GM stockholders 'wiped out'
While the dramatic jump might be good news for day traders, it’s likely meaningless for the longer-term investors who bought stock in the company they either worked for or believed would never fail.
That’s because stockholders in the “old GM” will fade in the rearview mirror as the “new GM” drives out of bankruptcy with the federal government, the United Auto Workers and bondholders behind the wheel.
If they’re lucky, current shareholders might get through the bankruptcy with a 1 percent stake in the “new GM,” according to financial analysts. Such a small ownership stake would never allow existing shareholders to recover their losses, the analysts say.
John Berkley, a former GM worker and now a financial adviser with SII Investments, said he knows of plenty of people in Janesville—primarily GM employees—who held onto the stock for far too long.
“As far as that stock goes, they’re basically wiped out,” Berkley said.
That’s because common shareholders are typically far down the list of creditors considered in bankruptcy cases.
But GM’s is not a typical bankruptcy case, Berkley noted, adding that 100 years of U.S. bankruptcy rules are being rewritten for the automaker.
“Trying to predict what will happen with the ‘old GM,’ the ‘new GM’ is pretty difficult,” he said. “In this case, you’ve got the federal government with pretty deep pockets saying we’ll stand behind you, not let you go under.”
Since the bankruptcy declaration, GM’s shares were suspended and then delisted by the New York Stock Exchange. They now trade on the Over-The-Counter market under the symbol “GMGMQ.”
The ‘Q’ designates a company in bankruptcy.
The stock closed in normal-hours trading Thursday at $1.29, down nearly 19 percent from its Wednesday close.
Why would anyone buy what’s widely considered to be worthless GM stock at $1.29?
Because someone else might pay $1.50 for it today.
That’s the speculative nature of equity markets.
They are the day traders and short-sellers who might be buying and selling the stock in an effort to boost the price until the stock is canceled by the emergence of the “new GM.” Day traders buy and sell quickly in hopes of turning a profit. Short-sellers borrow stock and sell it, with the hope that they can later buy it back at a lower price, return it to the lender and pocket the difference.
“It’s crazy, very strange,” Berkley said. “If you’re not a complete expert in this, you have no business messing around with it.”
The automaker issued the following statement at the close of trading Wednesday, when the stock hit $1.59:
“While GM does not control the market or its stock price, GM management strongly believes that any recovery for the common stockholders in the chapter 11 bankruptcy process is highly unlikely, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the secured and unsecured creditors are fully satisfied.”
That means thousands of local investors, including GM workers, are holding worthless stock certificates.
“Unfortunately, the GM stock was such an emotional thing,” Berkley said. “People let their personal lives and attachment to the company keep them in way too long.”
Berkley said he had client’s buying GM stock when it traded at $15 per share.
“They figured it couldn’t go any lower, so why not?” he said.
But go lower it did.
Historical charts show GM’s share price at $36.70 two years ago. Between then and now, the chart is a steep cliff from a fairly steady stock that hit a high of $93.63 on April 28, 2000.
“People should have seen this coming from a company that’s basically cannibalized itself for the last years,” Berkley said. “You should have seen the trend, and trends are our friends.”
Berkley said some people are selling GM stock to lock in their losses for tax-deduction purposes.
But the others, he said, are just gambling.