GM bankruptcy rumors revive, tripping the stock

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Rumors that General Motors Corp. will file for bankruptcy protection have heated up today, dragging the stock back below $2.

Bloomberg News reported that GM was ‘speeding up preparations for a possible bankruptcy filing even as directors scout for deeper savings this week to avoid that outcome, people familiar with the plans said.’

Reuters also has weighed in, saying GM was in ‘intense and earnest’ preparations for a possible bankruptcy filing, quoting ‘a source familiar with the company’s plans.’

The stock was down 30 cents, or 13%, to $1.97 at about 11:15 a.m. PDT, after gaining 18% over the three previous sessions.

It is, of course, in GM’s interest to keep talking about bankruptcy, if the game is to scare the United Auto Workers and GM bondholders into deep concessions to keep the company afloat.

Any deal with the UAW and the bondholders is certain to result in the issuance of massive amounts of new equity in return for their concessions, heavily diluting current common shareholders.

Kent Kresa, GM’s interim chairman, told my colleague Ken Bensinger in an interview last week that GM hoped to eliminate at least $28 billion of debt and union obligations through equity swaps. Such a move would be tantamount to almost completely wiping out current shareholders, Kresa said.

Speculators in the stock may still be betting that a deal with the UAW and the bondholders would leave shareholders with something. In a bankruptcy filing, however, a wipeout would be virtually guaranteed.

-- Tom Petruno