Monday, March 30, 2009

Obama Might Allow GM to go Bankrupt

Great news. It would be nice to actually see a big company fail. Currently, GM bonds trade at an average price of 18 cents on the dollar. This would not shock financial markets. Anyone lending to them already has taken a big hit. The stock trades at a value of $1.7B, on $91B in assets--option value. Implied vols are around 220%, the short rebate is about -87% (you pay 87% annually on the proceeds generated from a short sale).

Thus, it's already dead. Bankruptcy would not 'disrupt' the firm, it would clarify the situation.


Plamen said...

Agreed, would be nice to see GM fail, but you and I will pay for those pensions anyway - unless you seriously believe a Democrat will screw the UAW in any significant manner.

The bigger mystery to me is why the stock is not trading at $.01? Under what plausible scenario do the shareholders not get wiped out? China decides to buy 10 mln GM vehicles at sticker price?

Jim Glass said...

I find it interesting that while the Adminstration hasn't been able to apply the "good bank - bad bank" model to any bank yet, they are planning to create a "good GM" and a "bad GM".

(At least according to the WSJ, the Times doesn't mention it.)

Anonymous said...

Under what plausible scenario do the shareholders not get wiped out?

Obama is the scenario. He has said that "everybody, including creditors, will have to give up something" (paraphrased). He has in effect said that creditors will lose money in preference to shareholders, which is exactly the opposite of what happens in bankruptcy.

Anonymous said...

I think the option value of the share being $2 instead of $0.02 is related to the small but non-zero possibility of a major political conflict for the U.S. arising that drives rapid industrial expansion.

J said...

By "Major political conflict" you mean war? I agree, war is always around the corner.

Another factor is sheer inertia and lack of imagination. For many, it is difficult to act on the possibility of change.

Anonymous said...

To Plamen and Randian:
It's option value. Why do people by lottery tickets when the expected value is negative?
These bankrupt firms never trade at zero when they should. There are some folks out there willing to make a bet that common stock of GM will not be worthless.