Bankruptcy Could Reduce GM's Debt by 65% 21 comments
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Recently a J.P. Morgan analyst put forth the idea that a GM Bankruptcy makes more sense now then it did a few months ago, because the consumer has probably been desensitized to the idea after the recent government rescue of Chrysler and GM. He also estimates that GM can reduce their debt by 65% by declaring bankruptcy, as opposed to only by 25% via an out of court restructuring.
When it comes to a GM bankruptcy I think the important metric is the magnitude of debt reduction, rather than the damage done to the public's perception of the company. At the moment GM sells enough cars to be profitable, however their debts, labor agreements, bloated infrastructure, etc, don't provide them with the efficiency needed to turn a profit. . Conceivably the company could cut their debts by 25% and still have trouble turning a profit, so it just makes sense to declare bankruptcy in order to get the maximum cost savings.
A 65% reduction in debt would go a long away towards making the company more efficient, and is probably worth the loss of market share
Furthermore I think the amount of damage to the GM brand from a bankruptcy is moot at this point because GM's brand value is in the toilet anyway, how much brand equity can GM have when they're selling cars at employee pricing, with heavy incentives, at a loss, etc, just to get them off the lots? Once you've established yourself as the low cost provider you don't have much in the way of brand equity, because the marketplace won't pay a premium for your product.
As a result now is probably a good time to declare bankruptcy and reap the savings from a major debt restructuring as the public's perception of GM can't fall much lower, and the company could probably leverage the bankruptcy related cost savings to be the low cost provider and make a profit.
There is nothing wrong with GM being the Wal-Mart (WMT) of the car industry as long as their operations are structured in a way that supports that business strategy, and bankruptcy seems like an avenue that can get them there.
Sources:
Reuters: "GM bankruptcy could seed restructuring: analyst" -- Jui Chakrovorty, February 09, 2009
Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.
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Those who embrace the extremist-capitalist IGMFU (I got mine f*** you) dogma make themselves targets because of their bankrupt idea that in, what they refer to as, the greatest land in the world it is not only OK to trample over those who are less fortunate on the way to Park Avenue but also advisable!
Any nation's people are only as good as their least.
I have no problem with those who comport themselves with responsibility to the greater good while earning large amounts of money. None at all. Having had worked directly for several individuals worth more than a billion dollars I am confident in my understanding that the foundation of ANY fortune is built upon at least one crime.
No one can look at their balance sheet and see any other possible option. You simply cannot continue to fund retiree medical benefits for five retirees for every active worker and expect to every turn a profit. So, out choice is make GM a ward of the state or do some cutting. Sorry, in the real world, these are your only choices.
On Feb 10 08:48 AM shadrach wrote:
> Bosun, why is it when those who can't support themselves don't get
> their way its class warfare but when those in the upper tiers are
> made to support them, thats not? Hating those who are more fortunate
> whether by luck or ambition and asking them to make up others shortfall
> is an attack on them.
>
I'll pose this question here even though not quite in context. Lets assume for the sake of argument that the democrats are right: Bush was a moron and deserves to be in jail along with all the banking industry he helped enrichen, Ok? Just assume for a minute.
So we put them all in jail and start over and free up credit. At that point it seems to me we have two paths to choose from:
1, we free up credit like it was so that everyone can have two or three credit cards, two new vehicles, a 300K+ home etc... and all on a 40K per year salary. The new banks wind up going under just like the old Bush banks when those who shouldn't have that credit can't pay the bills so credit freezes, spending therefore drops which dries up demand which causes prices to fall exacerbating the situation until prices fall to the level that the market will support them or starting the pattern over with new banks. Same pattern we've seen over the last decade ending up right back where we started.
