Funds Hold General Motors to the Bitter End

What does a company need to do to get kicked off of an index around here?

As of Friday, General Motors was still in the S&P 500 and the Dow Jones Industrial Average. If the indexes hold the stock until the company declares bankruptcy are the index funds and ETFs that track indexes with GM as a component obligated to hold it to the bitter end? Are they are allowed to sell it ahead of time or do they have to suck up the loss, even though everyone saw this coming from a mile away?

According to AOL Money & Finance, all of GM’s shares are now owned by large block holders. Institutions hold 36%, mutual funds, which includes ETFs, hold 62% and the rest with others like the executives. State Street Global Advisors hold the most GM shares of any institution, 26.9 million, or 4.37% of all the GM shares outstanding. Surprisingly, only 5.26 million of those shares reside in the SPDR Trust (SPY). Still that’s a big loss for one fund no matter how you slice it.

Vanguard Group has the second most shares, 23.99 million, or 3.93% of the shares outstanding. However, four of its funds are in the top 10 holders, the Vanguard 500 Index [VFINX] has the most shares of any fund, 5.8 million. This is followed by Vanguard Mid-Cap Index Fund (VO), Vanguard Total Stock Market Index Fund (VTI) and Vanguard Institutional Index Fund. Barclays Global Investors, owner still of the iShares ETF family, comes in third with 17.8 million shares.

The shocking part is that according to Standard & Poor’s, a component of the S&P 500 needs to have a market cap of at least $3 billion. With 610 million shares outstanding, GM would have to trade at $5 to make that. But GM last saw $5 on its shares on Dec. 8, 2008, more than five months ago. It’s not like S&P doesn’t remove stocks from the index. It’s deleted nine companies already this year.

Peter Cohan knows how to evaluate a company. He’s amazing at looking under the hood and breaking apart a company’s financial statements to see the rotting husk of a business. At Daily Finance, he says the failure of GM matters because it shows of success can lead to failure and how now the U.S. can’t even fail right. Companies can’t shut down without government intervention. He adds that the U.S. system of economic growth, venture-backed innovation, has been nearly snuffed out and that is not good news.

Cohan also list the five big reasons why GM didn’t have to fail and squarely lays the blame at the feat of managers who were overly impressed with themselves for no good reason. The five reasons: 1) bad financial policies, 2) Uncompetitive vehicles, 3) ignoring competition, 4) failure to innovate, 5) managing the bubble. Ignoring the competition and failure to innovate are the worst crimes and that should justify Rick Wagoner’s firing pretty easily.

Disclosure: No positions

Comments

[Douglas Kor...:]

I think the execs bailed out, like rats leaving the sinking ship, selling at $1.60 or so -- many funds dumped, also.

Don't forget the main reason GM failed, hiring Lutz and refusing to sell the EV1 electric car, arresting its own customers who tried to buy the EV1, crushing instead of selling their own product, and selling control of the battery needed for the Toyota Prius (which GM owned!) to Chevron Oil.

Boy, that were dumb, DUMB, D U M B. Only boneheads like Wagoner, Lutz and Fritz could screw the pooch that badly.

Jun 01 04:53 AM

[PeteK:]

Douglas,
Add to that, you forget to mention the dumb UAW, who killed
the goose, and bring GM to this ending.
Well, maybe good for GM after all, a new life is better than
no life. Should be an axciting day for all Americans.

Jun 01 05:42 AM

[PeteK:]

It's not too late to bring back the EV1.
Better yet, get more new ideas with new technology.
Automakers should team up with Greenchek Technology,Inc.
This co, GCHK.OB is dealing with Hydrogen fuel technology etc and is now setting up manufacturing facility in China.. If China wants to buy this technology, why not GM or Ford and so on ?
With Oil hitting $68.11 this morning, thnik fast !!

Jun 01 06:34 AM

[john s. gordon:]

bonehead decisions have been a long standing tradition in the corporate suite @ GM.
> jack

Jun 01 09:04 AM

[Mad Hedge F...:]

As they should. I'll tell you what GM's problem is. My dad was a lifetime GM customer, religiously buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a tragically deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, "I didn't fight the Japanese for four years so I could buy their cars." (He was a Marine). GM's problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks that brought them home from harm's way. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles. It is no coincidence that GM's problems really accelerated with the passing of the "greatest generation." During the last 35 years, when Japan's share of the US car market climbed from 1% to 40%, I begged GM to mend their ways and build a quality, price competitive product that Americans wanted to buy. They answer was always the same: "Nobody can tell GM how to build cars." Maybe someone should tell them.

Jun 01 10:29 AM

[Kinabalu:]

"Peter Cohan knows how to evaluate a company"

Peter Cohan may know how to evaluate a company but his Daily Finance series on GM sure doesn't show it. It's a primer on why management consultants are useless. Remember the old adage "amateurs talk strategy, professionals talk tactics". The 5 part series has only one reference to a tactic, and that was a successful one - the introduction af the Saturn by Roger Smith back in the '80s.

A real study of Why GM Failed would be replete with failed tactics, from their moves in hydrogen powered vehicles, electric vehicles, international diversification, financial tactics and, certainly, union negotiations.

Jun 01 11:29 AM

[henarl:]

So don't buy index funds!

Jun 01 02:37 PM

[TAS:]

Government Motors is going to be a source of amusement for several years. The first hilarity was the press conference today at GM.

Postal Service, Amtrak, Medicare, Social Security,...err...GM.

The pedigree is priceless.

Jun 01 07:50 PM