General Motors bankruptcy process and its affect on stockholders?
 

I read an article just now relating to General Motors and the possibility that the company be entered into a bankruptcy process if the government opts on that route instead of supporting its continued existence.

The specific article can be found HERE and the portion I'm curious about is quoted as such:

If General Motors would be entered in to the above stated "bankruptcy process" would all shareholder stock effectively become worthless, or is there an alternative that could result in a bankruptcy process being entered without shares of the stock becoming worthless, literally?

there are two main types of bankruptcy in the US, chapter 7 and chapter 11. In chapter 11, companies must submit a plan to the courts about how they are going to pay back debtors and 'fix" the company in exchange for some protections. In this case, the stock doesn't necessarily lose all values, but generally they are delisted and only traded over the counter, and in the vast majority of cases they are canceled and do become worthless (though not necessarily, again).


Chapter 7 means that the company is really finished, and can't come up with a plan to pay back debtors. As such, it is liquidated, and stock becomes worthless.

In the case of GM, the talk is of a chapter 11 bankruptcy. There have been a few cases where outstanding stock was not cancelled, but they are in the minority. Texaco, if I remember correctly, didnt cancel its stocks, but delta did, for example.

Owning stock in a company that files Chp. 11 can be boon or bust. I've bought stock in a company while they were in Chp. 11 and have made a very nice return. But i had the opposite happen too. It's really high risk but when they come back they often roar back. I bought stock in a pharm. research company after there cancer drug was turn down by the FDA. Their stock dropped to under a buck and filed for Chp. 11. With two years they out of Chp. 11 and the stock was close to $20. Think they came up with some drug that would help organ transplant patients. I don't really remember all the details, was years ago, but I do remember wishing I'd bought a lot more of that stock.

And yeah, my understanding is Chp. 7 is the end. The company is dead and the bones are being picked.

Thanks for the replies.

It's hard for me to imagine General Motors disappearing from the face of American car manufacturing, and lately their stock price is a $1.00. With that said, it certainly seems a risky play. But with it so cheap, providing they don't go bankrupt and disappear, you're likely to turn a nice profit over time.

Ford was at about $1.00 in late November, and they're hovering around $4.00 now, which is still mediocre, but would have been profitable had someone bought stock at $1.00 per share.

To consider investing in failing stocks seems to be the complete opposite approach of most investing advice, but providing the company doesn't totally crumble, it seems there is potential for gains. It's admittedly tempting to consider, providing you're willing to accept the fact that the money is disposable in the literal sense of the word.

Is there any difference between a stock that is bought before a company enters Chapter 11 and stock bought afterward, aside from the price? Stock is stock right, or do they have different classes like some mutual funds?

Yes.

Outstanding stock at the time a company files for chapter 11 can be canceled.

Delta canceled its outstanding stock when it filed for chapter 11 bankruptcy, so those stocks are worthless, but stock sold since then isn't.

Good information, thanks.

What factors determine whether a stock is canceled or not? Does it vary on a case by case basis, depending on the bankruptcy ruling and procedure, or could there be indicators that might indicate a company being more likely to have its stock canceled than not if it does in fact enter the bankruptcy process?

Case by case, Jimellow. Totally dependent on what the it will take to get the company functioning outside bankruptcy. In most cases the existing stock gets wiped out. Heck, in most cases the reorg doesn't work and the company gets broken up through the chapter 11 process instaed of in chapter 7.

GM in bankruptcy has the potential to be a massive clusterfuck. With the dealers (and their sycophants in the various state govts), the bondholders and the unions, there's lots of opportunities for pyrotechnics. Unfortunately I don't see any way to fix GM's ailments without a chapter 11.

From what I've been reading, it looks like current shareholders will be wiped out, with bondholders becoming the new shareholders.

Et voila. Debt free GM emerges.

There was a reason your grandfather didn't play stocks so much... (go on, whose grandfather did?)

