Debt-for-equity-swap Of The Week: General Motors

RR has sent me a link to a Reuters article:

General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) is pushing some bondholders to swap their debt for equity, as Chief Executive Rick Wagoner tries to keep the automaker out of a Chapter 11 bankruptcy that would likely cost him his job, The Wall Street Journal said late Friday, citing people familiar with the plan...

Last week, the U.S. Congress rejected pleas from GM, Ford Motor Co and Chrysler for $25 billion of loans, and asked the automakers to submit detailed turnaround plans...

A debt swap could leave many unsecured debtholders with big losses. Many GM bonds have been trading at small fractions of their face values, suggesting that many investors are uncertain about the automaker's ability to pay its debts.

The key to all this is in the last two paragraphs:

"Many GM bonds have been trading at small fractions of their face values...". Modigliani & Miller won a Nobel Prize for pointing out that the total 'enterprise value' of a company is usually equal to the value of all its shares and its bonds. Corporate finance wizards claim that companies can boost their own value in the good times by replacing shares with bonds (in other words, using borrowings to fund a share buy back), if this is true, then in the bad times, the reverse must also apply (in other words, doing a debt-for-equity-swap). And seeing as many GM bond holders have already lost a lot of their money, it won't hurt them for those bonds to be exchanged for shares of an equivalent market value, or, from a negotiating point of view, shares to a slightly higher market value.

Further, why should Congress use taxpayers' money to make loans to (i.e. buy bonds issued by) companies if that money would just be used to repay existing bonds, i.e. boost their market value? That wouldn't produce a single automobile or save a single job.