More Problems for GM

When Dwight Eisenhower became president, he appointed Charles Wilson, the president of General Motors (GM), as his secretary of defense. During his confirmation hearing, Wilson was asked if he could make a decision that was opposed to GM’s interests. He said that he could but he couldn’t imagine such a situation “because for years I thought what was good for the country was good for General Motors and vice versa.”
Over the years, Wilson’s answer has been changed to “What’s good for General Motors is good for the country.” Quite the opposite of corporate ruthlessness, Wilson was really conveying civic responsibility.
Sadly, today’s GM is quite different from Wilson’s. Last week, the company said that it had lost $2 billion more last year than it had originally reported. The company will also miss the deadline for filing its 10-K report. GM also restated results from 2000 to 2004. If you’re keeping score, GM just restated its 2001 earnings in November.
This company is a financial black hole. For 2005, GM lost $10.6 billion. That’s $18.69 a share. To put it in perspective, the stock is currently trading around $21 a share. In 1955, General Motors was the first corporation to register $1 billion in annual sales. At the time, GM was the one of the largest employers in the world—only Soviet state industries employed more people. Today’s it’s about as profitable.
The accounting mess surrounds the classification of cash flows at ResCap, the residential-mortgage business of its financing arm, General Motors Acceptance Corp. The company has been trying to sell 51% of GMAC. The restatement will cut GMAC’s 2005 profit to $2.5 billion from $2.8 billion Thanks to the latest bungle, on future deal may be gone forever. Who wants to do business with these people? I expect that the ratings agencies will downgrade GM’s debt again. It’s already junk. It will soon be even junkier.
GM has $300 billion in long-term debt. That’s over $530 a share of junk debt. So if you pick up a share for $21, you’re also buying $530 of junk-rate liability. Since the current Dow multiple is about 8.2, this means that GM’s debt is worth over 4,300 Dow points. How much longer will this company be a part of the Dow?
Did I mention there’s also an SEC investigation? And there’s also the issue of Delphi. It looks like GM and Delphi are finally close to an agreement with the UAW on early retirement incentive. GM is liable for pension and health-care obligations for these workers. The company estimates its liability to between $5.5 billion and $12 billion.
Of the 10 hottest-selling cars in the world, only one is made by GM. To be honest, GM isn’t really a car company. It’s a pension and health benefits company that sells below-cost cars as a side business. The WSJ quoted an accounting professor as saying that it appears that the auto maker “is leasing cars to rental companies at a loss, to keep the plants running.” This is what it’s come to.
GM’s board has now called for an investigation. I hate to break it to them, but there’s been an investigation going on for some time. Here are the results. Draw your own conclusions.

Posted by on March 20th, 2006 at 12:39 pm


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