GM Bankruptcy fears

[ESRBob]

Is this old news? Haven't been following all this.

http://biz.yahoo.com/ap/051115/gm_bankruptcy_fears.html?.v=7

I always think about our threads about JG's GMAC bonds and why they were paying such a nice premium a year ago. Not sure if GMAC would be tarred with the same brush, but it always makes ya think.

My takeaway lesson, that I understand many will disagree with: no individual company is ever safe enough for a buy-and-hold ER investor -- give me a low-cost tax-efficient fund any day.

 

[Michael]

No one company is safe to hold as a long term buy and hold investment, yet the employees are dependent upon one company for their pension/health care. People would be better off with cash on the barrel head, and investing their own money for retirement in a diversified manner.

Putting 30 years into GM's pension plan is a very high risk investment. The same as their stock and bonds.

 

[windsurf]

Easy to say in retrospect;  15 years ago, those GM guys (my brother is one) were only looking at the retired stiffs who had it made in the shade.  Is the same (your proposition) true of those on gov't and military pensions?? I guess I would say not, but I am sure that a case could be made for 'yes."

 

[Michael]

I agree.  The government will just print more money to pay military pensions.  This will debase the value of GM and other private pensions (paid by the PBGC, which doesn't index for COLA) through inflation.  In effect, money will be transferred from private pensions to public pensions (and other government expenditures).  The private pensioners will notice that their pensions no longer buy much, but will have no idea why.  The CPI will be further cooked to pretend that nothing happened.

Cash on the barrel head in private industry.  The rest is just a trick.  Skip the regular bonds in the portfolio, and replace them with inflation hedges.  The government has no way to repay the debt, so they won't.  They will follow the time honored tradition of inflating it away, and pretending that they repaid it.

http://www.house.gov/paul/tst/tst2005/tst111405.htm

 

[Chaps]

It is an unfortunate situation, particularly for those directly involved (employees, suppliers, bondholders, retirees, etc.). Until very recently I had substantial funds in the GMAC Demand Notes program but it became painfully obvious that the risk was not worth the great rates. I think that a spin-off of GMAC while it is still worth something should be seriously considered by the board as the funds not tied up long term are leaving like rats from a sinking ship.

A couple of quotes from an updated GMAC prospectus summary:

"We have recently experienced a series of negative credit actions, resulting in the downgrade of our credit ratings to historically low levels. Only one of four nationally recognized rating organizations currently rate us as investment grade and any further reduction of our credit ratings would negatively affect our business."

"Our business requires substantial capital, and if we are unable to maintain adequate financing sources our profitability and financial condition will suffer and jeopardize our ability to continue operations."

Good enough for me to look for an exit . . .

 

[TargaDave]

Easy to say in retrospect; 15 years ago, those GM guys (my brother is one) were only looking at the retired stiffs who had it made in the shade. Is the same (your proposition) true of those on gov't and military pensions?? I guess I would say not, but I am sure that a case could be made for 'yes."

Great point. There seems to be tremendous confidence that existing and future gov-military pensions are absolutely safe while private pensions and SS are obviously in trouble. How will voters feel when SS and pension bailouts get slashed while gov-mil benefits remain intact. Who knows, but it could get nasty.

 

[renman]

Wow. I always considered the gov't pension part of my FERS comp package inviolable, even while acknowledging that SS would most likely have to change. I sure hope that doesn't turn out to be a naive assumption!

 

[KB]

Cashin' out......I removed most of my money from my GMAC Demand notes too.

The risk wasn't worth the interest rate to me.

 

[Martha]

Last spring, the bankruptcy talk for GM was that it probably had three years to get its house in order or it would end up in bankruptcy. Now the talk is of shorter time frames. I haven't heard much lately about the possibility of selling off GMAC. If I recall, a little more than half of GMAC's business is auto loans.

 

[saluki9]

Last spring, the bankruptcy talk for GM was that it probably had three years to get its house in order or it would end up in bankruptcy. Now the talk is of shorter time frames. I haven't heard much lately about the possibility of selling off GMAC. If I recall, a little more than half of GMAC's business is auto loans.

If you happen to know any investment bankers (I have a few in the family) ask them, GM is shopping GMAC like nobodies business. The trouble is finding somebody big enough with cheap capital to buy them. HSBC, GE capital, and Citibank come to mind.

 

[Nords]

Last spring, the bankruptcy talk for GM was that it probably had three years to get its house in order or it would end up in bankruptcy.  Now the talk is of shorter time frames.

