GM’s North American Operations will go bankrupt. This statement will not come as a “revelation” to many TTAC readers. Of course, there are still some who will continue to claim that this website is “crying wolf” regarding The General's descent into ignominy. But to challenge any outcome other than a Chapter 11 filing borders on lunacy. As its centennial mark approaches, the vertex of the perfect storm now engulfs The General. Like it or not, believe it nor not, it's a tempest that will engulf the ship and send it to a rocky bottom.
The storm has three main components. First, higher costs for diesel and gasoline.
Not to belabor the obvious, but higher fuel prices have dramatically lowered demand for big rigs. Until recent "End of Days," GM’s domestic production was geared 60 percent (plus) towards fuel-hungry trucks and SUVs. GM’s suits only built cars as a way to satisfy requirement for corporate average fleet economy (a.k.a. CAFE) regulations, and to keep a full line-up of choices amongst six of its seven brands.
GM doesn’t make money on cars. It hasn’t done so for well over a decade. The domestic automaker is the high-cost producer in a competitive car environment, where its passenger cars are mostly inferior to the offerings of Toyondissan. Even when a particular GM car is in demand, it’s still a losing proposition– when you you consider (as you must) the aggregate profit and loss across all of GM’s automotive offerings. Now, without truck sales to bolster gross contribution, the money just drains away.
Second, the finance crisis continues full tilt.
The current “downturn” is mostly a result of the debacle in the housing market (which resulted from a finance system flush with excess liquidity just a few years ago). Lenders find their balance sheets under pressure and contracting. This obviates the possibility of making credit available at reasonable terms, and then only to the least risky of borrowers.
That’s a huge downer for the car market. Without lenders willing to finance a new car to a 650 FICO score borrower, dealers might as well kiss the metal goodnight every evening– since they’ll see it again in the morning. And the next. And the next.
Third, the general economy stinks no matter what the President and the Fed’s Bernanke say.
Americans feel mostly poorer (surprise – they are!) and are acting accordingly. That means big time cash conservation. Anyone who can or needs to defer buying (heck, you can’t lease a domestic car anymore!) will do just that. They’ll sit on the sidelines. The sales numbers for all manufacturers (except Honda) prove the point; total '08 auto industry turnover is now expected to come in at around 14m units. That’s at least two million units under trend. Or think of it this way: at $28k for the average selling price of a new car, that’s $56b in lost revenues.
And there you have it. All three Motown automakers relied on trucks to cover their asses on cars. The plan worked great as long as they shared the big rig market to themselves, gas was cheap and anyone who had a job and half-decent credit could get financing. That’s all gone away and, well, we know where The Big 2.8 stand today: teetering on the abyss of bankruptcy. With GM closest to the edge. (Chrysler’s a black hole of info, but let’s suspend reality and believe Nardelli’s telling the truth.)
All the signs are there. At $10/share, GM’s stock price yields a total market value of less than $6b for a $160B revenue company. The credit agencies all mark the corporate credit of the company just a few notches above default, and that’s a gift. The bond market trades GM’s debt securities at close to recovery values.
The company’s financial statements chart the changes; GM’s just a breath away from insolvency. As of June 30th, GM's working capital stands at a deficit of $20b. Total shareholder equity is a staggering $56b in the hole. GM’s net liquidity (cash less debt) remains underwater at $15b. How can GM escape?
It can’t. There is no light at the end of the tunnel. There’s no amount of restructuring that can save this company. GM will do what automotive suppliers before it-– Delphi, Tower, Dana– have done. File bankruptcy for its North American operations. End the misery, pare the company’s balance sheet, shed brands, complete the transformation.
The new round of employee pricing marks the last gasp of life prior to a filing. Yes, this time GM's lowered its dealer inventory to 750k units (as of July 31st). That's 300k units lower than the last time General Motors ran its "I'm an Employee, You're an Employee" sale, in June, 2005. But there's no mistaking the urgency involved. The General must get its dealers to order new vehicles at a rapid pace. That's the only way they can keep the factories humming and life-sustaining cash flow coming… for a few more months.
