Viewpoint: GM tottering on brink of bankruptcy

Some rough and rocky road lies ahead for the U.S. economy. Our financial system may have just a slight fever now, but there are signs it may develop a near-fatal illness.

On March 15, General Motors’ stock plunged from $34 per share to $30 per share. Doesn’t seem like very much–just more than 10 percent in a day. But two days later, the stock fell to $28.35 and the market cap skidded to $16 billion. That means GM was down almost 18 percent for the week.

So what? What difference does that make? It means the giant automaker is nearly broke and expects to lose $1.50 per share in the first quarter alone. As if that isn’t enough, GM is packing a debt load of more than $300 billion.

Taken with the $16 billion cap there is the clear implication that GM is headed toward bankruptcy. Stockholders, if they used their funds to buy stock rather than loaning it to the company, could buy the automaker almost 20 times over. Some see GM defaulting on the bondholders, who would then own a company worth less than $16 billion.

That sounds like not too bad a deal, right? After all, $16 billion is a bit more than pocket change, but let’s go further. Interest rates have begun to climb. For every point they rise, it will cost GM an additional $3 billion in annual interest payments to refinance its debt. That’s money they do not have. Where will the company get another $3 billion, $6 billion or $9 billion as interest rates jump by 1 percent, 2 percent or 3 percent more?

The money won’t come from selling cars and trucks—sales are depressed. Selling stock? That appears a very distant prospect in today’s market. Borrow more? Who would lend it? General Electric, which had extended GM a $2 billion line of credit so the Detroit giant could pay its suppliers, pulled out of the deal last May, telling GM it wanted to end the arrangement in December of this year. Now the two companies are talking of ending the pact much sooner (

There’s no ray of hope from the feds, either. The U.S. government has been propping up the bond market; and no buyers are on the horizon, even for treasury bonds, and they haven’t been there for some months.

GM spokesman Tony Simonetti said the loan agreement provided that GE could bail out earlier if Standard & Poor’s lowered GM’s ratings. She said, however, that the two companies were proceeding to end the arrangement before Standard & Poor’s dropped its rating for GM from stable to negative, which may mean a further drop to junk bond status is just ahead. Fitch ratings also scaled down GM’s standing to one notch above junk bonds.

GM has been hard hit by sluggish North American sales and mounting costs for health care, materials and pension costs. A decline in its market rating would substantially increase the company’s borrowing costs. “GM North America is our 800-pound gorilla, and it’s important that we get this business right,” said Rick Wagoner, chairman and CEO of GM (

Last week, GM said its earnings forecast for this year is $1 to $2 per share, revised down from $4 to $5 a share.

The debt load is bigger than Enron, Global Crossing, LTCM, Kmart and the Iraq war all combined! If that goes belly up, it is big enough to take down the entire U.S. financial system and the government as well. That would happen because a company like GM going bankrupt would destroy confidence in the system. Borrowers and lenders would panic.

Our official gold hoard at Fort Knox and wherever is said to be 261 million ounces. At a price of $440 per ounce, that’s only $115 billion. What do you think the reaction would be if a mountain of wealth three times larger than the current U.S. gold hoard just vanishes? Our annual deficit is near $700 billion. How would the government sell bonds to finance the debt if bondholders are getting annihilated?

Other nations are sniffing the wind, and a huge dumping of dollars is about to start that will make the recent drop in the dollar seem like only a small pothole in the road.

Some observers say it may take three months to a year for GM to declare bankruptcy. When it does, the dollar will lose 90 percent of its value in the following six months to a year.

In hopes of avoiding that fate and getting its runaway debt under control, GM has announced a round of cost-cutting measures. Some 38,000 GM employees in this country were told they would get no merit raises this year. The company also plans to cut its matching contributions to employee retirement funds by 60 percent, beginning April 1. Along with that, salaried workers will be allowed to buy three extra vacation days for $175 per day…a move to trim payroll costs.

The company’s U.S. market share is less than 25 percent this year. Analysts say some serious reorganization is needed. Stephen Girsky, chief auto analyst for Morgan Stanley in New York, said: “It’s one thing to say things are tougher than they expected, but what people want to know is, ‘What are they going to do about it?’ The company’s market share doesn’t support its size. They have too many plants, too many workers, too many models, too many dealers, and their employee benefits are too high.”

GM revealed it will expend $2 billion in cash this year instead of boosting its cash flow by that amount.

The automaker’s announcement last week sent the stock market into a downward spiral. The Dow Jones industrial average dropped 112.03 points last Wednesday and GM shares slipped 14 percent to $29.01 per share–wiping out almost $2.7 billion in shareholder equity.

GM’s market value of $16.6 billion is one-eighth the size of Toyota, the planet’s No. 2 auto manufacturer. Stocks of Ford, Daimler-Chrysler and GM suppliers also slipped (Detroit News).

From the March 30-April 5, 2005 issue

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