Lemme point out that conventional wisdom says we should invest in a company of such a large capitalization, with so much cash, a generations-long history, and a product still in demand by many.  The fact that it's trading at a 23-year low means we should be backing up the truck!

Like TH has said, the stock market is the only store in the world where they put up signs reading "SALE!  HUGE DISCOUNTS!!" and the customers run away screaming in terror...

Perhaps I should be dumping my profitable shares of Nortel and redeploying them to GM.  I already own enough surfboards...

 

[Gearhead Jim]

To generalize-

The railroads went bankrupt in the 1970's
The steel companies went bankrupt in the 1980's
The airlines are going bankrupt in the 2000's
The domestic auto companies (fill in the blank...)

Big, stupid companies with shortsighted unions do not survive

Unfortunately, the union can do little to improve the stupid management. And the management can do little to improve the shortsighted union.

 

[Texas Proud]

To generalize-

The railroads went bankrupt in the 1970's
The steel companies went bankrupt in the 1980's
The airlines are going bankrupt in the 2000's
The domestic auto companies (fill in the blank...)

Big, stupid companies with shortsighted unions do not survive

Unfortunately, the union can do little to improve the stupid management.  And the management can do little to improve the shortsighted union.

Nice one.... but like you said, it was management that made the problems worse..

GM was making 'record' profits a few years back and did not pay down their pension liability nor thier outside debt... now that they are having problems... tough...

And the point of not buying things when there is a 'SALE' price on it...this not a product you can take and enjoy.. it is an investment and you can LOSE everything if it goes bankrupt... If I buy a car on sale, I still have the car... very different things...

 

[wabmester]

Last spring, the bankruptcy talk for GM was that it probably had three years to get its house in order or it would end up in bankruptcy.  Now the talk is of shorter time frames.  I haven't heard much lately about the possibility of selling off GMAC.  If I recall, a little more than half of GMAC's business is auto loans. 

GM did recently talk about finding a buyer for GMAC. Their bonds jumped when that happened. I had been looking at some 9% coupons selling at 80, and they jumped to 95. They were a great deal at 80, and still a good deal at 95. I wouldn't worry about GMAC.

 

[SteveR]

...And the point of not buying things when there is a 'SALE' price on it...this not a product you can take and enjoy.. it is an investment and you can LOSE everything if it goes bankrupt...  If I buy a car on sale, I still have the car...  very different things...

I think the poster was saying that the stock market is the exception to the general impulse of people to run TO a sale of some item and to run AWAY when prices fall in the market; which is exactly the best time to buy stock...when they are down. I have seen that many successful stock market investors tend to sell into a market run up and buy when it falls. The average investor does just the opposite...fear of loss makes them sell on a declining market while they buy into a bull market. The end result is less profit in the longer term for the average investor.

 

[Texas Proud]

I think the poster was saying that the stock market is the exception to the general impulse of people to run TO a sale of some item and to run AWAY when prices fall in the market; which is exactly the best time to buy stock...when they are down.  I have seen that many successful stock market investors tend to sell into a market run up and buy when it falls.  The average investor does just the opposite...fear of loss makes them sell on a declining market while they buy into a bull market.  The end result is less profit in the longer term for the average investor. 

I agree that if we are talking about the stock market in general, but we are talking about GM....

If I put a 'Sale' sign up on a car and said 'you can drive this car, but there is a 30% chance it will dissappear in a year and you will have nothing', I do not think you will have many buyers... this is the people running away from a sale... It is only when you have a strong belief that you will be able to keep the car and that it will not give you problems that you determine the 'value' was worth the investment...

I know, bad analogy.. but what else do I have to do

 

[justin]

I agree that if we are talking about the stock market in general, but we are talking about GM....

If I put a 'Sale' sign up on a car and said 'you can drive this car, but there is a 30% chance it will dissappear in a year and you will have nothing', I do not think you will have many buyers... this is the people running away from a sale... It is only when you have a strong belief that you will be able to keep the car and that it will not give you problems that you determine the 'value' was worth the investment...

I know, bad analogy.. but what else do I have to do

Assuming this hypothetical car was a GM, I think you have made a very astute analogy. There is around a 30% chance the car won't be there after a year due to mechanical failure or falling apart. It is a GM after all...

 

[Michael]

Wow. I always considered the gov't pension part of my FERS comp package inviolable, even while acknowledging that SS would most likely have to change.

