TEXT OF INTERVIEW
Kai Ryssdal: The financial instrument most in the news this week was the good old fashioned IOU. Nobody actually used that word, of course, but that’s what all the talk of bonds was about this week. Both in the case of the Treasury bond market and the looming bankruptcy of General Motors.
Joining us for our Weekly Wrap of Wall Street and beyond is business writer Heidi Moore and Felix Salmon from Reuters. Good to talk to you both again.
Heidi Moore: Good to talk to you Kai.
Felix Salmon: Yeah, great to talk to you Kai.
Ryssdal: Heidi, let me put you on the spot and make this prediction 72 hours in advance. Bankruptcy — yes or no with General Motors?
Moore: Definitely yes. I mean, there’s no other way to go. In fact we just saw this week that two auto parts makers, Visteon and Metaldyne, which actually supply Ford mostly, applied for Chapter 11 bankruptcy. So you’re already seeing bankruptcy play out. It’s as if it has already happened.
Ryssdal: Is there a parallel here between what the bondholders did with Chrysler and what bondholders are doing with General Motors, Felix?
Salmon: Not particularly, because in Chrysler a lot of people got upset that the secured bondholders, their rights were being trampled on by the U.S. government.
Ryssdal: Secured bondholders meaning they’ve got assets behind those bonds.
Salmon: Exactly, that they could foreclose on Chrysler and take possession of all of those auto plants in Detroit and somehow sell them off for hundreds of millions of dollars and make a profit that way. It was all a little bit unrealistic, but at least they felt that they had that right.
In the GM case, GM does not have secured bondholders. And so, the people who are owed money by GM, whether they’re union or whether they’re the U.S. government or whether they’re GM bondholders, are all on the same level with each other. And they just all have to pitch in together to try and help create a new GM, which is going to be able to be viable going forwards.
Moore: I mean, one of the things to add about that is, I think what the government has learned, if we can talk about there being some kind of parallel, is the issue that bondholders can make an awful ruckus and can really drag a process down. The Chrysler process could’ve been a lot cleaner if the government had not ticked off the bondholders and I think that they’re learning that now with GM. So they’re saying, let’s get the bondholders taken care of and out of the way, or else we’ll be here for years.
Ryssdal: Right. And it’s costing them money and time, right?
Moore: Exactly, it costs them money, it costs them time. It’s a huge loss to self image, because it makes the government look bumbling if they can’t pull together a good automaker bankruptcy, when the reason the automakers are bankrupt is that the government has portrayed them as somewhat bumbling themselves.
Ryssdal: That’s very zen.
Moore: Isn’t it? Yeah, it’s like if an automaker declares bankruptcy in a forest and no one hears it.
Ryssdal: Zen and the art of auto bankruptcy, right?
Salmon: It’s worth noting that GM is being nationalized, right now. When it emerges from bankruptcy, it’s going to be owned more than 70 percent by the U.S. government. It’s basically going to be an arm of the U.S. government.
Moore: Right and so the government has to look more competent right now. That reputational risk is actually pretty big for the government.
Ryssdal: OK, change of gears here. Different, but related topic, the Treasury bond market, which on Wednesday kind of went a little bit crazy. Interest rates on Treasury securities really jumped up. Felix, explain why that happened and why it matters.
Salmon: No one really knows why it happened. It seems to have been driven largely from the mortgage market that a lot of people started to selling a lot of long-dated mortgage bonds. And exactly why they started selling a lot of long-dated mortgage bonds is open to a lot of debate.
The optimists among us tell us that what we’re seeing is something called a “steepening of the yield curve,” if you will. Basically what that means is that the bond market is looking normal and that it’s more expensive to borrow money for 10 years than it is to borrow money for 10 months. On the other hand, you can look at it as, “Oh my God, the U.S. government is taking on all of this debt and there could be lots of inflation down the road, so we’re selling.”
Ryssdal: Well Heidi, let me pick up on that thread, right. We the government are having to borrow trillions of dollars and if interest rates rise, we’re going to have to pay more than trillions of dollars to borrow that money. Mortgage rates are going to go up, so that’s going to be bad for the housing recovery, whatever it is. I mean, this whole green shoots thing kind of gets trampled if interest rates rise, right?
Moore: Actually one of the funny things about this is, is how we’re handling it as a country, which is try to drag China down with us.
Ryssdal: Explain what that means though. It’s important, because China is buying all our Treasury bonds, all our debt.
Moore: Sure. Tim Geithner, the Treasury secretary, said today that, really the Chinese need to stop saving so much and start spending, just like we do here. And pretty soon we’ll be bailing out China, I’m sure, if that happens in 15 years or so. Unfortunately, that is not really a wise solution to the power that China holds over U.S. treasuries, which is kind of the big problem here. But you know, we got ourselves into this mess and the issue should be, how are we going to pay back all of that money.
Ryssdal: Heidi Moore and Felix Salmon. Thank you guys.
Moore: Thank you.
Salmon: Cheers Kai.
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