I may be missing something in the financial print, but isn’t General Motors already bankrupt? Or at least insolvent? If you read the press releases coming out of Detroit, or the dispatches from the shill automotive press—there to test drive the new Corvette, not to read cash flow statements—the news about General Motors is not all bad. It has about $19 billion in cash on its balance sheet, and the wizards of Grosse Point have a plan to streamline the company, close some plants, gradually lay off 30,000 workers, and downsize an SUV-sized company into a mean lean machine, although presumably something with tighter lines than the old AMC Gremlin.
I hope the reorganization plan works, just the way I hope, whenever I am in a GM car, that I can open the trunk or find the gas-cap release. But before we dream about a new Camaro saving GM, let’s go through the GM numbers, which ought to be giving anyone sticker shock, including those selling used-car economics in Washington.
Through the third quarter of 2005, GM reported a net loss of $3.8 billion. It would have been $6.4 billion had the company not had tax-losses carried forward that tipped $2.2 billion to the bottom line. But the news is actually worse than that. The car division lost almost $10 billion in the first nine months, red ink that was offset by more tax-loss carryforwards and another $2.2 billion earned at General Motors Acceptance Corporation (GMAC), which is essentially the GM house bank. It does more than provide financing for the family Bonneville, although that’s a major part of the business. As an asset-based lender, GMAC provides mortgages, commercial credit, and other banking services that have nothing to do with all those documents the car salesmen make you sign before you can drive a Hummer H3 into the desert storm that is Little League baseball.
Car enthusiasts and GM believers will argue that the current losses are beyond the control of the company’s management. High gas prices choked off SUV sales (that’s because of Bush, Rummy, Katrina, and Rita). Blame the Japanese and the Koreans for GM’s drop in market share (in the US, 44 percent in 1983 to about 22 percent now; GM’s share of the global market is currently14 percent). Blame Asia in general for paying their workers about $1 an hour and limiting pension and health benefits to a few bowls of watery soup. You can thank the Germans for making all those Audi and BMW black sedans a must-have rung on the ascendant corporate ladder. Because of the Electoral College, Michigan is an important Democratic swing state, where unemployment is not a hot option. Plus sleazy Enron-like accountants tanked Delphi, the former GM parts division that was spun off and is now bankrupt, threatening GM’s ability to source inventory. Take away GM’s generous labor contracts, the pension shortfall, the prescription invoices, the competition in Asia and Europe, the odd recall here and there of 300,000 cars, the memory of the Chevy Vega, and you could say we’ve got a pretty good company.
Still, GM’s balance sheet has breakdowns that might perplex even Mr. Goodwrench. Yes, at September 30th, 2005, the company lists $55 billion in “cash and marketable securities,” and total assets of $469 billion. Although the company has to mail out a few “Red Tag” rebate checks before the end of 2005, that cushion should see GM into the future, even if it loses $5 billion for a few years or revives the Corvair. Except that, under a bankruptcy-court’s hammer, I have a hard time imagining that a GM will net $469 billion.
To come to terms with GM’s liquidation value, you have to understand the corporation as not one company, but at least four: a car company, which has a death rattle; a Health Maintenance Organization (HMO), where none of the patients pay; a pension plan, in which the company took the actuarial gamble that no one would get old; and a bank, which, while making money and well-managed, still has a lot of Chevy Impalas backing up its loan portfolio. I am sure there are buyers for the bank (GMAC), and at 12-15 times earnings, maybe it could fetch $34-40 billion. But if a part of GM is worth that amount, what does it say about the rest, given that the entire company, including GMAC, has a current market value of $13 billion. It says the car business of GM is in a $20 billion hole.
If some of GM’s assets are questionable in a distressed sale, the liabilities are stubbornly real. Total liabilities amounted to $446 billion, which, in theory, leaves the shareholders with $23 billion in capital, although balance sheet equity is what in accounting is called a plug figure. For example, among its assets GM lists $28 billion in deferred taxes and inventory of $14 billion—assets of value so long as GM is a going concern. Shut the doors, and there is not much of a secondary market for its tax credits or Caddy mufflers. The same would be true of halted assembly lines.
Other liabilities include the often-reported health benefits that are due to retirees. $32 billion due is carried on the balance sheet as “post-retirement benefits other than pensions,” which explains why GM is the world’s largest HMO, albeit one without doctors. Another $10 billion is due to the pension plan. Together these obligations are often imagined as a “$1,600-per-vehicle handicap” that is chained to the bumper of every new GM car. These numbers are those of September 30th. I have read elsewhere that GM’s unfunded pension liability is closer to $17 billion—but all these figures are the difference between calculated future pension obligations and the current market value of GM’s pension investments. GM’s pension nut is covered in a buoyant stock market, like that of the roaring 1990s, but crushed in a bad one. The company may even get hit with another $11 billion in similar pension/health charges if its supplier, and former subsidiary, Delphi, is liquidated, and some of their personnel charges are shifted back to the seller, GM, which agreed to cover those liabilities in a liquidation.
Despite boasting of a cash surplus on the balance sheet, the challenge at GM is to avoid a run at the bank. In 2006, according to one report, the company has to pay off or refinance some $44.7 billion in outstanding debt. But since those notes went on the books, GM’s credit rating has been lowered to junk-bond status, which means that instead of paying 5 or 6 percent for five-year money, GM may be looking at coupons in the range of 10-15 percent. In the land of loan sharking, that is a lot of vigorish.
