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Detroit's Unions Seem Ready To Deal. And The Creditors?

With Chrysler and General Motors scrambling to meet government deadlines for restructuring, you're going to hear a lot of talk about which stakeholders are making the necessary concessions--and whether the unions, in particular, are giving up enough.

As I've written before, the United Auto Workers deserves its share of the blame for the industry's troubled state. But, to its credit, it has already made significant concessions. And, by most accounts, it has indicated a willingness to concede even more.

But the UAW has also said it won't make such concessions until the companies' creditors start making bigger sacrifices of their own. At the moment, those creditors don't seem ready to do that.

With General Motors, the problem is bondholders who hold $28 billion in unsecured debt. Bondholders have been saying they want as much as 33 cents on the dollar; GM has been offering substantially less than that.

In an effort to drum up sympathy, spokesmen* for these credtiors have argued that “G.M. bondholders are not a collection of Wall Street banks. Many of these bonds are owned by average citizens, who purchased them to support their own retirement and college expenses and other critical needs.”

But that's not quite so, according to the New York Times Andrew Ross Sorkin

While it is true that there are some “retail” investors that own G.M., about 80 percent of the bonds are held by large investors and hedge funds, many of which play in distressed debt markets. Some of them would less politely be called “vultures.” Indeed, G.M. bonds have been changing hands rapidly, suggesting that some hedge funds have been plowing into them, gambling that these investments soon will be worth even more.

It seemed unlikely to me that students or grandmothers had formed this ad hoc committee and would hire Paul, Weiss, Rifkind, Wharton & Garrison, the law firm, and Houlihan Lokey Howard & Zukin, the restructuring advisory firm, to advise them. That takes millions of dollars. Whoever these investors are, they must have billions at stake.

So I called Gabe Roth, the spokesman listed at the bottom of the message, and asked if I could speak with some of the bondholders the committee represents. The answer: “No. We’re not making them available.”

I followed up by asking which investors were members of this ad hoc committee. “We’re not making that public,” Mr. Roth said.

I reminded Mr. Roth that government money was at stake, and that we taxpayers might end up bailing out the bondholders. Doesn’t the public have a right to know whom they are negotiating with--or against? He demurred, suggesting that he needed to protect the bondholders’ identities.

But the identities of big G.M. bondholders are not a secret. They are disclosed in regulatory filings. Here are some of them: Capital Research & Management; Loomis, Sayles; and the Pacific Investment Management Company. Those are not exactly the mom-and-pop investors.

If I understand this correctly, we're talking (mostly) about firms that bought bonds when they were already trading at very low values. They don't like GM's deal because it would mean less money for them. As Sorkin writes, "this is not about keeping their jobs or, frankly, about patriotism. It is about dollars and cents."

Chrysler's debt is different from GM's. It's secured, which means it's backed by the company's assets (rather than expectations of future earnings). But it's also having trouble getting concessions from creditors, according to the Washington Post's Kendra Marr:

Chrysler's bankers represent one of the biggest obstacles. They previously loaned the automaker $6.8 billion and have resisted requests that they swap a chunk of that money for stock to help reduce Chrysler's debt, according to people familiar with the discussions. Since Chrysler's assets were used as collateral for the loans, these holders of secured debt could claim the company's plants and operations if it files for bankruptcy.

You can imagine why the creditors would act this way. And, under normal circumstances, who could blame them? Maximizing profits is their whole reason for exsitence.

On the other hand, the list of lenders include Morgan Stanley, J.P. Morgan Chase, Citigroup and Goldman Sachs. Remember them? Representative Gary Peters of Michigan does, and he sounded off to the Post about it:

"Some of these debt holders are financial institutions that exist today only because of government support," Peters said. "Yet they now stand hypocritically unwilling to cooperate with the government to help maintain an American auto industry."

The Post story notes that the UAW hasn't made enough concessions yet, either. But, again, my understanding--consistent with the accounts in both the Times and Post--is that the UAW has been more flexible and constructive than the creditors.

*One complication of the debate is that the spokesmen are self-appointed; they don't speak for all bondholders, although they do seem to represent the large majority. 

--Jonathan Cohn