[player24]

Q: Why buy a preferred stock with a lower yield and higher dollar price than bonds of the same issuer which have a comparable maturity?

A: In most cases, you should demand much greater compensation for owning the preferred stock of a high yied company. Your investment in preferred will recover much less than the bonds in a bankruptcy.

But: This case is somewhat unusual. The security being referenced has a bond indenture (contractual coupon payment) and is pari passu with GM senior unsecured debt.

However: This security is not "true" preferred stock. If it was, it would be yielding much more than the debt.

And: The stock looks remarkably expensive versus the debt. The best GM trade is to short the stock and buy the bonds in an appropriate ratio (currently about 2.5:1). You will gain under nearly any scenario - the one exception being if the stock rallies by more than 50% in the next year. GM does not deserve a $15 billion equity market capitalization.

Finally: GM is not too big to fail. A bankruptcy won't put the company out of business (probably). Most large corporate bankruptcies simply transfer the ownership of the company - debt holders become equity holders...and equity holders become dust. Preferred can recover more than common equity, but the difference is often small. The US economy is large and diverse - don't expect Congress to act to protect GM creditors and equity holders.