GM is trading at 3.18, BGM is trading at 3.33 and GMS is trading at 3.55. Why would anyone own a common stock when they can get a security of higher priority AND one hat pays a fat dividend at nearly the same price? It does not make sense to me.
In a normal world, your argument is a slam dunk. However, we aren't living in a normal world, and it is entirely possible a "legislated" solution that DOES harm bond holders WITHOUT completely wiping out the common lands on Planet GM. Not suggesting it's right or moral or anything else - just suggesting that it "is".
Yea, I am thinking the Central Bank is concerned if they do something to wipe out the common stock, it will impact any possible future private investors from venturing forward for any company in distress. Destroy auto stock owners, and bank stock owners will be quaking in their shoes. The government wants a steak in all that get bailed out, but they are still trying to figure out the best way other than interest payments.
While I know the government can do whatever it wants, is it not illegal to just tell the debt holders, we aren't paying you anymore, all while keeping the company out of bankruptcy.
In the business world, you cant be flipant about paying your debts. Its very bad business. To retain any measure of credibility, you must always at least act like you tried everything you could to pay your debts. You are right in that these companies could blow everybody off but then the lawsuits would fly and the bancrupcy fillings would follow. Then you face the judge and if he sences a cheap skate scoundrel standing before him, he will order remedies much harder than the standard humble pie he deals with. When your hat is in hand, you dont act like Rob Blagoyovich. You act like those 3 Auto CEOs you saw on television taking their spanking. I wish somebody would spank me or even beat me silly for 15 billion dollars. And by the same token, the government doesnt want to do something that scares away future investors, or the government may be warding these companies far longer than they bargain for. Fiat has already expressed interest in Chrysler, but its all dependent on the government first adequately shoring them up.
Makes sense. Anyways, my point is. If I were to be in GM, wouldn't it me safer to be a bondholder if you are paying the same price for a bond paying a 50% dividend vs holding the common stock that is doing nothing. Like you said, if the government wiped out the debtors, without payment, it would scare away futures investors to any business and really hurt America.
I don't think any of it is safe so I don't mess with it compared to other choices. But I wouldn't say the common stock is doing nothing. In the past 2 weeks that stock has bounced around between 3 and 4 bucks and people are trading it. I suspect the prefered stock doesn't get this kind of activity and I dont think the dividends on the prefered will be paid. Where is the money gonna come from? And while the government wrestles with the idea of wiping somebodys debt out, the idea is to make bond holders trade for common stock. So they take their chances like everybody else. They just havent figured out yet where to get this common stock. The more they simply print, the more its diluted. And the Government wants a billion shares of its own. So they are all trying to figure out what is best for future investors and the industry. Its possible the gov might abandon their equity claim for the greater good. Maybe thats why the crazy stock still trades above 10 cents. But I aint touching it.
GM has multiple tiers of debt. The "junior" stuff holds basically the same relationship to the "senior" stuff as the common holds to bonds in general. So by all rights, if the senior debt is taking any kind of haircut, the junior debt should be wiped out right along with the common. What will actually happen is anybody's guess at this point.
The reason I ask is my father is in GM. he knows little about investing and only bought it because it was "cheap" this was at 8 bucks or so. I keep telling him if he wants to play GM to get out of the common stock and get into GMS. So if you guys were to chose between GMS and GM, which would you go with?