gets his fair share of the pie. The perception of disproportionate treatment -- which the Jimi Hendrix plan shamelessly exudes -- will amount to a perception of unfashionable political pandering and only sully further what is already a huge mess.

Around the Web

GM Bondholder Group Says Offer Isn't ‘Reasonable' (Update1 ...

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Big G.M. Bondholder Heads for the Exit - DealBook Blog - NYTimes.com

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6 Upsides To a GM Bankruptcy - Rick Newman (usnews.com)

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