Bondholders wreck the car companies

In negotiations with Chrysler and GM (GM), management has made sacrifices. Salaries have been cut or capped. Rick Wagoner lost his job. The UAW has made huge concessions on pay and the funding of its pension and health plans. Even suppliers are operating under the assumption that they may not make the kinds of profits that they did when the two companies were healthy.

But creditors at GM and Chrysler won't agree to be pushed for further sacrifices. News overnight was that Chrysler would go into Chapter 11 because its bondholders would not take the deal supported by the Treasury. So, as unsecured creditors, they are willing to take their chances in court.

GM's bondholders are taking a similar position. After being asked, not very nicely, to swap their debt for equity, they told the company "no" and will offer a counter-proposal. If that does not work, GM will probably go into Chapter 11 as well. According toThe Wall Street Journal, "A committee representing institutions owning General Motors Corp. bonds will present a counter-offer to the company's debt swap that will seek a majority stake in the car maker and ease fears about potential U.S. control of a major manufacturing company." If this proposal is accepted, the government will not get a piece of GM. Instead, the company will pay it back all of the loans it has been given by the Administration.

The creditor proposal for GM makes some sense. It allows taxpayers to get cash instead of equity in a company that will be in trouble no matter how it's restructured. The future of the domestic light vehicle market recovery is still in question.

But, the government may look at the creditor proposal as too rich. If so, a court will decide how the company will be divided among new owners and whose claims will be paid. For creditors, that is not necessarily as risky as being asked to own a portion of GM.

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

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