Already in 2005, GM has paid $11 billion in interest expense, although most of that ($9.3 billion) has been to fund the finance company, which draws about $260 billion from the market. The $3 billion that it will cost in 2005 to fund the car companies will jump next year as interest rates increase and GM has to raise junk money to fund their losing propositions in the pension and health-care portfolios. At the moment GM’s 30-year, 2033 bonds (with 8.375 percent coupons) sell at $0.74 on the dollar, giving them an effective yield to maturity of 11.7 percent. But 30-year GM bonds don’t sound to me any more realistic than the illusion of keeping of a Chevy Caprice for 30 years.
Other than selling a lot more cars, what’s the solution to GM’s problems?
The persistent rumor is that, beyond sticking the pension obligations to the U.S. government, laying off 30,000 workers and closing some plants, GM plans to sell down enough of GMAC to move the finance company off the balance sheet. As a stand-alone business, GMAC would not be saddled with its parent company’s distressed credit rating. But as a stand-alone, it might also look for loan collateral other than a Buick LaCrosse. GMAC was set up to finance GM car sales. Dealers without easy money, however, will feel like they are back to the challenge of talking up the horsepower or handling abilities of the Chevy Nova.
Official bankruptcy might give the company a chance to renegotiate its union contracts, or pass more of the pension and health liabilities on to the federal government. Airlines in the same bind have used this strategy. But it would also start a run at the bank, which funds some $260 billion in the institutional market. Hence the GM dilemma: it can sell GMAC and lose its in-house financing arm, or it can keep GMAC and watch its balance sheet become a hostage to the high-coupon misfortunes of the car industry.
In recent months, the financier Kirk Kerkorian—who has previously held large stakes in the likes of MGM and Chrysler—has acquired 9.9 percent of GM. His capital invested in GM is roughly $1.68 billion, according to published reports of his stake. Mr. Kerkorian is a smart investor but you have to wonder why he would be eager to own 10 percent of a company that has more than $300 billion in debts, less than $30 billion in equity, and is betting the ranch on selling suburban vehicles that get the gas mileage of armored cars. He might be of the view that GM is, as they say of other large banks, “too big to fail,” and that the Bush administration will assume the pension and health care cost in exchange for GM avoiding bankruptcy. After all, the Carter administration bailed out Chrysler, and it lived another day to sell mini-vans, much to the profit of Mr. Kerkorian, although he bought into the company after the bailout.
He might also push the GM board to spin off GMAC to existing shareholders, and then encourage the remaining GM shareholders to pull the plug on the car division. (That could double his investment if 9.9 percent of GMAC is worth about $3.5 billion.) But I think GM’s creditors, unions and shareholders will fight to keep GMAC under the parent company corporate umbrella. Meanwhile, he financed part of his investment with a $400 million line of credit from Bank of America, which can’t love the drop of $350 million on the position, although his wealth dwarfs these losses. At the same time, so long as GM clings to its $2 dividend (an 8.7 percent yield at current prices), Mr. Kerkorian can pocket about $29 million a quarter in dividends. But that yield will pale compared to equity losses if his chips remain on the table while GM’s shares slide away.
Despite the company’s reputation for industrial dominance, it has been a long time since the business of America was GM. Compare its $13 billion market capitalization with Intel’s $142 billion, Exxon Mobil’s $357 billion, or even the Gap’s $15 billion. At the same time GM’s revenue of $193 billion sets a lot of tables, and anyone who has recently sat in a traffic jam knows that it is impossible to go broke selling cars in America. With lower sales than GM, Toyota’s market cap is $181 billion, a point not lost on shrewd investors like Kirk Kerkoiran. But more than most businesses, GM is hostage is to many misfortunes, not to mention special interests.
During the 1980s, I spent two weeks in Detroit, assessing the industry. I met Edsel Ford (the corporate executive, not the 1950s car model with fins) and inspected injured crash dummies. My conclusion was that the US auto sector is part of the fashion industry, expected one month to have a complete line of gas-efficient hybrids and in the next to roll out some new muscle cars. But it takes years to retool a factory to turn out mini-vans instead of Firebirds. Sometimes it is even cheaper to close down a plant and build a new one elsewhere. Meanwhile GM has lost the luxury market to the Germans, and the fuel-efficient market to Japan, leaving Detroit to base its sale pitch on mid-range gas-guzzling sedans with “rich Corinthian leather.”
In a larger sense, GM and its creditors, which will soon fight over the spoils of a fading empire, are also hostage to the fashion catwalks in Washington. One administration speaks of empty oil reservoirs, and out comes the Ford Pinto. A few years later another administration preaches that oil is plentiful and that it is okay to cruise Route 66 in wood-paneled station wagons. Nor do companies like Ford or GM ever get the word on whether they are obliged to play by the rules of capitalism or socialism. If the rulebook is capitalistic, why does GM have to “buy American” and why can it not outsource its high costs to the same sweatshops that make Intel and Nike so successful? If the game is socialism, can GM not be proud of employing 350,000 workers, paying so many pensions, filling all those prescriptions, and making reasonable products, even if its balance sheet has the accounting air of a Soviet collective. A lot of lines are now blurred, and I imagine the real problem at GM is that senior management does not know whether it is coming or going.
Wasn’t the business of America easier to understand when everyone could be classified along the lines of being a “Chevy,” “Ford,” or “Pontiac” man?
