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Perian · 07-02-2009, 10:55 AM

GM Common Stock Still Trading: NY Times Explains Possible Reason
Link: http://www.nytimes.com/2009/06/28/yo...20stock&st=cse

Why Investors Bet on Bankrupt Companies

By MARK HULBERT - The New York Times - Published: June 27, 2009

SINCE General Motors declared bankruptcy early this month, its common stock has traded for as much as $1.59 a share; it closed on Friday at $1.16. Those aren’t great prices, unless you consider that the company has warned investors that “even under the most optimistic of scenarios,” those shares are likely to be worthless.

Why would anyone buy shares of a bankrupt company? It would be easy to conclude that investors are simply being irrational — and, undoubtedly, some of them are. But several studies of past bankruptcies raise the possibility that the market is being less irrational than it looks.

Every company, of course, has a predetermined pecking order — known technically as “absolute priority” — that specifies which creditors will be paid before others in a bankruptcy proceeding. Senior creditors, like banks, are typically at the top of the list; bondholders are lower on the ranking, and holders of preferred stock lower still. Owners of common stock are at the very bottom; they are to be paid only after everyone ranked higher has been paid first.

That’s the theory. And, presumably, if it were followed in the case of G.M., shareholders would almost certainly get nothing. G.M. bonds, which are higher in absolute priority than the common stock, have been trading for around 10 cents on the dollar. If holders of such bonds aren’t betting that they will be made whole, what makes owners of G.M.’s stock think they’ll get anything?

One possible answer is that bankruptcy courts don’t always follow the absolute priority ranking, according to Adam V. Reed, a finance professor at the University of North Carolina at Chapel Hill. In fact, Professor Reed said in an interview, some studies have found that such departures were common in the past. So he concludes that it’s not out of the question that holders of G.M. common stock will receive some consideration from the bankruptcy court.

Article continues at link.

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Current GM stock quote here: http://finance.yahoo.com/q?s=GMGMQ.PK

07-02-2009, 10:55 AM	#4 (permalink)
Perian News Contributor Join Date: Nov 2004 Location: New York Drives: 2008 Saab 9-5 Sedan Posts: 4,627	Re: "Old GM" Stock Still Being Traded - Has No Value GM Common Stock Still Trading: NY Times Explains Possible Reason Link: http://www.nytimes.com/2009/06/28/yo...20stock&st=cse Why Investors Bet on Bankrupt Companies By MARK HULBERT - The New York Times - Published: June 27, 2009 SINCE General Motors declared bankruptcy early this month, its common stock has traded for as much as $1.59 a share; it closed on Friday at $1.16. Those aren’t great prices, unless you consider that the company has warned investors that “even under the most optimistic of scenarios,” those shares are likely to be worthless. Why would anyone buy shares of a bankrupt company? It would be easy to conclude that investors are simply being irrational — and, undoubtedly, some of them are. But several studies of past bankruptcies raise the possibility that the market is being less irrational than it looks. Every company, of course, has a predetermined pecking order — known technically as “absolute priority” — that specifies which creditors will be paid before others in a bankruptcy proceeding. Senior creditors, like banks, are typically at the top of the list; bondholders are lower on the ranking, and holders of preferred stock lower still. Owners of common stock are at the very bottom; they are to be paid only after everyone ranked higher has been paid first. That’s the theory. And, presumably, if it were followed in the case of G.M., shareholders would almost certainly get nothing. G.M. bonds, which are higher in absolute priority than the common stock, have been trading for around 10 cents on the dollar. If holders of such bonds aren’t betting that they will be made whole, what makes owners of G.M.’s stock think they’ll get anything? One possible answer is that bankruptcy courts don’t always follow the absolute priority ranking, according to Adam V. Reed, a finance professor at the University of North Carolina at Chapel Hill. In fact, Professor Reed said in an interview, some studies have found that such departures were common in the past. So he concludes that it’s not out of the question that holders of G.M. common stock will receive some consideration from the bankruptcy court. Article continues at link. ----------------------------------------------------------------------------------------- Current GM stock quote here: http://finance.yahoo.com/q?s=GMGMQ.PK