The battle for General Motors' ( GM) soul is being waged between two devils called creditors and unions. Neither seems to care much about the company. Devils just want their due. For the United Auto Workers union, the concessions their members are being asked to accept undermine decades of hard-won perks and privileges -- benefits that few non-union employees could ever dream of getting. The workers would end up as minority owners of the company and will have to figure out how to reconcile their desire to squeeze more perks for themselves against their new ownership obligation of maintaining a profitable business. Good luck with that. For bondholders, the debt-to-equity swap requires them to take on more risk with less opportunity to recoup their investment in the company. Naturally, they are pressing for a better deal. They never wanted the burdens of ownership. They just wanted the higher yields bonds once offered. Hey, no one said corporate bonds were risk free. But bondholders aren't the credit kings anymore. The government holds the creditor trump card and would end up with the biggest stake in GM as repayment in kind for the emergency loans taxpayers provided the company. The winner will likely be the UAW because Uncle Sam is on their side. The Obama administration seems to support the current plan that gives the unions a 39% stake in GM while the bondholders end up with 10% and the government claims 50% in exchange for its loans. Lowly common shareholders end up with 1%.
Bondholders may well decide to take their chances in bankruptcy court, where the government doesn't get to make the rules and the interests of creditors generally prevail over unions. That's a risky gamble in this era of quasi nationalization and government intervention. Do they really want to find out what other tricks the Obama administration may have up its sleeve? Whatever happens, I fear the company will suffer under its new masters -- none of them really know anything about running a car company. But then again, neither did the previous leadership, apparently. This is what happens when you sell your soul to a devil. Just ask Faust.