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How GM bankruptcy would hit investors

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Kai Ryssdal: Shares of General Motors took a drubbing today — off 16 percent on a report in The New York Times that brought fears of bankruptcy bubbling back up. There is speculation that GM and the White House might do something like what was being considered for the banks not too long ago. Two separate companies — a good GM that includes everything that might make money, and a bad GM holding everything that doesn’t. A lot of people lose if GM goes under. But Marketplace’s Jeremy Hobson reports some losers are more equal than others.

JEREMY HOBSON: If GM goes bankrupt, there’s an order to who gets repaid and when. Senior debtholders have collateral backing their investments, so they’re more likely to get their money back. After that, you look to the bankruptcy code’s absolute priority rule for guidance, says Peter Chapman of Bankruptcy Creditor’s Service.

PETER CHAPMAN: The absolute priority rule would say no general bondholder recovers anything until all of the senior senior bondholders are paid in full.

Junior bondholders are further down the line. They’re already looking at figures as low as 8 cents on the dollar for their investments. But they got paid a bigger interest rate for their unsecured debt when times were good. Stockholders come right at the end of the line. Chapman says they won’t get a dime until the company has repaid its debt.

CHAPMAN: You can’t go out and borrow a bunch of money and then steal it all and get away scott free. OK?

Well, at least not if you end up in bankruptcy court. Peter Gilhuly is a bankruptcy lawyer at Latham and Watkins. He says stockholders may be nearing a wipeout, but they had the most to gain when GM was doing well.

PETER GILHULY: They have the upside of a value of a solvent enterprise, but when it’s insolvent, their equity is worthless.

Those junior bondholders hate the idea of bankruptcy as much as the stockholders do. Because if the company does the quick-rinse bankruptcy that’s expected. Bondholders could be arguing over pennies in court for years, while the best parts of the company drive off into the distance.

In New York, I’m Jeremy Hobson for Marketplace.

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