They are paid from the same source. I would guess that you will get your pension. I wouldn't count on the COLA keeping up with real life cost of living though. The budget deficits are already huge, and the boomers haven't even started to retire yet. China is willing to buy only so many treasury bills. When they stop, the printing press is all the politicians will have left.

 

[haha]

I think the poster was saying that the stock market is the exception to the general impulse of people to run TO a sale of some item and to run AWAY when prices fall in the market; which is exactly the best time to buy stock...when they are down.

Well, yes and no. Yes for sure if what you are buying is something like an index fund. Not so clear when what you are buying is one business, even a very large one making very important products.

There appear to be lots of arguments why GM common stock may not be so hot now. It isn't because it is low; I like to buy low; just not everything that is low.  Doesn't mean GM may not go right back up, but remember, it can go bankrupt, continue to operate as debtor in possession, eventually restructure as a much smaller company making maybe Chevvies, Corvettes, possibly Cadillacs and a much smaller selection of trucks and SUVs. This reorganized company might or might not make any money, but it really wouldn't matter for today's stockholders, who likely would be wiped out or largely so in the re-org.

If you were sure it wouldn't declare bankruptcy it might be worth the gamble, but I don't see how anyone could be sure of that.

Ha

 

[Mr._johngalt]

I've been doing a LOT of financial reading. The other day
I read where someone (forget who) said in an article that
a GM bankrupty is "inevitable". Then, yesterday I read in
'Smart Money' that Ford Motor, GM, and GMAC long bonds
look like a good deal for "aggressive" investors. There was a whole
page devoted to this. I once said
that I would buy more (GMAC) if I had the cash.
Probably not now. Leaning toward land. Anyway, that bond
yield is way up there and GM is making a lot of moves to
stop the bleeding. Plus, they are sitting on a mountain of cash.
My guess is, even if the worst happens maybe I'll get lucky and be dead by then. In the meantime, those nice interest checks keep coming

JG

 

[Howard]

I am overweight in GMAC and in Ford Credit, I would however prefer that they sell off the whole thing rather than piece meal, letting the banks strip it of the best paper.

US Car Makers cannot compete with those in countries where the State assumes the Health Care costs, it is not possible.

Remove the several thosands of $'s that are added to each car by Social Benefits, these automatically knock the US Car Maker out of the game.

China, the Government owns most of the companies, they can make up whatever cost they like, you think Enron had Creative Accounting, you ain't seen nothing yet.

GM make a fine car, reliable, fuel efficient, cheap to maintain.

Chapter 11 is about breaking the Power of the Union.

 

[haha]

Chapter 11 is about breaking the Power of the Union.

You are probably right. However, wouldn't matter much to the creditors and stockholders in the event of a bankruptcy.

Although, I would expect that senior obligations would come out pretty well. Like you say, absent these benefit costs GE is an ok company. Not great, but OK.

Ha

 

[Honkie]

I am overweight in GMAC and in Ford Credit, I would however prefer that they sell off the whole thing rather than piece meal, letting the banks strip it of the best paper.

US Car Makers cannot compete with those in countries where the State assumes the Health Care costs, it is not possible.

Remove the several thosands of $'s that are added to each car by Social Benefits, these automatically knock the US Car Maker out of the game.

China, the Government owns most of the companies, they can make up whatever cost they like, you think Enron had Creative Accounting, you ain't seen nothing yet.

GM make a fine car, reliable, fuel efficient, cheap to maintain.

Chapter 11 is about breaking the Power of the Union.

Warning, Dumb question ahead - is GM or any other US company for that matter mandated or otherwise required in any way to provide Health Care and/or Social Benefits?

 

[Mr._johngalt]

I am overweight in GMAC and in Ford Credit, I would however prefer that they sell off the whole thing rather than piece meal, letting the banks strip it of the best paper.

This is a good point. Here is another angle. GMAC just sold
off 20 billion $ in auto loans
to Scotia Bank??. If they do end up
selling GMAC as a sep. entity, this "breaking off" of pieces
makes the total "nut" smaller for a potential
buyer. OTOH. GMAC is so big
that maybe this theory doesn't work.

JG

 

[JPatrick]

Warning, Dumb question ahead - is GM or any other US company for that matter mandated or otherwise required in any way to provide Health Care and/or Social Benefits?

Their requirements are established by their union contracts.  Federal law requires that they pay into the pension guaranty fund to provide insurance for the contractoral pensions.