Being a Bond Holder

Well if someone told me that my bonded security in a company "should willingly" be swapped at 27 ¢ on the dollar for non-securitized common stock I'd tell them to go screw themselves too.

The whole basis of buying corporate bonds instead of corporate common/preferred or corporate grade investment paper is that it is SUPPOSED to be the most secured form of credit ownership an investor can grant to a corporation. Meaning, although you don't get high yields or actual controlling and voting rights, you are supposed to get a guaranteed return of a modest rate and further be protected as a creditor class should the company falter or capitulate.

The US bankruptcy courts have ALWAYS ranked corporate bond holders as the First in line to get payments after the company's debts to suppliers and B to B liabilities. Meaning that if you own anything else other than a corporate bond, and the company goes into bankruptcy, you get paid LAST and often at pennies on the dollar. Because bond holders get the lowest return on their investment & because they have almost no influence on the ownership or operation of the company, they are seen as being the least able to mitigate their loses when a company goes south. Preferred and common stock holders have the ability to dump stocks easily or even force board room changes as well as block the actions of a company before it goes into bankruptcy.

So until now the rock solid rule was that whenever a company enters bankruptcy, after all the company's debts due to operation costs are paid, bondholders get paid in full if possible depending on the liquidity and total amount of assets possessed by the bond holders.

In the case of GM, the bond holders were owed approximately 3 billion in GM debt. GM if entering bankruptcy has in its assets more than enough money to conclusively pay off its debts to suppliers and the UAW and have enough cash and asset value to retire the entire bond debt. Stock holders of course would get squat after the bond holders were paid- but the stock holders could expect to be issued new shares in the company that emerges from bankruptcy, so their losses would only be paper loses assuming GM goes on to survive.

I saw the Treasury enforced offer to buy GM bonds in USA Today last Monday. GM basically said that bond holders would be forcibly converted to shares of common stock by the Treasury. The conversion of bond debt to stock was literally 27¢ on the dollar----FAR BELOW WHAT THEY COULD REASONABLE EXPECT TO GET IN A BANKRUPTCY----and to add insult to injury- although bondholders represented a claim to more than 60% of GM's current net worth, the Treasury had informed GM that the bond holders would not be allowed to collectively be represented at all on a future board whether GM enters bankruptcy or not.

In short the Treasury told GM that if it expects any government money- the bond holders get the shaft. Instead of collectively owning 60% of the asset valuation of GM, bond holders would be reduced to under 2% of the asset values.

Chrysler's fate for its bond holders is even worse. Essentially Obama said if you don't take take a beating and smile you are unAmerican. So if the offer is lose your secured debt, lose your dollar amount on that debt, gain no equity, and get less than 2% liability assets in a new GM or Chrysler or be declared un American I guess your options suck.

In plain English, the Administration has told the bond holder < which thanks to 401 K and mutual funds really means most Americans with conservative investment holding in corporate bonds> take a 83% hit on your investment and be thankful we aren't threatening to prosecute you in court.

This is the biggest sea-change in bankruptcy law in 200 years. And if you are wondering, it represents a direct and hostile corporative seizure by the federal government due to a politicalized policy agenda of the current Administration. For all of you who screamed about the Patriot Act or how malevolently incompetent President Bush was, I hope that you will be equally outraged at what Obama has done in the cases of the automakers and the banking system.