Why GM Is Not Zero

by Manshu on May 29, 2009

in Investments

A few days ago, I wrote about the GM bankruptcy and how the stock was worth nothing. Today the stock is still trading at 75 cents and I found out something very interesting about this.

From Barrons:

The mystery is that it isn’t trading at zero. That’s what the common is worth. Goosegg. Nadda. Zip. Zilch. Nothing.

So why’s it holding above 78 cents?

It’s still in indexes. It’s still in the S&P 500. And will be so until Standard & Poor’s reacts to the bankruptcy filing and replaces the stock with that of a viable company.

And until then, index funds have to own the stock.

Some of the biggest remaining shareholders are State Street, Vanguard and Barclays. Basically, the indexers.

So even if the Index funds don’t want to own it because the stock is worthless, they have no other option but to own it because it is part of the index they track. Very interesting.

{ 5 comments… read them below or add one }

Will Luxing May 29, 2009 at 9:47 pm

That is an extremely interesting find. I myself was wondering why the GM stock was still being valued at around 70-80 cents per share. That’s a good fact to know, seeing as some less wary, inexperienced investors might assume the company had not in fact gone bankrupt, and maybe (just maybe) they could have made the terrible mistake of trying to cash in on a so called “blue chip penny stock.”

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Manshu May 30, 2009 at 1:43 pm

Yeah Will, I found it curious too. I wonder if they should change the rules to allow them to sell the stock in such a situation. Because now the stock won’t be worth anythign when they try to sell. No one would want to buy it.

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Matt SF May 30, 2009 at 2:07 pm

I think a lot of people have been asking this question, but this helps explain some of the confusion. I would imagine being dropped from the Dow Jones index funds/ETFs and the S&P 500 index funds/ETFs will be the final coffin nail. Plus, GM is likely in several other ETFs as well.

But I’m curious, is there any way the common equity GM stock can resurrect itself? I wrote up a post several months ago about GM’s Preferred stock (GPM) that has been popular lately considering the bankruptcy fallout.

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Manshu May 30, 2009 at 3:56 pm

@Matt,

I am not aware of a way that the equity can resurrect itself now. but someone is still buying Call options so may be there is something that the market knows that we don’t.

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Joe June 4, 2009 at 1:26 pm

How will the preferred stock – hgm( senior notes) be treated in
Bankruptcy? Does the normal laws of bankruptcy remain
with the governments intervention? What are the assets in
China worth? How can the union get new preferred stock that
pays 9% and the bondholders ($28Billion )get nothing?

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