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by Eric Englund
General
Motors and the U.S. government have several characteristics
in common. Both are unwieldy behemoths which have become debt-laden,
wealth-destruction machines. Their workers are overpaid and
under-productive (for Federal employees, counterproductive
is a more apt description). Foolish creditors have kept these
monstrosities afloat and will eventually end up regretting
ever having lent these debt addicts a dime. Yet, each one
is a public-relations machine preaching to the citizenry that
it is indispensable. The Federal government, accordingly,
is working with General Motors on a rescue
plan which entails exchanging debt and other liabilities
for equity. If this exchange offer is successful, President
Obama will be hailed, by the mainstream media, as a visionary
leader with the good sense to override the impersonal phenomenon
known as the free market. Isn’t it true, after all, that what
is good for General Motors is good for the country? Not anymore.
What
is good for the United States is an unhampered free market.
In a free market, successfully anticipating and meeting the
needs of consumers are rewarded with profits and wealth creation.
Conversely, when a business consistently loses money it must
either adjust its business model in order to compete more
effectively (before its financial condition becomes too weak),
or face liquidation. Failure is not the end of the world as
the resources tied up in a failed company can be freed up
for entrepreneurs to use in other productive ventures.
In all
my years as a financial analyst, I have never seen a company
as grossly mismanaged as General Motors. This automaker’s
financial destitution indicates GM’s management team, laborers,
and related union executives may be the most incompetent in
U.S. history. It is abundantly clear Americans love automobiles.
Hence, it is a no-brainer that the U.S. is a market where
a company could become hugely successful and wealthy by manufacturing
and selling cars. Since GM’s
founding in 1908, it has managed to accumulate – as of
fiscal year-end December 31, 2008 – a deficit working
capital position of $32.7 billion and a deficit equity
position of $86.2 billion. So in the course of 100 years,
General Motors has sold millions upon millions of automobiles
and has managed to become profoundly insolvent. The Three
Stooges could have done a better job of running an automaker.
Within
a free market, a company with such shockingly poor financial
indices could never be reorganized – it is plainly too far
gone from a financial perspective. Thus, it would be liquidated
with secured and unsecured creditors doing whatever they can
to recover a percentage of the monies they are owed. Common
shareholders would be wiped out.
In looking
over the details of the above-mentioned exchange offer, I
have no doubt this is merely a stop-gap measure as GM would
remain deeply insolvent. Here are key points of the exchange
offer:
- Common
stock plus accrued interest in cash offered for $27 billion
of outstanding public debt
- Successful
exchange to result in at least $44
billion reduction in total liabilities from
bondholders, U.S. Treasury, and VEBA
- Bondholders
to own 10 percent of GM after successful exchange offer
- Exchange
contingent on VEBA modifications and U.S. Treasury debt
conversion conditions resulting in at least $20 billion
reduction in liabilities
- Expect
to seek bankruptcy relief if the exchange offers are not
consummated
What
if the exchange offer is successful and total liabilities
are reduced by $44 billion? This would still leave GM with
an equity position of negative $42 billion. No company can
continue to operate when it is so incredibly broke. To be
sure, this implies GM would remain a ward of the state and
the U.S. Treasury would continue to lend it money; thereby
perpetuating this wealth-destruction machine.
To
further drive home the point, as to how broke GM is, let’s
do a quick thought experiment. If Supreme Commander Obama
decided to simply give GM a "gift" of $100 billion,
would all be well at General Motors? Undoubtedly, you know
the answer is "no." Even with such a generous gift,
GM would still be a precariously leveraged company with a
total liabilities-to-equity ratio of nearly 13 to 1 – using
GM’s 12/31/08 balance sheet as the basis for this analysis.
It should be obvious, therefore, that the aforementioned exchange
offer is merely placing a bandage on a mortally wounded company.
This
is why I cringe when I hear politicians and financial reporters
mention any kind of reorganization for General Motors (including
Chapter 11 Bankruptcy reorganization). Any such reorganization
would automatically imply massive Federal guarantees that
will come at enormous taxpayer expense; which also indicates
that productive citizens are viewed, in Washington, D.C.,
as mere abstractions born to serve the needs of America’s
political elites.
The marketplace
has spoken; GM has failed and it should be liquidated. New
entrepreneurial and wealth-creating opportunities
most likely will emerge from such a liquidation. To continue
down the present path assures more wealth will be destroyed
by the financial black hole known as General Motors.
April
29, 2009
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