Protecting union interests and defrauding bondholders during GM bankruptcy proceedings

When General Motors went bust following the stock market crash of 2008, the Obama administration stepped in to oversee the restructuring of the company. Obama was concerned that if the company were to go into Chapter 11 bankruptcy the oversized union contracts and pension obligations would be thrown out in court and restructured under the direction of a bankruptcy judge, most likely not to the union’s advantage. Unions had provided Obama’s campaign with $206 million to get him into the White House and he wasn’t about to let them down, at least not when taxpayer money could be used to bail them out.

New York investor Steven Rattner, who had zero auto industry experience but had raised millions for Democrat campaigns over the years, was given the task of protecting union interests at all costs. The plan he came up with was as unprecedented as it was illegal: defraud GM investors who were owed billions and hand over the newly restructured company free of debt to the United Autoworkers Union and federal government.

The formula developed by Rattner awarded 40% of GM to the UAW, 50% to the federal government while granting only 10% ownership to bondholders who would collect a measly 5 cents on the dollar on their initial investment. There was no precedence in bankruptcy history to support the wholesale fleecing of GM bondholders who, unlike stockholders, are guaranteed preferential treatment during Chapter 11 reorganization.

The bondholders held $27.2 billion in debt while the federal government had invested $16.2 billion at the time, and yet that didn’t stop the Rattner from awarding the government a 5X greater stake in the new company. The Wall Street Journal described the transaction as “so devoid of economic logic or fairness that it confirms the fears of those who said the original bailout would lead to a nationalized GM run for political ends.”

Considering the government was unlikely to assert itself in day to day operations, the UAW walked away with a controlling interest in GM. In addition to their 40% ownership stake, they were also given an additional $10 billion in cash which meant they would recover 76 cents on the dollar on their owed pension obligations. While the UAW walked away nearly whole from bankruptcy proceedings that in the end cost taxpayers $26.5 billion, white collar workers at GM and “non-union Delphi workers lost nearly their entire pensions.”

Not willing to lie down and take it from the community organizer-in-chief, bondholders sued the federal government in bankruptcy court and won. In 2011 they were awarded 30 cents on the dollar two years after the Obama administration tried to send them home practically penniless.

While Rattner never got his just due for attempting to steal billions from GM investors, he was found guilty of ripping off the New York Pension Fund in 2010. According to New York Attorney General Andrew Cuomo, “Steve Rattner was willing to do whatever it took to get his hands on pension fund money including paying kickbacks, orchestrating a movie deal, and funneling campaign contributions.” Rattner was fined $6.2 million and agreed to a two year ban on associating with any brokers or investment advisors.

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5 Responses to “Protecting union interests and defrauding bondholders during GM bankruptcy proceedings”

  1. I don’t even know how I ended up here, but I thought this
    post was great. I do not know who you are but certainly you are going to
    a famous blogger if you are not already ;) Cheers!

  2. Fred,
    I’m a Delphi bond holder. How do I go about getting my $.30 on the dollar for my bonds?
    I’ve held them for years and Etrade dropped them from my portfolio because they are worthless. I need to pursue this as this is my most significant source of income in my retirement.
    Thanks
    Craig

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