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GM Bankruptcy Appears Inevitable Following Failure to Strike Deal With Bondholders

28 may 2009 - News - Editor

A sharp rise in Treasury yields and the seemingly inevitable bankruptcy of General Motors were contributing factors to stocks falling on Wednesday, with the Dow Jones industrial average falling 173 points, the Standard & Poor’s 500 shedding 17 points and the Nasdaq composite dropping 19 points, representing a decline of 2 percent, 1.9 percent and 1.1 percent respectively. Wall Street had rallied on Tuesday on the strength of an optimistic reading on consumer confidence. However Tuesday’s gains were wiped out in Wednesday’s slump, but analysts generally agree that this is to be expected as investors await more concrete evidence that the so-called “green shoots” of economic recovery are developing.

To avoid bankruptcy, General Motors needed to strike a deal with bondholders, with the proposal being that $27 billion in unsecured company debts would be swapped for 10 percent of GM’s stock. However, bondholders have rejected the proposal and it appears more likely than ever that the once mighty automaker will be forced to file for bankruptcy, which could happen in the next few days. With the worsening economy and drastic decline in new car sales, GM shares have lost 55 percent of their value this year alone. Since reaching a record high in October 2007, GM shares have dropped 97 percent. Speculation abounds as to how the post-bankruptcy GM will be structured in light of the fact that the government will own as much as 70% of the company, and what this will mean for GM’s staff and the economy.

Bankruptcy and/or nationalization will mean that General Motors will be removed from the Dow Jones industrial average’s 30 component companies, where it has held a spot since 1925. Once again, speculation is rife as to which company will fill the gap left by GM’s departure from the well respected stock market index. The replacement company need not necessarily be from the industrial sector and a poll on CNBC has listed eight possibilities for viewers to choose from – Wells Fargo and Goldman Sachs Group, both from the financial sector; Amazon.com online retailer, Abbott Laboratories from the pharmaceutical sector; oil company ConocoPhillips; and tech leaders Apple Inc., Google Inc. and Cisco Systems Inc. Speculation and polls, while interesting, do not decide who will replace GM on the Dow, that decision lies with Robert Thomson, managing editor of The Wall Street Journal.

 


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