The GM (er, Motors Liquidation) Anomaly

A few months ago, I wrote a series of posts about anomalies in the pricing of Citigroup common and preferred stock (see here for the final installment). At the time, Citi’s common stock traded at prices that appeared to be way too high relative to the preferred stock (which has since converted into common).

Limits on short-selling appeared to be the best explanation for that anomaly.

In today’s New York Times, Floyd Norris notes that the same thing is happening to shares of Motors Liquidation Company (symbol MTLQQ). Motors Liquidation is what remains of the bankrupt General Motors. It has no ownership in the new, post-bankruptcy GM and, a (see correction below). As far as I can tell, everyone believes that ML’s common stock is worthless. Yet, as Norris shows in an accompanying chart, the stock has persistently traded above $0.50 per share:

(One nit: I don’t think the top chart should be labeled “General Motors stock price …”; it should be “Motors Liquidation stock price …”)

Norris argues, correctly I think, that the difficulty of shorting ML common stock is why it trades at a positive price. Potential sellers have been unable to drive the price down where it belongs (close to zero) and, indeed, are occasionally forced to buy back shares to close their positions. Thus, the stock trades around $0.60 per share, and the number of shorted shares has been declining.

As a contrast, Norris points to Delta Airlines which went through bankruptcy back in 2006-7. In that case, short sellers increased their positions over time, and the stock price worked its way down to zero.

Correction (11/3/09): An astute reader points out that I was wrong to say that Motors Liquidation has no ownership position in the new GM. According to the investor FAQs for Motors Liquidation:

As part of the consideration for the acquisition of substantially all of the assets of the old General Motors Corporation, 10% equity in the new GM, as well as warrants for an additional 15%, will be provided to Motors Liquidation Company which is still in Chapter 11. Distribution of this equity to unsecured bondholders and other claim holders will be determined through the court process and will not occur until a plan of reorganization is submitted, accepted and implemented. It is too early to tell how long this may take.

If I am interpreting that correctly, it means that Motors Liquidation is, in essence, the conduit by which unsecured bondholders and other claim holders will eventually receive their equity stake in the new GM.

Another useful item on the Motors Liquidation web site is this warning to investors in common stock:

Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the company’s secured and unsecured creditors are fully satisfied. In this case, management strongly believes all such claims will not be fully satisfied, leading to its conclusion that the common stock will have no value.