Option 2, we start over and don't free up credit like it was and everyone complains there is a credit freeze. You know, banks only make loans to those with good credit, can make a 20% or so downpayment, won't extend more on a credit card than 20% of your yearly salary and banks won't allow loans whose payments when coupled with all your other debt payments total more than 40% of your yearly net income like it used to be. In this situation, we face up to the fact that not everyone can own their own home, not everyone can have a credit card, etc.. so prices drop to the level that the market will support and life goes on or we revert to option 1 and start the process over again.
Am I missing something. I'm sure there were some unscrupulous loan officers out there who didn't offer to discourage the borrower from taking out some loans, but in the end why is it the "greedy" banks fault. Those in foreclosure etc.... are the ones who sought out the bank, applied for the loan and signed the dotted line.
I am very much a proponent of your Option #2.
As for your final paragraph I must strongly disagree with your premise. I was repeatedly cold called by mortgage brokers offering me no doc 0% intro rates blah blah blah. I told them all the same thing - pound sand. So, its not just those who actively walked into a bank seeking a loan.
I categorically reject the extremist-capitalist metric of making money from something on the razor edge of illegality. Again, its a perspective thing.
On Feb 10 09:36 AM shadrach wrote:
> Well, I don't know who you worked for and I personally don't know
> any billionaires so I can't speak intelligently about that level
> however I do know quite a few millionaires which is still very wealthy
> to me and from knowing them I know that not all wealth is based on
> crime.
>
> I'll pose this question here even though not quite in context. Lets
> assume for the sake of argument that the democrats are right: Bush
> was a moron and deserves to be in jail along with all the banking
> industry he helped enrichen, Ok? Just assume for a minute.
>
>
> So we put them all in jail and start over and free up credit. At
> that point it seems to me we have two paths to choose from:
> 1, we free up credit like it was so that everyone can have two or
> three credit cards, two new vehicles, a 300K+ home etc... and all
> on a 40K per year salary. The new banks wind up going under just
> like the old Bush banks when those who shouldn't have that credit
> can't pay the bills so credit freezes, spending therefore drops which
> dries up demand which causes prices to fall exacerbating the situation
> until prices fall to the level that the market will support them
> or starting the pattern over with new banks. Same pattern we've
> seen over the last decade ending up right back where we started.
>
>
> Option 2, we start over and don't free up credit like it was and
> everyone complains there is a credit freeze. You know, banks only
> make loans to those with good credit, can make a 20% or so downpayment,
> won't extend more on a credit card than 20% of your yearly salary
> and banks won't allow loans whose payments when coupled with all
> your other debt payments total more than 40% of your yearly net income
> like it used to be. In this situation, we face up to the fact that
> not everyone can own their own home, not everyone can have a credit
> card, etc.. so prices drop to the level that the market will support
> and life goes on or we revert to option 1 and start the process over
> again.
>
>
> Am I missing something. I'm sure there were some unscrupulous loan
> officers out there who didn't offer to discourage the borrower from
> taking out some loans, but in the end why is it the "greedy" banks
> fault. Those in foreclosure etc.... are the ones who sought out
> the bank, applied for the loan and signed the dotted line.
There was a handshake when these people, like myself, took a job with GM/Delphi to do a job in a salaried position. Not all salaried people made the financial day to day decisions and yet they are included in the mis-management syndrom of thought. Clerks, engineers, floor managers, etc, said they would do what was asked of them and for that they would be rewarded in retirement for their efforts. In days of old two things would get you hung, horse stealing and backing out of your handshake contract. Horses are in the past.
Most of the 15,000 retired salaried employees that were with Delphi, if not all, had more time with GM than Delphi. Delphi afterall was only in real business as a stand alone for approx. 6 years before filling for bankruptcy. A well orchestrated intent to bust the unions was started well before 1999. No one can prove this but on the other hand no one can prove it otherwise. If not then there isn't a real 5 year business plan as we are all told.
Yes, GM can save 65% by going into bankruptcy, and yes, I believe it will start with the salaried retirees and migrate from there. Delphi only has a part of my pension left as any part of the so called "legacy" payments and they got rid of the hourly "legacy" requirements when the GM unions took them back.