In fact, Captain Rick Wagoner's recent "We're OK through to the end of 2009" pronouncement is more of a timeline for C11 than a RenCen renaissance. Maybe the perfect storm will pass by then? If it doesn’t, it’s lights out. Sooner, rather than later.
He mentions TTAC….
http://www.lewrockwell.com/greenhut/greenhut56.html
I’ll honestly be surprised to see GM survive much beyond their 100th anniversary next month, before going Ch. 11.
What concerns me is that the judge will take one (long, glaring) look at the (cooked) books and will say – um, NO. Chapter 7, for you…
no surprise, they did it on purpose. no one could have been this stupid consistently.
There comes a time when a ship lists dangerously too far to one side, and nothing can be done at the controls to right it again. We are there.
Ken, let me see if I understand you correctly. You said;
The company’s financial statements chart the changes; GM’s just a breath away from insolvency. As of June 30th, GM’s working capital stands at a deficit of $20b. Total shareholder equity is a staggering $56b in the hole. GM’s net liquidity (cash less debt) remains underwater at $15b. How can GM escape?
I thought that when both sides of the ledgers were added up that GM was in the black to the tune of 15 to 20 billion, but you seem to be saying that they are in the RED to 15 billion overall! (I haven’t a clue about financial stuff). Is this correct? If so then GM is already dead and nobody has phoned the undertaker yet.
I agree with Menno.
If we look at the books now GM have about $20 billion left in their cash hoard.
But GM have:
Loans which they have to pay back at a crippling interest rate.
Loads of staff to buy out
A deteriorating credit rating
A pension hole in Canada of $5 billion
A pension hole at Delphi of $8 billion (but the Feds are tapping them for “only” $1.5 billion)
Not to mention that they still have many quarter with which to post losses and “one time charges”.
AND they need at least $12 billion with which to keep day-to-day operations running.
So, now, $20 billion doesn’t sound like much, does it?
And this figure will dwindle over the coming months, which will only increase the chances of the presiding Judge saying “It’s time to end this ‘turnaround’….”
The economics ramifications will be horrendous and the world will feel it. Don’t think only GM NA will go chapter 7, GM will go chapter 7 GLOBALLY. Delphi filed when they did so they could spin off other operations whilst they could. Now, new laws prevent this from happening (apparently). So, say goodbye to Vauxhall, Opel and Holden, too. They’ll all be sold off or liquidated to pay back creditors.
So many people out of work, so much money taken from economies who needed it and very little chance of getting a new job in this economic climate.
Still at least Rick Wagoner will have a pension when he retires, so it’s not all bad……..(!)
While the assessment of the financial position is deservedly dire, some form of bailout strikes me as being more likely.
It wouldn’t quite be like the Chrysler bailout of the Iacocca era, but it would come close. Like then, it would entail federal loan guaranties on new debt issued by the commercial banks.
But it would probably also involve new equity, provided by the investment banks. The twist is that lurking behind this new capital would be money from abroad, with holders of shiny trade deficit US dollars looking to cash in on their bets before the dollar rebounds, which it is likely to do. This wouldn’t be widely advertised, but it will be the foreigners who ultimately fund most of it.
If GM was properly managed and if the leadership took a fresh approach of what could be done with the company to make it work (read: making it smaller but more efficient while improving a couple of brands, while worrying about market share only after they have first put their house in order), then it could be quite a powerhouse.
A new team could do all that; the current one can’t. The potential to recover their old debts and to make new profits would strongly motivate someone to get into this deal if they can control the management.
Here’s an added twist — while Wagoner and many others will fall, I’ll bet that Lutz keeps his job.
I don’t think they’ll have to go Chapter 7. What judge wants to be the guy who killed GM? It’s too important to the US economy. They’ll be allowed to go 11.
But, is there any plan to emerge from 11?
Pch,
Not wishing to argue – but rather to discuss- Do you think bailouts are enough w/o Ch11? I’m thinking bailouts are pretty much a given – no matter who wins in November, but it might work better if GM filed Ch 11 before asking for the money.
For one thing, a BK GM has more need for the bailout, at least from the POV of the average taxpayer.
A second thing is if they don’t file 11, can they get rid of some brands and dealers? And if they can’t, can they recover, no matter how big the loan guarantees are? Doesn’t GM fundamentally have to restructure to survive?
