General Motors And AIG

The Obama administration has given General Motors 60 days to come up with a plan to justify another round of tax payer infusions that would ostensibly stave off a bankruptcy filing. As Steve Priestap has written below GM belongs in bankruptcy for a lot of reasons. Arguably the most important reason is that federal bankruptcy court is uniquely suited to sort through the maze of conflicts and claims between interested parties to arrive at a result that is as fair and just as possible.

Yesterday brought news that the government likely would not let GM use any additional tax payer money to pay off existing creditors such as bondholders:

“President Barack Obama’s auto task force told the biggest U.S. automaker it doesn’t want taxpayer funds used to repay debt maturities, said the person, who declined to be identified because the talks are private. Detroit-based GM has $1 billion of 1.5 percent convertible securities coming due June 1.”

A payment default on these bonds would most certainly precipitate a bankruptcy filing but that fact, in and of itself, is not startling. Bondholders have known this for months. However, there is an interesting twist to the story about these bonds and other GM debt obligations held by large US financial institutions. Many of these bond holdings have been insured against default, which means that the bondholders, in the event GM goes bust, will collect their money anyway because they have insurance to protect them from loss.

Guess which company probably wrote most of that insurance? That’s right, AIG. So now tax payers are presented with the conundrum that they have already bailed out GM bondholders (who should be losing their shirts at this point) by pumping massive amounts of cash into their insurer, AIG. (This is another reason why more people everyday are coming to see AIG as the financial Death Star.)

Do taxpayers really trust the Obama administration (with its unstaffed Treasury Department) and Congress (with its multitude of conflicts of interest) to unwind this convoluted scheme they are already into in the amount of $200 billion dollars? This is yet another reason why GM belongs in bankruptcy today.

H/T Clusterstock

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