The government is trying to get GM and Chrysler bondholders to take a hefty haircut on their debt rather than push the companies into bankruptcy. The problem is, it's a terrible deal for the bondholders, and there's no reason for them to do it:
The UAW has been largely unwilling to negotiate with GM until it sees what concessions will be made by bondholders and others.
The standoff between bondholders and the UAW underscores the difficulty surrounding GM's attempt to reorganize without the coercion of bankruptcy. Key players in the Obama administration are pointing to the lack of progress as a reason that bankruptcy could be unavoidable.
At Chrysler, the U.S. wants banks and investors who control its bank debt to give up about 85% of the nearly $7 billion they are owed. In bankruptcies, such senior secured lenders typically get most of their money back.
Some senior lenders believe they would get more than 70 cents for each dollar of their secured loans if Chrysler is broken up and sold under bankruptcy, said people familiar with the talks. Other lenders don't have an exact number nailed down and are awaiting detailed figures from the auto maker on its assets.
All of the 40-plus lenders and investors are nonetheless incensed by the last Treasury offer: that they accept about 15 cents per dollar of face value of their loans.
The government wants to keep the automakers out of bankruptcy because it wants to maximize gains for employees. GM's pension, thank God, was actually overfunded last time I looked, so at least retirees won't lose the income they've planned on as so many do in these legacy industry bankruptcies--the PBGC fund top benefit is
well under a little over* $50K per annum. But the health benefits will probably vanish, as will a lot of jobs, and the union contracts all get torn up.
But it's trying too hard to maximize that value. It has no credible threat of nationalization with congress in its current mood, so why would bondholders take a deal where they barely recover any of their money? Social welfare might (might) be maximized by keeping these conpanies as big as possible, but I doubt the bondholders feel any personal obligation to bear that cost. They've already lost at least 30 cents out of every dollar they gave the auto companies.