What Does the Auto Bailout Mean for Bondholders?

Bondholders lost most of their investment during bankruptcy proceedings.

Following the collapse of the financial system in the fall of 2008, the U.S. economy rapidly declined into a recession. Government loans prevented Chrysler and General Motors from going out of business. Bondholders lost most of their investment in the companies.

Auto Bailout

General Motors and Chrysler neared bankruptcy but were saved by a last minute bailout of $17.4 billion from the Bush administration in December 2008. The auto bailout funds came from the same program that Congress had passed to save Wall Street firms, known as TARP, the Troubled Asset Relief Program.

GM Bankruptcy

The Obama administration agreed to lend General Motors an additional $30 billion to cover losses and fund operations while it filed for Chapter 11 bankruptcy. In exchange, the federal government received a 60 percent stake in the new firm. Bondholders received a 10 percent stake in the new GM but had to forgo what was originally owed.

Chrysler Bankruptcy

Chrysler's bankruptcy was cleared after the Supreme Court refused to hear a plea from bondholders to prevent the bankruptcy from continuing. Indiana pension funds, representing $42.5 million of Chrysler's $6.9 billion in secured debt, contended that their compensation was unfair at just 29 cents on the dollar.

References

• Detroit News: Obama defends auto bailout
• Politico: Bush announces $17.4 billion auto bailout
• CNN Money: GM to head into bankruptcy
• Bloomberg: GM Bankruptcy Judge Ends Hearing Without Sale Ruling
• New York Times: As Court Clears Path, Chrysler Is Set to Exit Bankruptcy