I know that generally people don’t care (mostly because they’re in survival mode), but that’s going to leave one hell of a crater sometime in the next 16 months.
It’s going to be rough winding down a war while isolating a major industrial melt down.
GM is even putting employee pricing on some 2009 models. GM has absolutely made their product seem like throw away items, with the steep discounts, huge rebates, financing for everyone and employee pricing on cars that have not arrived at the dealership. Growing up GM was one of the entities one always thought would be around, but the days are now numbered. What a colossal shame.
Dynamic: that is where I think the govt. bailout will come in.
Frankly, doing a non-bk bailout of GM will be one of two (or both things): 1) outrageously expensive or 2) totally futile. The only solution left is to have GM file bankruptcy, and then bail it out with some loan guarantees conditioned on a large number of things, like Red Ink Ricks head on a silver plate, breaking the UAW, etc.
That’s the only way the company is coming out of it. It’s in too deep now, they have been relying on easy credit to sell their low end cars to poor people and leasing to sell expensive cars to richer people. With those avenues closing, their cash flow and market share is going head off the cliff in a big way. Bankruptcy will take it to the bottom of the Marianas trench. Even with a chapter 11 they don’t have the cash or the assets to weather that storm, much less the hard and expensive path of getting some quality product and slowly grinding their market share back up to a profitable level.
You see, GM is also in a really bad position for bankruptcy because it has such a vast amount of assets, but lacks the cash flow to service their debt. I don’t know much about C11, but its a general principle that they will have to pay the unsecured creditors at least as much as they would have gotten if GM had sold everything and given it to creditors. Which means not much debt is really going to disappear; they will get a friendly, low interest way of paying it back.
So its not like GM will emerge from BK a new lean and mean car making machine. They’ll still be burdened with debt. The only advantage I can see in a C11 for them is the ability to shed dealers, brands, and labor contracts to shed the institutional inflexibility they are currently burdened with.
So they will need loans, big fat loans, to make it out of C11. And, of course, a managerial Night of the Long Knives.
Is there an option on both horses? I see chapter 11 being the solution to start. Then, while the judicial branch does it’s thing, the other branches will jump in with some more government interference to help them emerge.
I would rather hope for chapter 7, which is more than deserved, at least for the first player to fail. Otherwise, it’s back to the airlines scenario where we will also have to bankrupt or bail out Ford. The real question is Chrysler. Will the voters be for bailing out a private equity firm?
Not wishing to argue – but rather to discuss- Do you think bailouts are enough w/o Ch11?
A bailout would almost surely include loan restructuring that would defer and extend existing debt, so some of the benefits of Chapter 11 would be available because the cash needs would be reduced.
If the management team was smart, they would prioritize rebuilding a brand or two (Chevy, Cadillac) while starving the rest so that their dealer obligations don’t cost them much. The dealers would hate it, but there isn’t much that they could do.
I haven’t done all the research, but I believe that the lurking bomb for the UAW is that they negotiated themselves into a hole with the VEBA plan. I believe that GM may have outsmarted them with this one; their convertible debt position is really closer to equity than debt, which means they are lower down on the priority list. They may not see much of that money unless there is a bona fide turnaround.
The real losers will be the existing equity holders. The new investors would probably get some sort of preferred stock that pushes the existing stockholders to the very bottom of the totem pole.
Admittedly, bankruptcy would allow for a cleaner break, but the federal government and the major creditors won’t want that because of the hits to everyone involved. The bailout will serve Washington and New York more than it would Detroit. This isn’t about the blue collar stiffs, but the white collar suits.
