Will You Feel Sorry for GM Bondholders?

May 14, 2009 by  
Filed under Fools of Finance

gm_bondholdersLast year I wrote about feeling sorry for a GM retiree who might have to go back to work in his 50’s.

Boo hoo.  Mr. ToughMoneyLove was not sympathetic.

Alas, it’s getting worse.

Now the small guy GM bondholders are whining. They want the government (of course, that means us) to protect their investment in GM that they thought was golden.

Here is one example of a gambling fool of finance who bet his retirement on GM bonds – $700,000 worth. What kind of crazy person does this? Your entire retirement savings in the bonds of a single company? A company in a fiercely competitive world market?

Do I feel sorry for Jim Modica, age 68? Yes, but not because he is about to lose his bet on GM. I am sorry that his brain apparently stopped working correctly when he retired at age 65 or whenever.

Even with his cognitive skills diminished, Mr. Modica remained persuasive. So much so that he convinced some of his family members to join in the no-brain train toward GM bonds:

We did this as a family. We had discussions about safe investments. We thought, who is the No. 1 carmaker in the world? GM. These bonds seemed like a sure bet.

Maybe Mr. Modica was thinking a little when he reached this conclusion initially. But wasn’t he watching the news about GM as its market share steadily declined over recent years? Did he not re-evaluate his risk as it increased and the market value of his bonds declined? Apparently not.

That’s what the people think government is now for, to protect the stupid people from their own stupidity, using money extracted from the less stupid people who still pay taxes.

If I see President Obama hugging this guy at a townhall meeting, I may have to throw a shoe at the television.

Image credit: Raleigh.mike

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10 Responses to “Will You Feel Sorry for GM Bondholders?”
  1. Rob Bennett says:

    I feel sorry for everyone who was hurt in the stock crash and in the economic crisis that followed from it.

    The common view is that it is each investor for himself and that whoever got hurt should just take his lumps without complaint. I don’t buy it. A stock market (and an economy too) is a collective asset. We ruined that asset with our tolerance of the insane mispricing of stocks that we saw in the 1990s. Now we should collectively get about the business of fixing the problem we caused.

    I’m not saying that we should bail out this group or that group. That’s a different question. I’m saying that we should realize that we all contributed to the problem and that we all need to get about the business of fixing it together. If the economy goes over a cliff, each and every one of us is busted. I’m not into pointing fingers. I’m into turning the thing around before our mistakes of the 1990s bury us.


  2. cjbr549 says:

    This guy is playing the sympathy card for his mistakes, but the bondholders in general are getting screwed as a political giveaway to the union. How many 401ks, retirement funds, etc are getting hosed so the unions can come out on top? I don’t know. Here is my basis:


    It’s almost enough to make you sick. And if you own GM stock or bonds, you should probably just have them send them to you as paper; they will be good for starting the fireplace or wood stove this winter, as current shareholders will be wiped out by a bankruptcy or reduced to 1% by GM’s recovery plan. Of course, they may someday be valuable as collector items, so don’t despair too much. Those of us invested in S&P 500 index funds are getting a 1/500th of a screwing over this, but they all add up. I guess all those union dues given to the Democrats these past decades are finally paying off. Let’s just hope card check dies on the vine. Well, enough of this rant.

  3. Marc says:

    Obama changed the bankruptcy rules, without changing the law. And the rule change is retroactive.

    His decision may have been stupid (Did he re-evaluate after Enron?), BUT bonds were much safer just 2 months ago.

  4. My Journey says:

    It sucks…but maybe the guy should have read any PF blog, book, or article – when someone out there screamed diversify or live with the consequences. This reminds me of a real life scenario that happened with of our ex-clients.

    She is a paralegal at Citi. We begged and begged her to diversify her 91% allocation of C. She didn’t. Followed C from 30s when we got a hold of her to the 3 something it is today.

  5. Matt SF says:

    What’s funny is this guy is supposedly an “employee benefits advisor”. How can a guy in his position be dumb enough to put all his eggs in one basket? Worse yet, he got his family to do the same.

    Personally, I feel more sorry for the GM employee.

  6. kitty says:

    The article doesn’t say if these are senior bond holders or not. If senior, they were supposed to be a very safe investment since in bankruptcy they are supposed to be paid first from the sale of company assets. At least this was before Obama choose to ignore the laws as posters above said. I am not sure how many of these bond holders have senior debt.

    @cjbr549 – this makes me sick as well. I posted before in Chrysler thread on more or less the same topic.

    Sure it is stupid to put all the money in one company bonds. It’s not like GM is the only company in the world – a minimum investment in a single bond issue is generally around $5000 (more or less for issues selling above or below par). So 700,000 is more than enough to buy many bond issues of different companies and in different industries. It’s not like GM is the only company out there that issues bonds.

    About a paralegal at Citi. I am guilty of keeping too much in my employer’s (IBM) stock as well. Not 90%, but maybe around 40% of non-401K or 20% of all invest-able assets; nothing in 401K though. So I can understand. You buy it normally as part of ESPP with a nice discount – at least this is what we had before the company changed rules at which time I stopped participating. You may sell a little here or there, but since this happens with payroll deduction of up to 10% of your salary, you don’t think about it. Your company is doing well, and you think – oh I’ll sell it eventually. Then you think “if I sell it now I have to pay so much in capital gains”. I realize it’s a stupid way to think, but I kind of understand this woman from Citi. I bet this 10% to ESPP were the only money she was saving; plus banks had nice dividends.

    But… Regardless if it is stupid or not, the bond holders are indeed treated unfairly here.

  7. Rick Beagle says:

    Employee Benefits Advisor is not a financial position (it is actually a Human Resources position), but rather an employee centric liaison between the company and their health care broker(s).

    This guy made a poor decision and his quality of life in his golden years will be severely diminished. It is unfortunate, but this is the downside to a capitalist market – some people get hurt. I know this sounds cold, but after the Enron debacle, he should have gotten a freaking clue.

    Rick Beagle

  8. TStrump says:

    I feel bad that he lost his savings … but too bad!
    At his age, he should have been protecting his capital.
    The rules of which companies are ‘blue chip’ and reliable have changed.
    Many of these old names are no longer safe bets.

  9. Four Pillars says:

    Unbelievable – thanks for pointing out that article. Investing in GM bonds is like investing in the Titanic….after the collision.

    What an idiot!

  10. jesse says:

    Maybe investing so much in the bonds of one company was stupid, but the way the Obama administration change the rules at the end of the game is what really hurt him. He has every right to be outraged!!

    Modica only believed that the rule of law would be followed. People keep saying “You made a bad investment” when it only becomes a bad investment when the rules were changed by a govt that gave preference to the UAW for political reasons.

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