Ever since I bought GM put options just a few days before the bankruptcy announcement, I’ve made it my personal mission to educate the public regarding what happens to common stockholders in a chapter 11 bankruptcy.
I’m going to say it here again, when a company “re-emerges” from bankruptcy, your old shares are gone. New shares are issued, completely irrelevant to the old shares.
With just a few more days before my July puts expire, I’m still clinging onto the hopes that GMGMQ hits $0, or anywhere near nothing. In the mean time, I’m combing the internet for information regarding the bankruptcy process. http://www.twitter.com/theticker has been an invaluable resource, providing a play-by-play of the GM bankruptcy court proceedings.
Finally, a good reason to use Twitter.
The corporate laws of the United States is so complex such that few understand what happens when a company goes chapter 11. Working in a brokerage firm, when a company announces its bankruptcy, we notice that there are always buyers, hoping to get a piece of the new company by buying the old company’s shares. Do NOT do this! The old shares will be canceled, and you will NOT get new shares in return. http://www.sec.gov/investor/pubs/bankrupt.htm
In this case of GM, I suppose Obama is partly to blame. Despite GM being kicked off the Dow and delisted from NYSE, you constantly hear in the media that Obama states: “through sacrifices, GM will be saved“. What investors need to understand is, GM as a brand will be saved, GM as an entity will re-emerge as a privately held comporation (owned by taxpayers, ironic, huh?), and new GM shares will be issued. Old-GM, which is in billions of debt, will have its assets sold to debt holders, employee retirement funds, unpaid bills, etc. Common stock holders usually NEVER get anything. In most cases, the bankruptcy court will simply declare the stock worthless.
If you do own GM, now might be a good time to sell, which the less informed still cling onto the hope that they get something of new GM. These people are keeping the stock at inflated prices. Now that GM is off the Dow and SP500, many institutional investors will be forced to sell their GM assets, so this price might be gone in days.
Finally, a quick disclaimers. I own puts of GM for July. So I want GM to go to $0. However I am also stating this based on experience. I made a bad bet last year, and lost everything when Lehman went bankrupt.