The handwriting is on the wall. Read it.
I would argue that you are the one missing the most obvious point. If GM, Ford and Chrysler went under this afternoon, tomorrow or the next day someone would come in and buy the facilities and continue to produce. It might be toyota silverados or nissan tahoes but someone will continue to make the vehicles which will include making parts for and standing behind the vehicles already out there.
Very well said. To this day no one can tell us where the Billions went that were given to the banks. Watch out all the laid off people are getting hungary while we had 18 billion dollors to the Morgan Stanley crooks
On Feb 10 09:13 AM John D wrote:
> Shadrach .. I'm pretty sure that it is not so much an attack on those
> more fortunate as it is the fact that the politicians (Bush Admin)
> threw $$$Billions to Wall St. with no song and dance or accountability
> and those of us that still have to work (I work in the auto business)
> have to crawl to Washington to BORROW money to keep us in business
> - You can bet that if the politicians had THEIR MONEY tied up in
> the auto sector and not on Wall St the tables would have been turned
> 180 degrees - they would have thrown the money to GM Ford & Chrysler
> and Wall St would have been doing the crawl. The 1st half of TARP
> was irresponsible to say the least and criminal to say the most.
> It looks like the new administration will not be throwing but actually
> delegating and making the financials ACCOUNTABLE this time.
>
>
On Feb 10 10:52 AM shadrach wrote:
> Casey,
>
> I would argue that you are the one missing the most obvious point.
> If GM, Ford and Chrysler went under this afternoon, tomorrow or the
> next day someone would come in and buy the facilities and continue
> to produce. It might be toyota silverados or nissan tahoes but someone
> will continue to make the vehicles which will include making parts
> for and standing behind the vehicles already out there.
While Clinton repealed Glass-Steagall Act of 1933, which started the housing lending crisis, then isn't Bush just as guilty for failing to reinstate it for 8 years and limit the scope of damage done? Is that a fair statement?
@GM
As a consumer and current GM vehicle owner, I am watching you. To date, I support your actions of taking the road less traveled and watching out for your retirees. I hope your spine holds out!
you have no problem borrowing $200 billions from the Chinese to give Americans a $300 tax rebate check so they can by a Chinese TV...BUT YOU HAVE A PROBLEM SAVING A COMPANY THAT COULD COST US MILLIONS OF JOBS!
You say that on every page. What does that even mean???
Although you are 100% correct in the stupidity of borrowing money and enouraging people to waste it, GM is a different subject.
If a person wants GM to survive [I very much do] - then he must accept that drastic moves are necessary. This patient has cancer, and we can keep hooking ever-more complex life support machinery to it. Or, we can put the patient under and cut the cancer out so that it might survive. Without extreme measures, General Motors is not a viable, survivable entity.
I made a loan to GM by buying their bonds because I want them to succeed. But like every debtholder, I took a risk. Without bankruptcy, the taxpayers are just paying debtholders. Is that what you want? [THANKS, by the way!]
GM must eliminate divisions, must close dealerships, and must reduce legacy costs. All those cancers are legally protected, ensuring the eventual death of GM. For my bonds and your pension, something is better than nothing.
If you want GM to survive, cowboy up and accept what must be done.
Now to GM viability...GM was a profitable company when they were giving the costumers what they wanted...SUVs!
As for the cancer...GM doesn't have cancer...GM is taking a physical beating from the Toyota republicans...as I explained before there is a market for so many vehicles in this country...and that means that for every one of them ...one of ours shuts down!
Our government lets in this country 700,000 vehicles from Korea...how many do we sell to Korea?
Toyota and Honda bring in over a million vehicles from japan or Korea and Mexico...how Chevy do the Japanese or the Koreans buy?
We need to take care of ours people(workers) every time we buy a foreign car we lose 9 jobs...that a beating not a cancer...we need to get up stand up and fight for our workers!