Safety: A World Turned Upside Down

In his Monday Morning Notes posting entitled THE GENERAL HAS NO CLOTHES Michael A. Berry, Ph.D. said "As of 6 AM Chevrolet Saturn (a GM affiliate) filed for bankruptcy in New York. The following chart shows a 91% decline in the share value of the stock effectively wiping out the equity holders of GM. Shareholders must include (or have included) a great many pension funds and endowments. This AM Bloomberg carried the story of a couple with six children who had invested $700,000 in GM corporate bonds because they thought they were safe, would see their children through college and ensure their retirement.

The General is dead. Long live the General.

The US and Canadian Governments will own 70%, the bondholders only ~10%.

Something is very wrong here.

Later this morning the General (GM) a 100 year old company will file for bankruptcy. The US government will own 60% ($20 billion loan), Canada’s government 12% ($9 billion loan)shareholders will get nothing. The bondholders (many retirees who believed in the General)will get between 10% and 15% of the new equity. How is it in our society that secured bondholders have been pushed aside? Irrespective of the human toll, the bond markets are going to be much more expensive in the future because of this government trump card.

One aspect of today’s bankruptcy is critical. This is a global event. It ushers in the changing of the guard globally. Politically, economically and from a capital markets regulatory perspective all has changed significantly. It is now more likely to be a confrontational situation with the government confronting corporate bondholders from time to time. Investments that were not supposed to be speculative (corporate bonds in GM) are now very speculative and have been made so by the solons in Washington and Ottawa.

The ethics of Moral Hazard has been thrown down in a most ungracious manner. Some risk takers have been rewarded and others thrown to the wolves – like the family who invested $700,000 in GM bonds.

This is wrong and immoral.

There has been a 180 degree shift in risk profile from what was previously considered “safe” to what was considered very risky.

The moral of this story is that there is no completely “safe” investment anywhere in the world today."