[Update: On Thursday morning, it appears that GM bondholders have changed their minds and agreed to take 10% of the company in exchange for their debt. Under the plan, if bankruptcy is averted (which is not at all clear it will be even with the bondholders agreement), current shareholders would end up with 1% of the company, meaning that the current stock price, around $1.30, is likely still too high, and possibly $1.30 too high. It will be interesting to see whether some major bondholders come out and say they were pressured by the Obama Administration or had fear of retaliation by the Administration if they didn't go along with the deal.]
The following is a note to Glenn Hall, editor of TheStreet.com, in response to his article suggesting that GM bondholders made a mistake
by not accepting the government's deal which would have given the bondholders a 10% stake in a restructured GM.
I think you're absolutely wrong in criticizing the decision of GM bondholders. First, I don't think they're likely to do worse in court than the deal the Obama administration is trying to shove down their throat. To the extent that they may do better or worse, their upside is probably larger than their downside.
More importantly, most of these bondholders certainly have fiduciary responsibility to investors and they simply cannot honor that responsibility by just going along with the Administration's politically motivated pro-union deal. If I were a bondholder through an investment in a fund, I'd strongly consider suing the manager if he accepted the deal.
But it goes beyond even that. The strength of our markets has always been that there are rules which people know will be followed. If people sit idly by as capitalism is replaced by corporatism or fascism, our nation is lost. And your prescription seems to be to simply let that happen.
No, the GM bondholders are doing the right thing, both in terms of finance and in terms of principle. Luckily, they haven't been silenced by Big Brother the way the Chrysler bondholders were.
If arguments like yours end up winning, that's the end of free-market capitalism -- and that's just what Obama wants, but it's reprehensible to see that view coming from TheStreet.com.