Why General Motors Should Be Delisted

The case for delisting GM shares is overwhelming. The auto maker has $16 billion on hand, while it needs $11 to $14 billion to pay its monthly bills. There is little doubt that some type of rescue package will be forthcoming shortly. But that inevitability itself is proof enough of the collapse of the private equity profile within a free market.

In financial terms, all shares in GM should be written down to zero, a step which will ensure that an industry critical to the American job matrix is restructured in line with the broader economic reality. In practice, however, what we will see is the consolidation of the state-capitalism phenomenon, along the lines of Russia and China, arguably with some adjustments for domestic political constraints. It is indeed striking to note that the once-forceful voices of opposition to the Wall Street bailouts are now being driven decisively into the wilderness.

The capital formation process, at the core of capitalism, demands that a price must be paid when the assumption of risk turns into an unmitigated disaster. A disruption of that capital formation process leads to a serious impairment of the principles which have guided the post-World War II American economy. The consequences for the political framework are frightening, since lawmakers transform themselves into willing businessmen, in addition to being policy makers.

Russia's Gazprom (OGZPY.PK) is a classic example of how state capitalism creates chaos in the risk measurement of private capital, and the consequent impact of the chaos on the pricing of both equity and debt. While Gazprom's shares have been rising and falling in line with energy prices, most investors do not see any major downside risk from current levels, despite Gazprom's shaky solvency position; Gazprom owes lenders $42 billion. That is because of both, the too-big-fail syndrome and the firm belief that the Kremlin will intervene to avoid a calamity.

Nevertheless, credit default swap traders are unimpressed. Late last month, CDS spreads for Gazprom breached 1,000 basis points. Regardless of a recent tightening, spreads are still expected to stay in the 1,000-1,250 bps range through the next few months. So, while equity investors have drawn their own worst-case scenarios on political grounds, CDS-makers continue to raise default perceptions on Gazprom bonds. This is the type of risk pricing inconsistencies a state capitalist system encourages.

In the European debt markets, Russian issuers like Gazprom are commonly called "quasi-sovereign", a category which Wall Street analysts are well-advised to establish (and propagate) in order to let institutional and retail investors recognize the compromise achieved in the most basic of capitalist premises, as such premises are conditioned by bailout money. Thus far, given that the bailouts are being driven by the perpetual preferred instrument, Treasury and Fed officials are denying that (despite the availability of warrants) the government will play any sustainable and influential role in directing corporate strategy. But, as questions regarding the use of tax dollars start to multiply, the duplication of the Russian experiment will become more than evident.

Going back to GM, the challenge of deciding whether Friday's close of $4.36 represents a buy or a sell opportunity is squarely predicated on where government intervention, as early as this week, will leave equity investors. Without doubt, any public announcement of an emergency package will drive GM's shares to $5 and above. That is exactly when put options are the logical answer, particularly during days when the implied volatility is relatively low.

Disclosure: None.

Comments

[fg144331:]

While GM is weeping, they should be pulling out the PLANs for the EV-1...FAST
to save their sinking company. No bail out for them, obviously they not sharp enough to watch trends. Notice the news that they are still making the suv's
that aren't selling...........jeez how smart can that be?

2008 Nov 09 10:10 AM

[Mister Jimmy:]

The EV-1 was based on lead-acid battery power and would have failed to satisfy the long-term quality and performance expectations of consumers. The coming Chevy Volt, with lithium ion batteries, is far superior.

Yes, GM offers many SUV's, even now, but also offers more models that achieve over 30 mpg on the highway than any other company. All of which begs the question, fg144331, how smart can YOU be?

2008 Nov 09 01:08 PM

[Peter Pavar...:]

I think you are dumber than a box of rocks.

2008 Nov 09 04:55 PM

[jmitch:]

The 30 mpg is way to low. In 1986 GM sold the Metro with a 3 cylinder engine and it got 45 mph. I appears they do not want to sell vehicles that uses less fuel.

On Nov 09 10:10 AM fg144331 wrote:

> While GM is weeping, they should be pulling out the PLANs for the
> EV-1...FAST
> to save their sinking company. No bail out for them, obviously they
> not sharp enough to watch trends. Notice the news that they are still
> making the suv's
> that aren't selling...........jeez how smart can that be?

2008 Nov 10 09:30 AM