Vulture culture has role in marketplace

As Simon Hildrey pointed out last week in his cover story on pension fund deficits (See Taking the weight), for every car sold by General Motors in America, $1,600 (922) of the purchase price goes to funding the post-employment benefits of former GM workers. That is a lot of Pontiacs, Buicks, Chevrolets and even Hummers on which to rely.

But General Motors comes up again this week, in Sunil Jagtiani’s piece on “disaster investing” (See Rich pickings) – as a firm so hog-tied by its commitments that it could become one of the biggest corporate bankruptcies of all time. “A crescendo of caterwauling will accompany its slide into turmoil,” he writes – not least from the unfortunate ex-employees from whom GM would probably be “protected” under Chapter 11 of the American bankruptcy law, which seems to favour companies over their creditors.

However, insolvency on GM’s part would present an opportunity for the “vulture” investors who thrive on distressed debt. This is a much bigger sector in America than in Europe, perhaps because governments here tend to stick to the old-fashioned view that a bankrupt company should be broken up and its assets used to repay those it owes.

The Americans play a longer game, potentially with more winners at the end, as firms are restructured and teased into shape under the protective aegis of Chapter 11.

Vultures, being neither so majestic nor so skilled in hunting as their cousins the eagles, tend to be viewed with distrust and distaste. Indeed, this is true of most carrion feeders, vilified in popular culture in everything from advertisements to Disney films. But while the hyenas in the Lion King may not have been welcome in the winsomely inclusive “circle of life”, there is no doubt such creatures provide a service. Even maggots have been used in the cleaning of wounds, as they eat only dead tissue, leaving what is healthy to recover.

The financial markets have evolved to the point at which it is possible for investors to make money out of almost any corporate activity. If the company whose dodgy bonds they bought goes into default, they can recoup their losses by buying up more bonds and coming up with a restructuring plan – or at least by tagging along with someone who can. This is worth bearing in mind for all those GM employees and alumni whose pensions might be about to vanish in a puff of bankruptcy protection.