GM stock falls a third day as investors surrender

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Some General Motors Corp. shareholders may be clinging to hopes that there’s still some real value in the stock. But everything is working against that notion.

Speculators had pushed GM shares to nearly $4 last week, apparently believing that the automaker would pull off a miracle financial recovery.

This week, those hopes have evaporated with the Obama administration’s threat to force the company into bankruptcy. The stock plunged 25% on Monday, 28% on Tuesday and on Wednesday fell as low as $1.58 before rebounding to close at $1.93, off 1 cent for the session.

Still, the price has been lower: It briefly traded at $1.26 on March 6.

Are GM’s shares worth something north of zero? It’s possible, if the company can restructure outside of bankruptcy court. But current GM investors would stand to have their stake drastically diluted.

Consider: The deal now on the table for the company’s bondholders supposedly would give them 90% of the equity in the company if they agree to take a huge haircut on the value of their debt.

The bondholders might well get less than that -- but only because the United Auto Workers union also is expected to get an equity stake for its sacrifices.

Between the bondholders and the UAW, the dilution factor for current investors would surely be massive. That means their claim on any future earnings would be minimal.

Even so, if a deal is struck to keep GM out of bankruptcy, it’s possible that the stock could enjoy a short-term rally, fueled in part by ‘short sellers’ covering their bearish bets.

What if, instead, GM ends up in bankruptcy court? A total loss for current stockholders would be all but assured, says George Putnam, head of Boston-based New Generation Research, which has compiled years of research on corporate bankruptcies.

‘More than 90% of the time -- in fact, close to 99% of the time -- shareholders get virtually wiped out’ in bankruptcy, Putnam said.

‘In a few cases shareholders have gotten some out-of-the-money warrants, or maybe 1% or 2% of the equity’ in the restructured firm, he said.

But mostly, bankruptcy means the old stock’s value is zero, Putnam said.

‘If GM files for bankruptcy, I think that would happen here, too,’ he said.

Of course, long-time GM shareholders may well figure there’s no point in selling now. If the stock becomes worthless, they can write it off for tax purposes at that point. Until then, it’s just a lottery ticket with extremely low odds of a payoff.

-- Tom Petruno