Interesting. Does GM make the decision on whether the stocks are wiped out, or does the commission/party in charge of the bankruptcy determine this?

If the company itself does, it seems like a shoddy practice. The investors that do stay with the company until the end get burned, the company emerges debt free, and can later start over, making its shares available to new shareholders? Seems a bit odd if true, and certainly doesn't reward loyal investors at all. It also seems like a much larger risk from the perspective of a prospective investor looking to buy now in the hopes of dodging his stocks being voided and actually turning a profit.

I was thinking it might seem like an interesting gamble if it was as simple as bankruptcy/bust or profit off a $1.00 stock that is bound to increase at some point if the company sticks around, but it seems it's not nearly as cut and dry as that.

Jimellow remember that holders of common shares are absolutely last in line
when it comes to claims on the remains of a bankrupt company.
In GM's case you have legions of bondholders, preferred shareholders etc,
to get paid off before any leftover scraps go to common shareholders.
My bet is they do a BK, much of the debt becomes equity leading to massive dilution of
the common, and then something like a 1:100 reverse split which would effectively render
existing shares worthless.

Yep. The rule is usually something like:
Secured Bondholders (can claim what they are secured against, so have first call)
Unsecured Bondholders (can liquidate the business if they aren't given cash)
Preferred Stockholders (first call on value of company)
Normal Stockholders (second call on value of company)

When you buy normal stock, you are buying the leftover profit.

On the other hand, the earlier stakes in the company return a more fixed return on the upside -- but have some shelter on the downside by having earlier 'call' on the companies resources.

People still own stock in GM?

I'm more concerned about the impact on the US taxpayer and how screwed over the people with GM pensions will be.

The proposal that GM has made to the US indicates that the current shareholders will be wiped out. Why is the stock still trading at over $1 and not 1 cent?

Hope.

When it comes to investing, "hope" is a 4 letter word.

it appears as though the "plan" to find "market solutions" that would enable gm debt to be mitigated has been swamped. if you believe the german government, by gm itself, by the giant sucking sound of it's high-speed implosion:

General Motors talks hit brick wall in Berlin | Business | guardian.co.uk

so much for "orderly bankruptcy.."

the way i see this, the obama administration really has to decide to act in a more explicitly social-democratic manner at this point, and do it fast. if the american auto industry is understood as central to socio-economic stability---not to mention whatever "prosperity" means in system terms at this point---then it should be nationalized outright, a plan for it's near-to-medium term put into place etc. if the administration does not act, it is effectiyely saying that the auto industry in general, and gm in particular, are not important enough to act in order to save.

it seems to me that the socio-economic consequences of allowing gm and it's entire supply and distribution chains to simply collapse far outweigh the value of any neo-liberal bromides taken from a mangled version of schumpeter--you know, all this "Creative Destruction" nonsense.

at the same time, gm was the weakest of the us manufacturers...

the breakdown in this "market solution" plan is symbolically not a good thing...the theater of it may be enough to send all those "rational actors" in the markets scuttling for the door again. i suppose we'll see.

what do you think should happen next?

Golly, I really don't know. I think it'd take an awful lot of political guts for Obama to go out nationalize GM. And as bold as he's been so far as President I'm not sure I see that happening at the moment. GM looks like its been all but run into the ground. How such an iconic could even falter so badly in the first place I still find unfathomable. Given the way things have been going, I'm thinking that the government's main priority might end up being just to try and assuage the fallout this will have on workers and their pensions.

Who knows, sure is one clusterfuck.

If you look at GM's balance sheet, in 2006 they had total assets of $186 billion. They had total liabilities of $191 billion. Shareholder equity was negative $5 billion, or the company was worthless to stockholders. 2007 it was worse, negative $37 billion, and 2008 it was worse again at negative $86 billion. Only fools and speculators hold investments in GM. Yes, I do think the folks in Washington are fools for putting money into GM.

They're not fools, Ace. It's not their money. They get to buy votes and protect favored constituencies using other people's money. Hardly foolish.