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General Motors - Bankruptcy in their future?

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  • General Motors - Bankruptcy in their future?

    Found this over on the front page on Yahoo! If true, I wonder who will follow GM. Ford? Chrysler? Where will it all end?

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    GM Bankruptcy Fears Rising on Wall Street By ALEKSANDRS ROZENS, AP Business Writer
    40 minutes ago

    NEW YORK - An increasing number of investors are betting that General Motors Corp., the world's largest automaker, may be forced to seek bankruptcy protection within the next six to 12 months as it struggles to overcome slumping sales and the high cost of health care benefits for workers and retirees.

    Concerns about the automaker's future are showing up in the credit default swaps market, where investors effectively buy insurance protection against defaults. Holders of GM debt who want to arrange a hedge against the risk that they won't be repaid are finding that the cost of buying the protection has risen dramatically in recent days.

    "The markets are telling you that more traders are starting to see a greater risk that a default scenario could happen sooner in time than later," said John Tierney, a credit strategist at Deutsche Bank Securities in New York. "You cannot deny there is a pattern here."

    GM spokesman Jerry Dubrowski responded by saying the automaker has "no plans to declare bankruptcy," and he noted that GM has about $19 billion in cash on hand. Beyond that, he declined to discuss recent pricing trends for credit default swaps. "Typically we don't comment on stock prices or bond prices," he said. "We don't think it is appropriate to do that."

    At issue is the nearly $31 billion in debt related to GM automaking operations that ratings agencies already have downgraded to junk status, or below investment grade. Dubrowski said GM's total debt, including debt sold by its General Motors Acceptance Corp. unit, now stands at $276 billion.

    Credit default swaps for GM are now trading at what is known as an "upfront" basis, meaning a bondholder seeking protection against a default has to pay more money up front because the Wall Street firms arranging the hedges have to pay more to protect themselves.

    Michiko Whetten, a quantitative credit analyst at Nomura Securities International Inc., said GM debt had previously never traded on an upfront basis. But now that it is, it puts GM in an unenviable category with Delphi Corp. and Delta Air Lines Inc. — other companies whose debt traded on an upfront basis ahead of their petitioning for bankruptcy.

    Auto parts maker Delphi, once owned by GM declared bankruptcy in October, and Delta, the nation's third largest carrier, went bankrupt in September.

    GM lost nearly $4 billion in the first nine months of this year. The Detroit-based company has been hammered by high labor costs and rising prices for raw materials like steel. And while it recently reached agreement with the United Auto Workers union to temper the rise in health costs, GM still has been losing U.S. market share due to competition from healthier foreign rivals and weakened demand for sport utility vehicles, its longtime cash cows.

    Wall Street's credit default swaps traders now view GM as a company so risky that a holder now must pay as much as $12 per year for every $100 of the automaker's five-year corporate debt if they want to hedge against a default, up from $8 to $9 just several weeks ago. In addition, credit default swaps traders are now demanding more of that money up front from investors looking to protect their GM holdings.

    These losses may not actually occur, but the pricing moves in the swaps market are a good indication of how Wall Street traders and investors are judging the risk of a GM default.

    GM Chairman and CEO Rick Wagoner said in an October interview with The Associated Press that unlike the airline industry, where some bankruptcy filings haven't had a big effect on business, even speculating about bankruptcy hurts the auto business.

    "When you're buying a car it's a very different thing," Wagoner said. "It's a massive financial commitment. You expect to own it for a long time, and (bankruptcy) is something that's going to have an impact in the consumer's mind."

    On Monday, GM, whose stock is trading at nearly half of its 52-week high, announced price cuts to shore up its sales. Its shares fell 40 cents, or 1.7 percent, to $23.34 in afternoon trading Tuesday on the New York Stock Exchange.

    GM's outlook in the credit default swaps market took on a bleaker tone after last week's disclosure by GM that it plans to restate its earnings for recent years. GM said its 2001 earnings were overstated by approximately $300 million to $400 million, but the final amount hasn't been determined. GM plans to issue the restated earnings for 2001 and any subsequent years before it issues its 2005 annual report next year.

