New plan for GM may put government at odds with creditors

The federal government may take an equity interest in GM (GM) in exchange for some of the money it is owed for bailout funds. GM is encouraging its major creditors to swap their debt for equity, too.

Does that mean that the government gets a better deal than firms that have been owed money for relatively long periods? Some of these companies may not be able to afford to lose their positions as debt-holders in the car manufacturer. Not every financial firm owed money by GM may be in a position to take a huge hit on its position.

According to Bloomberg, "A government stake would accompany a smaller share of the new company for bondholders, who own $27.5 billion in GM debt." If GM files for bankruptcy, it would seem that the only person who can decide what the government and other creditors will get is a judge, which adds further confusion to how much of a hand the Treasury will take in a bankruptcy filing.

The federal government is already acting like it "owns" GM. It has pushed out the company's CEO and has been active in pressuring the UAW and creditors to give the No.1 U.S. car company concessions that it might not give if the negotiations were free from interference.

But the one thing that the government will not control is what a sitting judge will decide about the rights of labor, creditors, and suppliers in a Chapter 11 proceeding. That could wreck whatever plans Uncle Sam has for GM's future.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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