Here’s the money shot from GM’s quarterly filing with the SEC:
“In connection with their year-end audit of our annual financial statements, our independent auditors assess whether a statement should be included in their audit report related to the existence of substantial doubt related to our ability to continue as a going concern. If the report on our audited financial statements included such a statement, we would not be in compliance with the covenants in certain significant credit agreements, including our $4.5 billion secured revolving credit facility and $1.5 billion U.S. term loan, both of which would be callable by the lenders. Additionally, we have other significant obligations that include cross-default provisions that could be triggered by a failure to comply with those credit agreements. We would need to seek a waiver from the lenders for any covenant breaches or cross defaults, or arrange for substitute financing. There is no assurance that we could cure a default, secure a waiver or arrange substitute financing in such circumstances or that we would not incur significant costs in doing so.”
This is the big fear at GM: auditors issue a statement regarding GM’s ability to continue as a ‘going concern.’ It would start a customer-killing PR firestorm, launch a possible “run on the bank” scenario by suppliers and trigger immediate default ratings by the credit rating agencies.
So in other words, GM’s fate is in the hands of Deloitte & Douchebag?
Let me see if I got this straight. They are more concerned about being labeled a failed business then the fact that they actually are a failed business?
3 words: Too. Bad. Gm. If this is required by law, then you need to do it.
Apparently, DB have good intelligence sources.
@thalter
Appearances are everything. There are very few businesses that don’t have major loans enabling operations, and their credit rating and status decides the terms of their loans.
If an auditor states as indicated above as far as GM is concerned, GM’s rating goes to somewhere south of nadir, where toilet paper swims.
We know GM is worthless, we’ve known that for years, and still they’ve been in “business”. It’s when the market finds out that GM is in real trouble, and that’s what’s happening now.
@Thalter
They are saying that if the auditors label them as failures, that will make it so, because they will be in default of their credit agreements.
I doubt that GM has made money on any of their models over the past seven years. That is: the cost of delivering that model into the hands of a customer being less than what the customer pays, with financial incentives considered.
But they’re good at the smokes&mirrors game, and have managed to pull off the pretense that they are a going concern.
So when can we expect to see GM cars for sale at Circuit City’s liquidation sale ?….buy a car stereo, get a free Malibu to put it in.
GM’s market cap yesterday was something like $1.7 billion. The market already knows GM is worthless. It seems to me that the only reason the price hasn’t collapsed to zero is that people holding GM don’t want to admit the loss and aren’t selling.
**phweet** Time out…
In this case, GM may be crazy like a fox. I can’t remember if it was here, or Bloomberg, or the NY Times recently, but somewhere it was stated that the proposed multi-gazillion dollar bailout package from D.C had some strings.
In a rare and surprising moment of common sense, the Honorables evidently decided that the rescue money could only go to companies believed to be a going concern or capable of continuing for the forseeable future.
For all the carping and whining seen here (TTAC) recently about what the gum’mint should or shouldn’t do with “our” money, I find it refreshing that Congress at least realizes it should fund companies with some chance of using the money productively.
If GM declares itself NFG, then they take themselves to the sidelines while the money is about to flow. I read the weasel wording in the 10Q as an attempt to remain in-bounds during play.
Game on!
Ken, I think you’re misreading this. It says nothing about consumers.
What this statement says is that GM can’t officially say it can’t pay without losing its ability to borrow the money that has enabled it to get this far.
In other words, an official announcement that they can’t pay back their loans would immediately force them to cease operations.
The consequences aren’t stated to be this bleak. It merely says that their costs to borrow would go up. But, let’s face it, they’ve got to already be very high. How much more could they afford to pay?
It sounds like GM’s current lenders are pursuing a “don’t ask, don’t tell” policy. As long as GM doesn’t officially admit it cannot pay back the loans, they’re somehow willing to keep pretending that it can.
A warning about the consequences of a potential “going concern” warning to come. Does anyone care to make an argument for this all ending well?
GM’s market cap yesterday ….$1.7 billion. The market already knows GM is worthless. ….. only reason the price hasn’t collapsed to zero is that people holding GM don’t want to admit the loss and aren’t selling.
A hunch: I’m guessing there are literally tens of thousands of GM employees and retirees who have significant positions in GM stock and cannot emotionally bring themselves to sell. (Maybe they can’t believe that GM won’t prosper again; maybe they’ve watched all their savings evaporate on paper and can’t bring themselves to make it final.)
Does anyone know if there is data on this available?
GM can not be labeled a credit risk or some-such bankruptcy (ie: Chpt. 11) status since it would mean disaster for any attempt at staying alive. No one will buy a vehicle from a company that filed for bankruptcy.
Bargain hunters, will however, buy the liquidated vehicles at fractional-pennies on the MSPR…
The reason GM is in this pickle because public already stopped buying their crap for decades. OK, they will get billion dollars and let assume they will introduce Volt in 2011 to the public. Who the F*ck going to pay $40K for a sh*tty Chevy that seats 4 and travels 40 advertised miles on electricity? Please show me the high achiever? Ok, there is one born every minute, but GM need more then THAT one to survive. Otherwise THAT one will have to shell 80K for the above mentioned Chevy.
I guess what they are saying is that it is wrong to shout FIRE in a burning theater if it means you would have to refund ticket prices to the patrons.
