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March 08, 2006

Third Avenue Value Fund's Marty Whitman Establishes Small Position in GM Debt

I'm still long General Motors (GM/NYSE) common stock. And still under water with my holding.

And, yes, I'm still cautiously optimistic that my GM investment will achieve a significant return over the next several years.

But that's just me. I noticed a Reuters report late yesterday afternoon that Marty Whitman of the Third Avenue Value Fund has bought $2 million worth of GM debt:

Whitman, known for taking big stakes in companies others have given up on, said his small position in GM's 7 3/4 percent bonds due in 2036 was bought at about 50 cents on the dollar. Third Avenue is prepared to be a "big player" in GM's senior unsecured debt if more can be bought at 50 cents to 55 cents on the dollar, said Whitman, who made a bundle on Kmart debt after it emerged from bankruptcy protection in 2003.

"It seems odds-on that General Motors has to reorganize if it is to solve its problems with burdensome legacy costs -- pensions and health care," Whitman said in a letter to shareholders released on Monday. GM said on Tuesday it would cut its year-end 2006 pension liability by about $1.6 billion as it moves to shift employees to a defined contribution plan. GM's pension liability in December was $10.92 billion, according to its balance sheet.

Though not without risk, a Chapter 11 bankruptcy would probably be the easiest way for GM to solve its legacy and labor cost problems, Whitman said. GM would likely be able to unload a large part of its pension benefits on the U.S. government, and might be able to impose new work contracts on the United Auto Workers, he said. In a Chapter 11 proceeding, he said, because "GM is so big and important for the U.S. economy, heaven and high earth would be moved to preserve some equity for existing GM shareholders."

I may be crazy (and going against Whitman may certify me as insane), but I do not think GM is going to file bankruptcy. Yet only time will tell on that.

P.S. Aside from Whitman investing in GM debt, I found it interesting that the Third Avenue Value Fund's portfolio held nearly 27% cash.


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You don’t sound quite optimistic. Cheer up! There is another one like you in this worl. That’s my father.

andre: I don't quite follow your comment, as I'm not pessimistic on GM shares. But thanks for reading and give my best to your dad! ;-)

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