Friday, March 20, 2009

What's Good for the Goose

General Motors bond holders are unhappy, and little wonder. GM has been negotiating a complicated debt exchange that would cut the automaker's unsecured debt by two-thirds to $9.2 billion. To get there, bondholders would have to accept about 30 cents on the dollar, which is a requirement of the automaker's $13.4 billion federal loan package.

How is it GM bond holders take a hair cut and those of the troubled banks get a free pass? Bond holders of Citi should expect the same and will get a debt for equity outcome. With Citigroup stock at current levels dilution seems less a problem than survival. The next bailout should come from bond holders and I suspect it will.

Lending to insolvent borrowers is a risk proposition and bond holders should prepare to swallow some of that risk.

John Barnyak