    That triggered what is known as an inversion in the credit swaps curve — a measure of risk between short- and long-term GM debt — meaning that Wall Street traders are betting the risk of GM declaring bankruptcy is greater in the next six months to a year than over a longer period of time like five years.

    In a November 10 report, Banc of America analysts reiterated a sell rating on the company's stock, saying they believe the odds GM management could be held accountable for the accounting woes has risen and this could accelerate a bankruptcy protection decision they judged to be "inevitable."

    According to Deutsche Bank's Tierney, the accounting problems caught investors by surprise and "contributed to a sense that GM problems are very deep."


    AP Auto Writer Dee-Ann Durbin in Detroit contributed to this report.

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  • #2
    It does make you pause. How soon will someone mount a campaign against the 3 domestics complaining they spend more on NASCAR (using hyperbole) than retiree health care.
    “Jealousy is the tribute mediocrity pays to genius.” -- Archbishop Fulton J. Sheen


    • #3
      Want to save American automakers? Then let the Big Three enter into their own government backed/bonded health care insurance pool like they've been asking for almost five years.

      Not the unions, not the "crybaby" retirees...but the CEO's and the board of directors called out the crisis five years ago. More money goes into health care costs per car made than metals and fabricated alloys in every American car. The foreign competition does not have this cost per car because health care is socialized.

      All the Big Three CEO's are asking for is a common health care pool in order to cut out the insurance bureaucracy that costs so much per car. Cut down these costs and American cars can ably compete with the Toyotas, Saabs, and Hyundais of the world.

      Keep the current system and GM will follow Delphi's lead and march straight to the bankruptcy court. The retirees and the unions could concede wages to living wage plus $5 (@$17 an hour starting, $29/hr. at 25 years, manditory retirement at 30 years at $31/hr., 50% avg. wage at retirement) and GM would be stable until 2106.

      Execs would also have to cap salaries and cut middle managers, too. Another solution would be to devolve GMAC into anything BUT car financing and take checks from independent banks. The cost of operating GMAC hurts GM, it doesn't help GM. Either that or pare it off into an independent corporation that does not feed off of the production side.

      Now we have to worry if they will be BK in 2006.


      • #4
        Don't have time to read the article or the follow-up posts but rest assured both GM & Ford will file bankruptcy fairly soon. The only question is when.
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        • #5
          There's a catch - Ford is still making money. Not in the US, but worldwide, they're profitable.

          GM, on the other hand, is not.

          Then again, if either cut their dividends, they'd be a lot closer to profitable.


          • #6
            Originally posted by JoeBob
            There's a catch - Ford is still making money. Not in the US, but worldwide, they're profitable.

            GM, on the other hand, is not.

            Then again, if either cut their dividends, they'd be a lot closer to profitable.
            Payment of dividends is not an item that affects profit under generally accepted accounting principles. FWIW


            • #7
              GM deserves to be bankrupt and its employees and retirees deserve to lose their rediculious benefits.

              NASCAR, however, is advertizing. Bankrupt or not, the company will spend on it.


              • #8
                A friend of mine, with family ties to a now retired ex-vice president of GM says that the situation is probably worse than is coming out in the news stories. However, for the near future at least, GM does still have billions of dollars in cash that can pay the bills for awhile. He also says that GM is looking into not building some of their own cars in the future. GM would start to move toward being more of an engineering and design company while contracting the actually building of some future GM models to outside firms. These outside firms might even operate some of the old closed GM factories. This ex-vice president told my friend over two years ago that GM would be bankrupt within 5 years. He said that they were not capable of making the hard decisions that would keep them solvent. He also thought that any kind of a government bailout of GM (ala Chrysler in the 70's) was probably not doable today. The numbers involved were just too big and the government debt situation today could not back GM even if they wanted to without destroying the value of the US dollar. We'll just have to see what happens.


                • #9
                  And not even the Pontiac Solstice and Chevrolet SSR can save them.


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