Bondholders probably have the most leverage in the talks. The president gave away his stick

TO BE NOTED: From the NY Times:

"G.M.’s Bondholders Speak in the Voice of the Aggrieved

By ANDREW ROSS SORKIN

President Obama had scarcely outlined his plan to save General Motors and already, the big money was pushing back.

Not three hours after the president spoke on Monday I received an e-mail message from a group representing G.M. bondholders — people who are likely to have an enormous influence over the future of the Detroit carmakers.

The e-mail message, from advisers for an “ad hoc committee” whose members collectively hold G.M.’s $28 billion of debt, started by suggesting that they wanted to be part of the solution.

But by the end of the e-mail message, they were complaining that they were “very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan.”

The e-mail message came from the same group that two weeks ago grumbled that “G.M. bondholders have been asked to make deeper cuts than other stakeholders,” and threatened to send G.M. into bankruptcy. “Unless the framework we suggested is utilized,” the group said, “the restructuring currently contemplated will not achieve the required level of acceptance to succeed on an out-of-court basis.”

During the next 60 days, G.M. and its stakeholder have the last opportunity to save the company — or risk letting a bankruptcy judge do it for them. To do so, G.M. will almost certainly need concessions from two groups: workers and bondholders.

The workers, represented by the United Automobile Workers, have made concessions already. And the president said they need to make even more, as painful as it will be. The workers — despite often appearing recalcitrant — have the most to lose. If G.M. falls into bankruptcy protection, they could lose not only their jobs but also much of their retiree health care plan.

Then there are the bondholders. Their motivation is very different. For them, this is not about keeping their jobs or, frankly, about patriotism. It is about dollars and cents. And, according to some analysts, there is a chance they would actually do better in bankruptcy court than they would negotiating against G.M. or the government, which is seeking to reduce G.M.’s debt by two-thirds.

“If I’m a bondholder, the best forum for me is in front of a judge,” said Daniel Alpert, a founding managing director of Westwood Capital, an investment bank. “Let’s face it: the biggest problem at G.M. is still its cost basis, and that’s chiefly labor,” he added, suggesting a judge would look at the situation dispassionately.

So far, bondholders have been offered 8 cents on the dollar in cash, 16 cents on the dollar in new, unsecured debt, and a 90 percent stake in G.M. G.M.’s bonds closed Monday at 16 cents on the dollar. Hoping to apply some public pressure to the bondholders, Senator Carl Levin, Democrat of Michigan, said Monday that if G.M.’s bondholders “refuse to work out a deal, they will likely end up empty-handed.” (That is not exactly true.)

Hoping to attract a bit of public sympathy themselves, the ad hoc committee has said, “G.M. bondholders are not a collection of Wall Street banks. Many of these bonds are owned by average citizens, who purchased them to support their own retirement and college expenses and other critical needs.”

That’s a bit of misdirection, however. While it is true that there are some “retail” investors that own G.M., about 80 percent of the bonds are held by large investors and hedge funds, many of which play in distressed debt markets. Some of them would less politely be called “vultures.” Indeed, G.M. bonds have been changing hands rapidly, suggesting that some hedge funds have been plowing into them, gambling that these investments soon will be worth even more.

It seemed unlikely to me that students or grandmothers had formed this ad hoc committee and would hire Paul, Weiss, Rifkind, Wharton & Garrison, the law firm, and Houlihan Lokey Howard & Zukin, the restructuring advisory firm, to advise them. That takes millions of dollars. Whoever these investors are, they must have billions at stake.

So I called Gabe Roth, the spokesman listed at the bottom of the message, and asked if I could speak with some of the bondholders the committee represents. The answer: “No. We’re not making them available.”

I followed up by asking which investors were members of this ad hoc committee. “We’re not making that public,” Mr. Roth said.

I reminded Mr. Roth that government money was at stake, and that we taxpayers might end up bailing out the bondholders. Doesn’t the public have a right to know whom they are negotiating with — or against? He demurred, suggesting that he needed to protect the bondholders’ identities.

But the identities of big G.M. bondholders are not a secret. They are disclosed in regulatory filings. Here are some of them: Capital Research & Management; Loomis, Sayles; and the Pacific Investment Management Company. Those are not exactly the mom-and-pop investors.

To be fair, many bondholders have lost a small fortune on G.M.’s bonds. And they have been frustrated that they have not been part of the dialogue in Washington and are worried the negotiations will be hijacked by the U.A.W., which has said it wants bondholders to make concessions before it does. (Bondholders say they have only had one official meeting with the administration.)

What is less clear, however, is how many new bondholders stand to make a small fortune if G.M. gets bailed out. (The government has a track record, which deserves scrutiny, of regularly bailing out bondholders and other Wall Street heavies.)

To its credit, the ad hoc committee was right about one thing: G.M.’s own restructuring plan clearly did not go far enough. In its e-mail message two weeks ago, the group said that “we are concerned that the company is putting too much faith in a near-term turnaround in the economy that would enable annual car and truck sales to reach previous levels. We do not know if the plan would, in fact, keep the company out of bankruptcy.”

President Obama concurred, pressing G.M. to come up with a better, more aggressive plan in the next 60 days.

Bondholders probably have the most leverage in the talks. The president gave away his stick — of threatening liquidation — when he said, “we will not let our auto industry simply vanish.”

The outcome for G.M. may still be bankruptcy, a plan that many have advocated. But if there is any chance of keeping the company out of Chapter 11, odds are bondholders — and not just workers — will have to come to the table with an open mind."