GM’s been kept alive only because it manages to pay its bills and debt service. That’s due to cash flow resulting from GM disposing approx $20B in assets over the last several years. That would include its stakes in Fuji Heavy, Isuzu, GMAC, and Allison. On an income basis, GM’s lost a ton but not all of those losses are immediate cash impact – such as the writedown of deferred taxes or charges for restructuring, Delphi, etc. But eventually some of those charges do become cash calls. If GM can’t generate cash from operations (or sell enough assets), the gig is up. The problem ahead is that GM will have to fund the VEBA deal, will have to rescue Delphi, and on it goes…but the company can’t really borrow to do so. Hence, the problems of the finance statements do catch up to the cash…
Chapter 7 ain’t happening; GM for all it’s faults has $160 billion in revenue; it’s creditors, pensioners, suppliers and dealers all know Ch 7 means they get close to nothing at the end; while in Ch 11 they will get 60-70 cents on the dollar, not great but better that 10 cents which is what Ch 7 gets them. BTW, a judge does not force someone into C7 or BR for that matter; only the creditors can do that. Given the amount of credit owned by institutional investors with a stake in GM’s survival (think state pension funds, union pension funds etc.) Add on the political implications, I’d say it is extremely unlikely
My God, Katie, I didn’t know the rest of the GM world operations would have to go Ch. 7 if GMNA do.
So the incompetence and arrogance of a few elite executives in Detroit not only get to punish a relatively innocent workforce in North America, but also will be a body-slam to tens of thousands of workers in the UK, Germany, Belgium, South Korea, Australia, in short everwhere GM are.
And GM are (technically) still the biggest auto manufacturer in the world.
This is going to leave a large crater.
The problem ahead is that GM will have to fund the VEBA deal
We’ll see what happens, but I believe that you will find that GM will effectively default on the VEBA terms. The UAW will have no choice but to renegotiate it, because they will discover that the alternative is to get zero.
A lot of these can be worked out by an aggressive turnaround team. Even Wagoner would be capable of nailing the UAW on the VEBA, as it is his people who put that plan together. He makes a lot of mistakes, but he’s not entirely stupid.
Scott, in effect, going Ch. 11 is only a prelude to some more TTAC Death Watches, because we all know that once GM declares Ch. 11, some 40-50% of intended buyers, won’t even consider it.
It’s one thing to fly on a bankrupt airline. If they go bust (Ch. 7), you are only out some ticket money, some inconvenience and some time.
Many buyers of $28,000 (on average) new US vehicles are obviously going to be VERY gun-shy about buying a long-term “investment” (i.e. depreciation producer) from a bankrupt auto company, no doubt about it in my mind.
So, the bad PR of a Chapter 11, and pretty much immediate loss of yet ANOTHER 40-50% of their market share in NA would doom GM, no doubt in my mind.
May as well save us all the mental grief and simply go Ch. 7, and get the pain over with so we can all pick up pieces and start afresh.
Scott,
Of course you are correct that chapter 7 will not happen, but it would be better for the rest of the world if it did. Even folks in New York would really be better off because the resulting structural changes would help the stock market in the long run. The existing rules on Chapter 11 are totally unfair to equity holders.
Only one automobile company ever, has survived Chapter 11 bankruptcy, and that was Studebaker in 1933, during the midst of the great depression.
Brand new management (and the suicide of the man responsible for the debacle, and I suspect, the resulting sympathy) brought the company through so it could build cars for 33 more years. But, it never was nearly the size, never had the influence or money or sufficient funding available to survive long-term. It only survived past 1954 because management suckered Packard into buying it so Studebaker could bleed the host dry.
Contrast this with literally thousands of US based automobile companies which have died or quit building cars from 1896 through about 1982. I think Checker was the last car company of anything resembling “mass production” which quit building cars in the US, in 1982 (though last I knew, Checker was still a supplier of parts to GM).
Menno,
I would actually shop GM SUV’s if they went into a chapter 11 fire sale. The odds that you would not be able to get parts would be almost nil.
As soon as things evened out, you could likely sell it for a profit.
Did anyone see the Charlie Rose interview of Mr. Wagoner on Monday night?
Mr. Wagoner sounded very confident that everything was going to work out. I almost went out to buy GM stock.
Pch
Thanks for your response. I see your point, it’s more about the suits than the guys on the factory floor. I still think they need to go 11 as well. Perhaps the bankers will get strings attached to the loan guarantees – restructuring the loans as you’ve said, while other less fortunate groups (UAW) will bear the full brunt of Chapter 11.
toxicroach
I agree, Ch 11 should be in conjunction with loan guarantees, not one or the other. If they can’t renegotiate the wage/benefits, change work rules, and dump some brands, I don’t see how they’ll survive. There’s no point in applying guaranteed loan money to the current business model.