Supposedly “independent” auditors and analysts who ignored or buried the bad news about companies they are hired to examine played a big part in the current market contraction and economic slowdown.
Well, You have to admit it makes Red-ink Rick’s public statements last friday a little more understandable.
They need to have the congress filled with a sense of urgency to get financing approved, but they want to keep the public in the dark as long as possible to keep up sales.
Politically, the Dems need to hang the issue on Bush before he gets out of the White House so it looks like they are cleaning up his mess. Obama gets the credit for helping out the workers while Bush gets the blame and Rick keeps his golden parachute ready for action.
The Auditors get to pull the trigger on the “ongoing concern” statement if Congress fails to act, so it adds additional pressure on the lame ducks to act quickly and not force many concessions from the General in return.
Wonder how all those institutional investors are going to explain their lack of responsibility in managing their investment in GM once they finally file?
A year ago I was saying the auditors must be agonizing about the “going concern” provision. Indeed, in view of the trend lines over the past several years and GM’s negative equity, I was a little surprised the audit of FY07 financial statements didn’t express doubt about GM’s survival. Auditors don’t want to get sued for failing to warn shareholders and creditors. But of course, neither does an auditor want to give its client a death sentence. My guess is the auditors informally advised GM that it is extremely unlikely the next audit will have what’s called a “clean opinion.” And that GM’s lawyers told management of a high risk of prosecution if the SEC filing lacks the warning.
Look for the same disclosure from Ford.
Darned if I can understand why the UAW hasn’t long advised its members to avoid buying GM and Ford stock. Isn’t a union supposed to serve the best interests of its members? For several years, GM and Ford stock has been a game for speculators and suckers.
Help me out here: Does their 10Q filing say that they are a going concern or not? If the auditor is stating that they are still a viable enterprise (against all reasonable analysis that they are), aren’t they opening themselves up for the mother of all lawsuits if/when things go even further south? I’m thinking the obvious parallel is Arthur Anderson & Enron. What am I missing here?
just one comment from europe…
if you, americans stop buying american cars and let detroit big 3 collapse then japanese will overcome and rule your car market… which means you can only buy toyota, honda, nissan, mazda, so from this position they will increase prices and you’re going to fill up the japanese car manufacturers pocket. is this the real american dream?
No one will buy a vehicle from a company that filed for bankruptcy.
Bullshit.
Just like “no one would fly on an airline in bankruptcy”, right? Give me a break.
Tools said:
if you, americans stop buying american cars and let detroit big 3 collapse then japanese will overcome and rule your car market… which means you can only buy toyota, honda, nissan, mazda only, so from this position they will increase prices and you’re going to fill up the japanese car manufacturers pocket. is this the real american dream?
Don’t know about Europe but here many of us do the following math. Toyota @ $25,000 and dependable for 10 years = $2500/year. Detroit Iron @ $20,000 dependable for 5 years = $4,000/year.
That is a great simplification since if you keep a car until new purchase becomes cheaper than repair the actual numbers might be Toyota 15 years and Detroit 7 years.
With the non Detroit manufactures starting to save pennies wherever it is possible foreign dependability will start to fall.
TexN :
November 12th, 2008 at 12:09 pm
Help me out here: Does their 10Q filing say that they are a going concern or not? If the auditor is stating that they are still a viable enterprise (against all reasonable analysis that they are), aren’t they opening themselves up for the mother of all lawsuits if/when things go even further south? I’m thinking the obvious parallel is Arthur Anderson & Enron. What am I missing here?
GM is advising investors and the public, through their 10Q, that their auditors have expressed doubts as to their viability as a company.
This is probably a compromise hashed out in collaboration with the auditors, in lieu of the auditors making the statement themselves. Wouldn’t be surprised if it clears the auditors – but it’s just smokes and mirrors.
tools,
If the Japanese played that card, we would simply play the “lawsuit” card, followed by the “American automotive company start up boom” card, and then the “thanks for playing” card.
Any strategy that ends up with the American public getting angry is a loser. I am quite sure the Japanese are aware of this concept.
What am I missing here?
The quarterlies (10-Q’s) aren’t audited. The annual statements (10-K’s) are.
Because the quarterlies aren’t audited, they allow for a bit more “interpretation” on the part of management. They don’t have an auditor’s opinion because they aren’t audited.
GM’s fiscal year is based upon a calendar year (January – December.) So the statement as of 12/31 will be audited, unlike this one.
Typically, managers negotiate with auditors over the language and content of their findings. Accountants and ratings agencies have to compete for business, so nobody wants to be too hard assed, lest they lose clients over it.
But with all of the blame being tossed at accountants and ratings agencies these days (unfairly, in my opinion), accountants are shifting into CYA mode. You can expect much tougher audits this year than you’ve seen in awhile, as the fear of legal consequences takes priority over fears of losing clients.
The fit will hit the shan during the year end, when the bad news gets shifted into high gear, because it won’t hidden as easily as it was during the quarterlies. This is true for all sorts of companies, not just GM, but GM has become the bad news story of the year and this year-end nuke will surely get lots of attention when it goes off.
Stein X & Pch101,
Thanks for the clarifications and insight. If I were an auditor, I would still have to steer clear of this slippery slope. I guess that’s why there are lots of high-priced lawyers on retainer………..
Tex