woody_zimmerman_118_2007The other shoe has dropped for holders of billions of dollars worth of General Motors corporate bonds. Bondholders have received a "tender offer" of 225 shares of GM common stock for every $1000 in bonds. GM common stock is currently selling for about $1.20 a share, so that would give bondholders about $270 for each $1000 - i.e., 27¢ on the dollar.

The offer comes in a letter warning bondholders that a bankruptcy might leave them with a lesser settlement on their investments. In addition, the promise is held out that this giveback by bondholders might keep the company viable and prevent bankruptcy. In other words, by taking this deal we might save the company. Holders of 90% of outstanding bonds must accept the offer to make it effective.

(Full disclosure: I'm a holder of GM bonds - not a large holder, considering the billions outstanding, but it's a large amount to me. So this topic is of more than academic interest.)

This tender offer reminds me of something that happened in the south in the mid-1930s. Cotton was selling below 4¢ a pound, with no increase in sight. Even so, some small farmers held a few bales back, hoping for a better price and seeing little sense in giving away a 500-lb. bale for $20.

Presently, traders began to show up offering as much as 15¢ a pound for those stashed bales. Many farmers jumped at the opportunity, only to realize their error when price supports above 30¢ a pound were announced. They had jumped too soon, having sold out to sharpies who had inside info. Farmers who held out, sensing that something was up, were able to cash in big.

The GM tender offer is something like that. But it is a gamble for bondholders, who are being offered paper, not cash, for their bonds. Freed of its debt, GM might survive; its stock might even go up; and in due time the bondholders might emerge almost whole. On the other hand, GM might file for Chapter 11 anyway, in which case its stock would be worthless. Bondholders will lose everything if they have given up their right to be first in line, in the event of a bankruptcy.

My broker's advice - which matches my private view - is to hang tough, decline the tender offer, and wait for the bankruptcy, which he thinks is almost certain to occur. Many experts think GM is already too far in extremis to be saved, no matter how much money is poured into it. Bondholders cannot save GM by essentially forgiving its entire debt. Even if they do this, the government will meet political resistance to handing GM more billions. History's greatest corporation will become history's greatest corporate shipwreck. Tens of billions of dollars in wealth and tens of thousands of jobs will be lost by GM's collapse.

It is not too difficult to see why the Obama administration wants to keep this crash from happening on its watch. If it occurs, historians will forever link it to Mr. Obama's "bailout" presidency, just as the Great Depression became inextricably linked to Herbert Hoover. The GM crash will have Mr. Obama's name engraved on it: "Obama? Oh yeah, he caused the crash of General Motors..." That won't be a fair linkage - just as Herbert Hoover didn't entirely cause the Great Depression - but it's the way history sometimes is recalled.

It has been easy to characterize GM's bondholders as rich banks and hedge funds that can easily afford to lose their investments - indeed, who probably should lose them. But this is a false picture born of envy politics. GM corporate bonds are spread over a wide area of the investing public, including pension funds and private holdings of small investors (like yours truly). Their collapse will represent a significant loss of wealth to many thousands of Americans.

The Obama administration surely knows this is true. So why is the Big O sanctioning an attempt to buy off bondholders with potentially worthless paper? As nearly as I can make out, there are two possible reasons. First, there is the Obama administration's obvious attempt to circumvent the bankruptcy laws. Those laws place primary holders of debt - i.e., bondholders - at the front of the line for redress if a company fails. But Mr. Obama has made it clear that he wants unionized workers at the head of the line. In other words, he wants to evade the bankruptcy laws with a special deal to advantage a favored constituency. (How's that for "upholding the laws of the United States" and enacting "change we can believe in?")

Second (although not necessarily in order of importance) is Mr. Obama's dislike - almost to the point of hostility - of personal wealth. Anyone who truly listened to his campaign rhetoric should understand that personal wealth is not his vision for the nation's people - except for himself and a favored few. So far, I cannot divine if this stems from dyed-in-the-wool socialism or from a pragmatic political calculation that people with personal wealth - and the independence it brings - will neither need nor want his brand of government.

Which view drives him remains to be seen. (It might be both.) Certainly, we shall understand the president's mind in due time, as he acts. His words have dazzled many - including the completely besotted Mainstream Media - but his actions will soon inform voters' impressions of him. Those impressions will long outlast his words.

My broker dryly notes that my paltry holdings will neither carry nor block the GM tender offer. The "big guys" who control billions in bond-value will move the thing one way or the other. I can only hope that they have the backbone to withstand the "offer we can't refuse" made by Mr. Obama and his minions. Those bankruptcy laws were enacted for a reason. Who is he to go around them?