Maybe we should start some kind of national program to mark former auto executives with a stigma like equating an auto executive as being dumb as sand.
For example if you shot yourself while cleaning your gun we could all say – “Hey – you just did a GM”
Landcrusher:
“Otherwise, it’s back to the airlines scenario where we will also have to bankrupt or bail out Ford. The real question is Chrysler. Will the voters be for bailing out a private equity firm?”
A more interesting question is will the voters be for bailing out a company that is for all intents and purposes under the control of one family? That is Ford’s dillemma. They can not be purchased by anyone, including Cap’n Kirk and they have debt equivalent to GM (not in size maybe but in the OMG! factor). If they can’t earn a profit on small cars, assuming things remain the same vis-a-vie fuel costs they won’t make it on their own. And no company in their right mind will buy them if the Ford family insists on keeping a controlling interest. If they go C11 the stock becomes worthless – unless, there is some special provision for Ford family preferred shares. Does anyone know how that would work?
Rick Wagoner told Charlie Rose August 18th GM’s future is “very bright”.
Wagoner and his cronies will talk the talk until they run GM out of money and the wheels come off the gravy train.
Good points. But the one comment that really stuck prolly went under the radar. GM and Ford depended on making money on trucks and left the bulk of the small car business to the Asians. As long as the economy held up , life was grand. U.S. did big trucks well and the Asians did small cars well.
Trouble hits both sides when they tried to do what the other was known for.
Japs can’t do light duty trucks. Period. I don’t care what YOU own or drive, if you DIY or live outdoors, or tow big things it ain’t in a Jap truck. Sorry Margaret.
And the U.S. can’t do small cars well. We’re learning to get small in a hurry, but the Japs still can’t do trucks. U.S. can’t live on current truck sales.
Gas and diesel are going down but :
Enough?
For how long?
I dunno…
So. Someone else here reads LewRockwell.com. Glad to hear it.
The current “downturn” is mostly a result of the debacle in the housing market (which resulted from a finance system flush with excess liquidity just a few years ago). Lenders find their balance sheets under pressure and contracting. This obviates the possibility of making credit available at reasonable terms, and then only to the least risky of borrowers.
Emphasis on the word ‘current’. Yes housing started the fall, but the whole system is hollow. Collateralized loan obligations, credit default swaps, etc. Hedge funds doing who knows what with how many billions at play, all leveraged out the ass. On and on. I liken it to a town of shanties each leaning against those adjacent to it. When one collapses, and more than one already has, many of the others increasingly tilt thus removing support from their dependent neighbors. It wasn’t so many months ago that the experts were telling us this wasn’t going to spread beyond the subprime mortgage sector. There are lots more banks of all sizes at risk. As for the health of the USD, I’m doubtful. Let’s see what happens as the bad news continues and becomes more intense. Guaranteeing GM loans will do exactly what? It won’t make the Cobalt or its successor competitive with the Civic, nor the Aveo with the Fit, etc. Buying time for Ford ‘might’ help, but GM? I don’t think so.
Here is another prediction: Most of the “bad news” will end after Christmas. Once the politicians stop trying to confirm that they feel our pain, and the press gets all of the mileage they can get with the sad xmas stories, the truth will come out and show that the biggest problem on main street is government redtape. The illness is spreading among people who have found ways to skim the fat without really adding much value. Those who really provide value are still doing so, and will find the disease is not fatal for them.
Too bad we won’t likely see either of the candidates start using the motto, “Let my people go!”
dew542512 :
Maybe we should start some kind of national program to mark former auto executives with a stigma like equating an auto executive as being dumb as sand.
For example if you shot yourself while cleaning your gun we could all say – “Hey – you just did a GM”
It’s not funny!
But I laughed; kind of hard, too. And of course, I agree.
Great points all around, but it boggles the mind believing a bailout/loan guarantee will “rescue” GM. Yes, they have an enormous cash burn crisis, but that focuses on only that side of the equation. The bigger issue is THEY DON’T SELL ENOUGH CARS AND TRUCKS TO MAKE A PROFIT. Their products are simply not competitive in the eyes of a great number of consumers.
