Monday, June 15, 2009

When people think of “bondholders,” they imagine tycoons. J.P. Morgan. Warren Buffett. Even the fictional Gordon Gekko of “Wall Street” fame.

In fact, tens of thousands of the bondholders of General Motors Corp. are not rich at all — and never were, even before the value of their bonds collapsed in the months leading up to the giant automaker’s bankruptcy filing.

Plenty of GM’s bondholders are Wall Street types. Most of the company’s $27 billion in private debt is held by investment firms. But many of those firms are actually managing the money of individual investors. And fully 20 percent of the bonds are owned personally by roughly 100,000 mom-and-pop investors across the country, according to Main Street Bondholders, a group organized to lobby on their behalf.

Paralegals, pilots, small-business owners and lots and lots of retirees have poured their life savings into the bonds of GM, once a blue-chip company so blue that it was considered safe for widows and orphans to own.

THE BONDHOLDERS: Click here to view vignettes of eight GM bondholders.

There’s David Tuckerman, 84, of Arlington, a retiree who lost nearly $20,000 of his dwindling retirement savings. Or David Talbot, a 24-year-old camp counselor from Bellingham, Wash., whose $5,000 gift of GM bonds from his grandfather is virtually gone. And Bill Zastrow, 58, a software executive and single father who lost nearly $240,000 in college and retirement savings.

They have one thing in common: They never thought this could happen to GM bonds.

No longer. GM bonds have been a declining investment for as long as the auto company has been in financial distress, which now has been years. Since last year alone, the value of the bonds has fallen from 80 cents on the dollar to as low as 5 cents in the week before GM’s June 1 bankruptcy filing.

As a result, plenty of families down the street — and even the mechanic on the corner — have seen their savings shrink to the point of disappearing. GM bonds have been classified as “junk” since 2005.

Why any average investor would rely on bonds is hard to fathom, given their riskiness. Yet many middle-class Americans do. Some simply believed in the mighty GM — the world’s largest automaker until last year — and put their money behind that belief. Others have strong emotional or employment ties to the company. All were seduced by the bonds’ high income and the fact that bonds are safer than stocks.

Buy a stock, and you own a piece of a company — the stock rises with the company’s prospects but is usually worthless in bankruptcy.

Buy its corporate bonds, and you have lent the company money. The job of a bankruptcy court is to get money back for you — at least as much as possible.

These days, small investors in GM bonds feel they are hostage not just to bankruptcy court but also to politics. GM’s bankruptcy was strong-armed by the federal government, which will end up owning 60 percent of the company in return for its bailout loans. The administration argues that GM would have gone extinct without a government-led “managed” bankruptcy.

The government probably saved jobs but also gave the United Auto Workers Union a large ownership stake in the company. Bondholders, who loaned the company more than the Treasury and the UAW did, were first offered just a 10 percent stake.

The small investors complained bitterly that they were getting short shrift and predicted that GM stock will be worth little or nothing in the end.

THE BONDHOLDERS: Click here to view vignettes of eight GM bondholders.

Opposition from big and small investors pressured the Treasury to offer bondholders an additional 15 percent stake.

But only the big Wall Street bondholders were given a vote on the new offer — and they accepted it only grudgingly.

The Main Street bondholders feel they were elbowed aside by the big investors with their expensive attorneys.

They are now hoping for the new GM to rev up, big time. The additional stake in GM is worth nothing unless the company’s market value reaches $15 billion. The bondholders would recover much of their original investments if GM’s value reaches an implausible $30 billion. The company has not been worth that much since 2004.

Many analysts agree that the bondholders were treated unfairly. Arguments continue in federal court and on the political stage. In the meantime, the bondholders have little choice but to suffer with their decision to hold on to what was once a sure thing.

Today, The Washington Times begins a series of stories examining who GM’s bondholders are and how they have suffered — and why. What follows is a look at the diverse group of people who are bondholders of a fallen American icon.

John Krudy contributed to this report.

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