Monday, June 15, 2009

Retirees who are also auto industry (GM) bondholders are taking huge hits


On Monday, June 15, 2009 The Washington Times has a front page story about a particularly galling result from the General Motors implosion and government-orchestrated bankruptcy. The story, by William Ehart, is titled “The Bondholders: GM deal erased many average Americans’ savings”, with link here.

The story starts with a picture of an 84 year-old retiree in Arlington who lost many of his retirement savings because GM will not have to make good on bonds (other than a small fraction of new ownership) that were sold by professional funds and investment banks to average investors. This is a different problem from the retirement pension, which appears likely to remain intact given the mechanics (and probable future bailout) of the PBGC and the arrangements. It’s also a different problem from retiree health insurance. This has to do with the principal value of bonds in GM held by “average Americans”, auto industry employees and others, which have dwindled to near zero.

There was a political calculation with the bankruptcy: the jobs of auto workers and suppliers, often of working age, had to be weighed against the welfare of retirees as well as political debts owed to autoworker and other unions. It’s typical “Democrat” stuff.

I’m not sure where Chrysler bondholders fall into this picture, but there may be similar problems.

It’s always dangerous for people to count on stocks or bonds in any one company or industry to pull them through retirement, no matter how dominant the company is at a particular time. It takes a long time to get to stable retirement, plenty of time for a lot to go wrong. Do not count too much on the value of your employer’s contributions in its equities or debts. Diversify. Use dollar-cost-averaging. Remember, with Enron, there were problems in that employees had not been permitted to transfer the securities to other vehicles. If this sounds like a Suze Orman smackdown, well, it is.

Of course, this story appears in one of the country’s main “conservative” rags, and it’s a pretty easy subject for attacking the underlying political constituencies and mechanics of the Democratic party.

No comments: