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Bailout Fail: Ford Drops Debt, while GM and Chrysler Flounder

Posted By Andrew M. Grossman On April 7, 2009 @ 8:33 am In Economics | Comments Disabled

After months of pressure from the federal government to push down General Motors’s and Chrysler’s debt loads, a deal remains far out of reach [1]. With the promise of further federal bailouts, no debt-holders wants to make concessions—accepting just 30 or 40 cents on the dollar, and much of that in possibly worthless stock—when holdouts could wind up paid in full.

Bailout-free Ford announced yesterday [2]that investors agreed to swap nearly $10 billion dollars in its debt for cash and stock, reducing its total debt burden by 28 percent. The price: about 38 cents on the dollar. After the late-afternoon announcement, Ford stock rallied, gaining 16 percent.

Without a government backstop, Ford could argue credibly that its debt-holders would take a beating if the company were forced to file for bankruptcy. But that seems increasingly unlikely: Ford’s prospects have been looking up [3], as car-buying consumers flock [4]to the only Detroit manufacturer that hasn’t taken taxpayer dollars. In any case, without the uncertainty of government financing, Ford’s debt-holders were able to put a firm value on its bonds and then choose whether or not to accept the automaker’s buyback terms.

Its rivals’ creditors, locked in a game of chicken with the federal government, cannot. The result is a stalemate that’s impeding GM’s and Chrysler’s turnaround plans—another cost of doing bailouts instead of straightforward bankruptcy [5].

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/04/07/bailout-fail-ford-drops-debt-while-gm-and-chrysler-flounder/

URLs in this post:

[1] out of reach: http://www.bloomberg.com/apps/news?pid=20601103&sid=a2_CLEozjc50&refer=us

[2] announced yesterday : http://online.wsj.com/article/SB123902308085992679.html

[3] have been looking up: http://online.barrons.com/article/SB123880681761288929.html?mod=article-outset-box

[4] flock : http://www.tennessean.com/article/20090401/BUSINESS/90401028

[5] cost of doing bailouts instead of straightforward bankruptcy: http://www.heritage.org/Research/Regulation/wm2342.cfm

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