By way of comparison, if the banks had not played it fast and loose with credit over the last 7 years, we wouldn’t be staring down anywhere near the mortgage and credit disaster we have now. We would’ve seen slower growth, but it would have been a smarter strategy.
Same thing with GM. Had they planned a bigger portfolio of competitive products, they wouldn’t be in the mess they’re in. The plan to bail out a failed company is an exercise in futility. It’s just delaying the inevitable. Seriously, what possible plan, what product mix would signal to the Feds and most importantly to consumers that GM makes what people want?
GM going tits up will have a terrible effect on the economy. The only thing worse would be putting it on financial life support and sending even more good money chasing after bad.
This is like a long movie that just won’t end. How can GM spend money even faster? They need to go out with a sensational bang. The Volt project is just too far away. Where is that new expensive Corvette and the Camaro at? They’ve got nothing but the Volt lined up after that and nothing lined up after the Volt.
I saw an Aveo hatch at the stoplight tonight and thought “I’d buy one of those in a millisecond if it was electric.” As it stands, it’s just another four banger, nothing special and not worth my cash. I’ve already got a gas burner.
http://upload.wikimedia.org/wikipedia/commons/thumb/c/c1/Chevrolet_Aveo_MY08_Rear-view.JPG/800px-Chevrolet_Aveo_MY08_Rear-view.JPG
And what was the logic behind that massive real estate grab they did? What are they going to do with all that property when they go under?
I think Chrysler is just Cerberus’s new play toy.
Ford is Mohamed Mullalys pet project and hobby. It will be a boost to his ego if he turns that company around and increase his net worth and self worth.
That home depot guy is likely just a tool for Cerberus. A middle man, blame guy, and fall guy.
Cerberus will profit off their purchase and investment one way or another.
So we have a timeline,or do we?Great DW Ken. So a reader would have to figure late fall.
Maybe I’m grasping at straws here but you go on to say “the perfect storm may have passed by then”
I’m confused are we looking at 6 weeks,6 months,2 years?Your opening statement is pretty bold,and you make a great case Would you be bold enough to give us a timeline?
Excellent piece from Lew Rockwell. TTAC is getting to be a big time force to be reckoned with. Bet Wagoner just hates that he can’t hide his b.s. from everyone. Robert Chapman is another excellent source of no bull financial truth.
Mikey, if you want some “extra reading” that’s “off the deep end”, check out the part under “Bouncing Toward October 7th”:
http://www.independencejournal.com/today.htm
Please tell me that photo is some kind of computer trickery. Pardon my language, but if I was on that ship, I’d be petrified.
Thanks for the link rtz,these guys are a litle off the wall but interesting nevertheless.Now this Chapman dude whoa!he is really scary.I can see a few nightmares coming tonight.
NickR :
August 20th, 2008 at 10:46 pm
Please tell me that photo is some kind of computer trickery. Pardon my language, but if I was on that ship, I’d be petrified.
I was on a US Navy guided missile frigate that the entire bow went so far under water in a typhoon the waves went over the bridge windows.
Terrifying indeed!!!!!!!!!!
Over 10 years ago GM decided on a strategy to once and for all bury their competitors (who were gettting closer even then). I think it was Ron Zarella who thought that if you fire sale millions of cars on the marketplace with: discounts,cheap leases, & 0 interest, the competitors would starve out and GM whose number one in the World Mfg. capacity would save the day. No one could grind the stuff out to keep up. Sort of a parallel to Reagan making the Russians crank up the arms race until they went under. Well, we know what happened. The Japanese held on the Koreans still came, the Germans kept up the luxury cars and by proving that the total cost of the car equation was not just price, but a better car and higher resale value in the end. It was this formula that finally did GM in. What we are seeing now is a mop up operation with GM still having now an annual fire sale and the foreigners holding fast on price and image. It’s not if this ends but when.
These guys are less “scary” than Independence Journal, but if you simply subscribe to the pablum fed to you by the Americagov Elitekontrol Corporruption, it’ll seem to be nonsense to you.
http://www.dailyreckoning.com/index.html
Actually I found the Independence Journal to be fascinating. Especially the part about the silver & gold, since I’m a bit of a gold bug. Interestingly enough, similar sentiment is creeping in the other gold bug sites as well.
