Page 2 of 2 Depravity at the GM wheel
By Julian Delasantellis
Normally, bankruptcy court is just about the last place a person who owns a
company's debt wants to see their interests addressed, since it is in the court
that so much of the company's few remaining assets will be portioned off
through court and lawyer fees well before the creditors ever see a dime - think
Charles Dickens's Bleak House. Conversely, since it is the arrival of a
company in bankruptcy court that triggers the CDS payout, the bankruptcy filing
for those with CDS on the company's debt can be like winning the sweepstakes -
especially if what you gain on your multiple cash-ins of CDS far exceeds what
you lost with your one measly defaulted bond.
But the real gem of the process is the ability of the bond/CDS holder to light
the match on all that gasoline. GM's predicament is
severe, but it's still not inevitable that its fate will end up in bankruptcy
court. The whole situation could be resolved with an out-of-court agreement
between the bondholders and other creditors and the company. Press reports have
GM still negotiating with its bondholders over a debt-to-equity swap that would
convert each $1,000 worth of debt into 255 shares of common stock.
If an agreement such as this is arrived at outside of bankruptcy court, most
CDS experts believe it would not trigger the CDS payouts, which would then
expire worthless. Thus, even though an out-of-court settlement may be the best
outcome possible for the totality of the company's stakeholders, its employees,
suppliers, communities,and so forth, it is exactly what the bondholder with a
sackful of CDS of the company's bonds does not want. He has to stop the
out-of-court settlement at all costs.
And he can. A bankruptcy court filing, in essence, is only a statement that the
company, whether or not it possesses sufficient funding to continue ongoing
operations, can't pay its debts. The company can file it, or, if the company
misses a payment to a creditor, the creditor can file with the bankruptcy
court, in essence, "throwing" the company into bankruptcy.
As its current pathetic rate of sales, GM can't pay its debts. The federal-aid
spigot has been shut off. Its a case of either an out-of-court settlement or
bankruptcy.
Many observers believe that it is the bondholders who stand to make a killing
with a bankruptcy filing through the cashout of their CDS who are using their
right as creditors to veto any plan that does not involve the bankruptcy court.
This is dog-eat-dog capitalism at its worst, since, although these bondholders
are making out like bandits (how appropriate), the other stakeholders will be
commensurately worse off when the inherent costs and inefficiencies of
bankruptcy court pick away at the company's dead carcass - making it even less
likely that it will ever rise again as an independent, operating entity.
When you buy a bond in a company, just as if you buy its stock, go to work for
it, or open up a coffee shop outside the factory gates, you are becoming a
company stakeholder - you are making a public statement of confidence in its
future.
However, buying one bond publicly and 1,000 bond CDS secretly makes you just
the opposite; you are a stakeholder in the company's failure. (The secrecy
arises because, with the total deregulation of this and other derivative
markets through the 2000 US Commodity Futures Modernization Act, no system-wide
records of position sizes or ownership exists with CDS).
Here is the general immorality of this process, indeed, of much of the
deregulated finance of the past decade. They took the corporate bond market, a
fine and dowdy way for companies to raise funds, a way that has been successful
since at least the Renaissance, and turned it into bonds-cum-CDS, a common and
cheap streetwalker to be discarded into the gutter upon the arrival of the next
bright idea from the whiz kids in the math department.
It was circumstances like these that spurred former Commodity Futures Trading
Commission (CFTC) chairwoman Brooksley Born in her ultimately unsuccessful
fight to regulate off-exchange and unregulated over-the-counter (OTC)
derivatives in 1998 (see
Born again - and again, Asia Times Online, April 2, 2009.)
You can't change the past, but humans, as a supposedly intelligent species,
should be able to learn from it. Therefore, more than a few eyebrows were
raised when Obama nominated Gary Gensler, a Clinton-era assistant Treasury
secretary (and, of course, a graduate from camp Goldman Sachs) as CFTC
chairman, the same position from which Born unsuccessfully tilted at windmills.
Gensler was part of the junta that defeated Born, and he was also a key player
in the passage of the 2000 Commodity Futures Modernization Act, the legislation
that has proven as problematical to the futures markets as Vesuvius was
problematical to Pompeii.
As is their privilege, two United States Senators, Maria Cantwell of Washington
State and Bernie Sanders of Vermont, placed an indefinite "hold" on the Gensler
nomination, preventing it from being sent to the full Senate for debate. They
only lifted their hold when Obama publicly came out in favor of much stronger
oversight and regulation of OTC derivatives markets such as those for credit
default swaps.
If the ruling patrician party in the Senate runs anywhere near as true to form
as filly Rachel Alexandra did in last Saturday's Preakness Stakes, the annual
Baltimore horserace for three-year-olds, you can expect the new regulation
proposals to be recycled soon as menus in fast-food restaurants, just the same
way that many of the colts defeated by Rachel Alexandra will soon be recycled
as the restaurants' entrees.
Not satisfied with the debauching of his basketball player student, Axel Freed
gambles and loses once again, but this time blood is spilled. Of course, why
should we expect that he wouldn't; Freed is hopelessly addicted.
Perhaps the same can be said regarding many of the Clinton era "new Democrat"
free-market bureaucrats that always seem to being picked for prominent
positions in the Obama administration. Are they addicted as well, hooked on
dismantling the previously well-operated private sector/public sector working
regulatory arrangements in favor of a deregulation regime that will make them
rich?
If so, perhaps Obama should change his slogan from the campaign's "Yes We Can"
to Nancy Reagan's anti-drug slogan: "Just Say No."
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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