Today's announcement of the GM bankruptcy appears to be following in the footsteps of the Chrysler banruptcy in regard to the treatment of bondholders. Where bondholders THOUGHT that they were 'secured creditors', and THOUGHT that they were legally entitled to go to the front of the line when it came time to chop up remaining assets of a bankrupt company, in both cases the bondholders have found that the 'rules of the game' had changed.
In both cases, US gov't pressure has resulted in bondholders receiving something less than 20 cents on the dollar for their investment ... as opposed to the UAW receiving about 80 cents on the dollar for their claims against the companies. While several lawsuits have been brought by bondholders, ranging from offshore hedge funds to Indiana public employee pension funds, so far these lawsuits have gone nowhere.
Additionally, it now appears that TARP recipient GMAC, via its newly created subdivision ALLY BANK, is bypassing bondholders and instead raising capital via the sale of CD's to retail investors ( at de-facto taxpayer subsidized above market interest rates ).
In reaction, several large banks have 'called out' GMAC for their supposedly 'unfair' use of gov't subsidized TARP funds which in turn allows GMAC to offer interest rates which non-subsidized banks cannot match. Of course, the same point applies to retail buyers of ALLY BANK CD's, who are being paid 2% interest on their 'investment', money that GMAC is in turn lending to 'subprime' buyers of new GM and Chrysler cars, and money which the FDIC (i.e. US Taxpayers) is insuring.
If I didn't know better, I would comment that this appears to constitute a fundamental shift in US capital markets ... with the US gov't now determining who will be 'winners' and who will be 'losers' ... despite the pre-existance of laws which supposedly prevented such developments from being able to happen. I would further comment that it appears that it is now the US gov't and not free market investors who is actually setting price levels for 'risk' - in this case ultra-low interest rates for 'subprime' GM and Chrysler car buyers - with the US Taxpayer now directly left holding the bag if and when these 'subprime' auto loans go into default, and with far too little money being collected from 'subprime' GM and Chrysler car buyers ( in the form of appropriately risk priced loan interest rates) to cover the expected losses.
Possible translation ... low income Americans are now 'entitled' to own a new GM or Chrysler vehicle, and higher earning American taxpayers are now obligated to cover the associated costs !
Put another way, gov't policy re 'subprime' GMAC auto loans is now essentially identical to Fannie / Freddie gov't policy re 'subprime' home mortgage loans ... with the exception that a US taxpayer bailout mechanism has been put in place from day one !
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