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Today's Outrage: GM Bondholders Make Bad Bet on Bankruptcy

We've seen this before with the airlines, when a major financing partner steps up with a cash infusion and negotiates the terms for emerging from court protection.

Consider how hedge funds and airline-related investors gained 52% of US Airways (LCC) after financing its bankruptcy reorganization -- while bondholders and other unsecured credit providers received stock at a rate of 3 cents to 17 cents on the dollar.

At United Airlines, the U.S. Pension Benefit Guaranty Corp. ended up with a 23% stake in the parent company, UAL (UAUA), when it emerged from bankruptcy in 2006. Unsecured creditors got 4 cents to 8 cents on the dollar.

The only optimistic example is Delta Airlines (DAL), which repaid unsecured creditors between 62% and 78% of what they were owed when it emerged from bankruptcy in 2007.

GM's bondholders can only dream of getting that lucky. Pennies on the dollar is the most likely scenario in a bankruptcy proceeding.

That won't live up to the dreams of all the folk who bought GM's bonds to one day pay for college for their kids or add a cushion to their retirement accounts.

Now it looks like the best they can hope for is to get the same 10% deal from the courts that they just rejected.

They better hope Obama doesn't hold a grudge.

Stock quotes in this article: GM, LCC, UAUA, DAL 
Hall is the editor of TheStreet.com. Previously, he served as deputy editor and chief innovation officer at The Orange County Register and as a news manager at Bloomberg News in Frankfurt, Amsterdam and Washington, D.C. As a reporter, he covered business and financial markets, worked in both print and television in the U.S. and Europe, and conducted in-depth investigative coverage at The Journal-Gazette in Fort Wayne, Ind. His work also has been published in a variety of newspapers including The Wall Street Journal, The New York Times and International Herald Tribune. Hall received a bachelor�s degree in journalism and political science from The Ohio State University and has taken graduate management science courses at Boston University.

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