If GM Is Restructured, What Happens to Shareholders?

BY busadmin  April 23, 2009 at 11:29 AM EST

GM; via Flickr

Question: If General Motors is “restructured” (either through the bankruptcy courts or outside the bankruptcy courts), will the shareholders lose all of the stocks they currently own? Or, as long as GM is a viable company traded on the NYSE, will the stockholders retain their shares (even if they are worth a nickel a share)?

Paul Solman: Oh, the stockholders retain their shares all right. It’s just that they’ll be nearly worthless, though probably more than a nickel.

At the moment, AIG stock is still trading around $1.50 a share, down from $70 in the summer of 2007. GM? $1.70 or so, down from nearly $40 back then.

The question isn’t whether or not the stockholders get hosed in a bankruptcy: That’s what’s SUPPOSED to happen. Stockholders of a company are “the last in line” when the firm goes under. That’s why stock pays better than bonds: to compensate for the risk of being wiped out in bankruptcy.

The question is whether the bondholders are compensated, or forced to take a significant “haircut” – a discount on their bonds, that is.

Part of the outrage over AIG is that the government has been making good on ITS promises to firms with which it did business. Why? Because of fears that if the government didn’t, other firms would topple as AIG did. So the bondholders and other parties with contractual ties to GM, for instance, might get something in a bankruptcy, as creditors usually do. But the shareholders? Nada.