The seemingly safe nest eggs of millions of Americans faced trampling yesterday by the likelihood of General Motors careening into bankruptcy.
Some of the nation’s most trusted investment brands — from Fidelity and Franklin to Pimco and Capital Research — are holding billions in endangered GM bonds which have been churning out handsome returns of between 7 and 8 percent, or higher.
But the new threat to their stability tore through bond markets after the White House threatened to pull the plug on its auto industry bailout cash unless GM and Chrysler slash more expenses.
Values of GM’s bonds have already skidded by as much as half over the past six months of auto-industry turmoil, but it hasn’t stopped the steady flow of quarterly interest payments to pensions, annuities and mutual funds.
Government bean counters overseeing the bailout want to replace GM’s current $15 billion in debt with cheaper notes or new stock, forcing GM to dump at least 19 versions of its outstanding bonds that have been a cornerstone of many funds for years.
Bond markets reeled yesterday, with GM debt skidding even lower. The face value of one GM bond for $1.5 billion — a 7.2 percent note due in 2011 — plunged 17 percent in just minutes to just 22 cents on the dollar. The yield — which rises as the price declines — soared to 126 percent.
Meanwhile, Ford Motor’s bargain-basement bonds have surged 38 percent this month. Its 7.45 percent notes due in 2031 have climbed in three weeks from 13.2 cents on the dollar to 31.5 cents. Ford refused bailout cash and is restructuring its own debt.
GM bondholders have grappled for days with the firm over ways to swap debt without triggering a bankruptcy filing.
One GM plan on the table proposes that bondholders give up three-quarters of their debt in exchange for a new stock or notes. Bondholders are demanding a government guarantee of any new notes they’d get in such a swap.
Sources told Bloomberg News that a new offer under review yesterday includes giving bondholders 90 percent of the equity in a reorganized GM with a combination of cash and notes that aren’t guaranteed by Uncle Sam.