So, to recap, since we’re entering the perfect storm, the powers-that-be have sh!t falling at top speed from the air recirculation device, several tons of the stuff is lining up behind other air recirculation devices, and the rich elite want to get the heck out and stay wealthy, in power and elite – and (literally) to hell with the rest of us – they seem to be trying the same massive trickery they pulled on Wall Street, with silver & gold.
“Prices” going down while demand is way up and supply is way down? But “prices” reflect “paper promises of silver & gold” not physical metal? While the elites buy up physical gold at manipulated low prices with soon to be worthless dollars?
How long have I been saying to my friends here at TTAC that you need to buy a bit of silver or gold, put a safe in your house and hold it?
We’ll see within a couple of years (or months, weeks, days or hours), won’t we?
Or, doesn’t anyone really think that GM going tits up is going to simply knock one of the final chocks out from under this economy, already teetering?
Charting the past 10 years of GM, understanding finance and corporate economics, taking into consideration the global current economic movement leaves on with only one conclusion: as Britain went so will America in her auto manufacturing.
There is simply too much ‘welfarism’ woven all through US heavy industry: pensions, killer exec salaries, unions, disastrous leadership, incompetent executives. Everywhere someone has a hand out for far more cash than they need.
Indeed the perfect storm and she’s been a long time coming!
What I dont understand is this: if bankruptcy is a foregone conclusion, and has been for some time, why hasnt GM already filed? What lies on the horizon that would give GM reason to hold off for one more minute. The guys at the RenCen arent as dumb as they are made out to be. I think Bankruptcy is a last resort, that is still years off.
Didnt you guys claim with certainty that Chrysler would file for Bankruptcy by August 3rd?
Well…..Its August 21st. Why is that point relevant to this discussion? Because it shows that in spite of your inclusion of “facts”, it is still only speculation on your part. I wont hold my breath for a GM bankruptcy after the employee pricing sales subside. Particularly with gas prices subsiding. Hope will spring eternal at GM.
I’ve been trying hard to figure out why GM keeps postponing the inevitable… and then it hit me… It’s because they know that Bush won’t bail them out. Not so sure about Obama and Mcain… Hate to think of my tax dollars going to fund more mediocrity…
And there you have it. All three Motown automakers relied on trucks to cover their asses on cars.
True, very true, but that does in itself not mean everything. This is not a static world and renders itself moot if GM can figure out a way to make cars profitable again, soon. (Given, that that doesnt appear to be happening)
At $10/share, GM’s stock price yields a total market value of less than $6b for a $160B revenue company.
Revenue is independent of value. Try projected profits versus market cap.
The credit agencies all mark the corporate credit of the company just a few notches above default, and that’s a gift.
Is it? It is probably pricing in a government bailout, a possible recovery, or some other miracle. They are priced.
The company’s financial statements chart the changes; GM’s just a breath away from insolvency. As of June 30th, GM’s working capital stands at a deficit of $20b. Total shareholder equity is a staggering $56b in the hole. GM’s net liquidity (cash less debt) remains underwater at $15b. How can GM escape?
I disagree again. The only way this is a problem is if there is a “run on the bank” so to speak. All GM has to do is meet its operations and debt service obligations, which in the short term it can do with cash on hand.
It can’t. There is no light at the end of the tunnel. There’s no amount of restructuring that can save this company.
This is a statement of opinion on their strategy, not on there actual cash position. Yes things look very bleak but the case is not cut and dried in these numbers.
GM will do what automotive suppliers before it-– Delphi, Tower, Dana– have done. File bankruptcy for its North American operations. End the misery, pare the company’s balance sheet, shed brands, complete the transformation.
They probably will do this but, again, but if it were certain, GM stock would be worth even less.
I like the way you think gamper.
The status quo is preferable to the unknown. They will put off bankruptcy until they can’t. As soon as they go bankrupt, the creditors are going to latch on to the cash. If there is no cash, then the creditors have a larger interest in the eventual reorganization.
See you at GM Death Watch 200.
Time for the Chinese to move in and take over GM a la Vauxhall in England – invasion by the backdoor is on the cards
capeplates, the back door is actually the side door.
SAIC-GM is 50% owned by both, being a JV, but GMDaewoo is part-owned by GMHolden (wholly owned by GM), and part-owned by SAIC of China (as well as having a tiny percentage owned by Suzuki).
If the Chinese manage to snag GM, it’ll probably be via the route they already have open to them, as a guess.
Part-ownership of some of GM’s operations already.
>>Of course you are correct that chapter 7 will not happen, but it would be better for the rest of the world if it did. Even folks in New York would really be better off because the resulting structural changes would help the stock market in the long run. The existing rules on Chapter 11 are totally unfair to equity holders.<<
Why are they unfair? You are either in the money or you are not. If you are, you get something, if you aren’t, you don’t. That is true of all classes of creditors. Equity happens to be at the bottom of the heirarchy, but you knew that going in as an equity investor…
FWIW, I don’t see GM going in as a Chapter 7. It is more likely to go in with a liquidating 11 plan which would bring a greater return to the creditors since it would be a controlled liquidation of going concerns instead of a fire sale…
TED
In the money or not is not the end of it at all.
The stockholders are the owners of the company. It is certainly fair that they should have to pay their debts before taking back equity from liquidation. That’s chapter 7.
Chapter 11 is where the workers and management get a judge to screw the equity holders in their favor. Reorganizing the company so that it can take the property bought with the stockholders’ capital, and then putting it up for sale to new stockholders while often simply giving the existing management a lot of the stock. That’s theft or chapter 11.
What chapter 11 was supposed to be, and what it has become, are two seperate things altogether. It hurts everyone, and only then helps a few people who otherwise would have to look for a job. In the end, I believe it simply reduces the number of jobs available in any given industry.
>>Chapter 11 is where the workers and management get a judge to screw the equity holders in their favor. Reorganizing the company so that it can take the property bought with the stockholders’ capital, and then putting it up for sale to new stockholders while often simply giving the existing management a lot of the stock. That’s theft or chapter 11.<>What chapter 11 was supposed to be, and what it has become, are two seperate things altogether. It hurts everyone, and only then helps a few people who otherwise would have to look for a job. In the end, I believe it simply reduces the number of jobs available in any given industry.<<
I do agree with you there. Chapter 11 is often used as a way to liquidate a company without going through Chapter 7. The company doesn’t survive in such a case, but it isn’t expected to. It is simply a way to sell off the assets (via section 363 sales) in a more efficient way than is available in a Chapter 7. Whether this is good or bad is a debatable point, but it certainly isn’t what was contemplated.
Regards,
TED
This article doubts that GM could survive chapter 11 because it doesn’t make amends for a failed product line, it wouldn’t change the cost structure much and people would be even more reluctant to buy products that involve a long term commitment (service/warranty) from a company that’s in a bankruptcy situation:
href=”http://biz.yahoo.com/usnews/080822/22_how_bankruptcy_would_wreck_gm_and_chrysler.html”>
OF course, trucks were money makers. Firstly it used more domestic contents. Meaning bigger profit margins stayed within US. For example every Opel Ecotec engine installed sends 850 dollars to germany, every Aisin gearbox on your Malibu- 750 dollars to Japan. Malibu flooerpan itself, being based on Vectra gives over 700 dollars to Germany. EVery Pontiac Vibe 2300 to Japan, etc. No wonder Gm is bleedind cash.
Secondly trucks are more primitive, easier to go along with domestic engineering capabilities. Trucks have leaf springs, live rear axle, 4 speed autos, OHVs, etc. Those who buy trucks rarely crawl underneath their rigs to check how updated the underpinnings are. The smart guys don`t crawl either, they go to imports which makes them not to need to crawl underneath. They can be sure This explains how Toyota can sell Sequoia but Pontiac can`t sell G5. Never mind the gas prices.
I don’t know if anyone has ever mentioned this in past GM Deathwatch posts, but… we might well look to the history of the British automobile industry for guidance. As we know, it does not exist anymore. They tried Government loans, they tried bailouts, they even tried partnerships with Japanese manufacturers. BUT, in the end the industry died anyway.
SO, should we waste our tax dollars (at a time when we can least afford it thanks to “W” and their camp) to bail out a company that deserves to crash? Let them file, shrink and if they remain uncompetitive they die. Simple as that.