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General Motors Inches Ever Closer To Bankruptcy

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"As goes General Motors so goes America" is a quote attributed to former General Motors President Charles Wilson in 1953. The idea behind the quote, that what's good for GM is good for America, and vice versa, has dominated commercial thinking and commentary for generations.

This recent article has crystallized much of my reading on this subject:

http://www.forbes.com/business/feeds/ap/20.../ap2603700.html

General Motors Corp.'s disclosures that it lost $2 billion more last year than previously reported and needs more time to sort out accounting errors in the finance business it wants to sell gave investors fresh reasons to worry about the world's biggest automaker. They sent GM's shares price down 4.5 percent Friday, shaving more than a half-billion dollars off its market value.
GM said after the market closed Thursday that it now estimates it lost about $10.6 billion in 2005 compared with its preliminary report of a loss of $8.6 billion. The company also said it was delaying filing its annual report with the Securities and Exchange Commission for up to two weeks after uncovering accounting problems.

GM has annual revenues of $190 billions and employs 325,000 worldwide. These figures alone support, superficially at least, Charles Wilson's assertion. The point is, if GM goes down the US economy will be grievously hurt, and the impact on the economy, house prices, and teh stock market does not bear thinking about. Not forgetting that a significant proportion of GM's finances are inextricably bound with Fannie Mae and Freddie Mac.

Here are some facts and figures (which have astonished me) that I've gleaned. I'll post some links to support my data, but Googling General Motors will throw up a wealth of info on the subject. (Sorry- something wrong with teh quote wrap and other features- they don't work)

Despite its earnings of $190 billions GM has a miniscule market capitalisation of $12bn. :o By comparison, the market values Wal-Mart at $204bn and Google at $112bn.

GM has debts of $400 billions +

GM experienced $10.6 billion losses last year

GM had $10.8 billion pension liabilities by end of 2005

Official figures suggest its pension is underfunded by $31bn.

The company’s unfunded retiree medical liability, increased to $61 billion at the end of last year

Cost of pension and healthcare liabilities for workers and retirees in the US add $2-3000 to the price of each vehicle.

It insures (ie pensions, health care, and other post employment benefits) 1.1 million Americans (retirees and dependents) and healthcare costs this year will be about $6bn+. GM is the largest private purchaser of health insurance in the country

The killer blow could be dealt by Delphi Corporation, the vehicle-parts maker spun out of GM in 1999, which filed for bankruptcy last month. GM could be liable for up to $12bn of the pensions and healthcare of Delphi workers, under a contract signed when the supplier was spun off. Delphi will decide by March 31 whether to ask the court to throw out its labor contracts, a move thought to guarantee a United Auto Workers union strike. That would shut down GM production at a time the automaker is counting on new products to restore profits.

GMAC, General Motors' financial arm (sells insurance of all types and mortgages), accounted for 80 percent of GM's profits

Shares plunged nearly 50 per cent in 2005

GM will be cutting 30,000 jobs (20% of total US workforce) by closing down 12 plants in the next two years

Due to the cutbacks in previous years GM today has to support three retirees for every active worker

GM has overstated past years earning. GM said its 2001 earnings were overstated by approximately $300 million to $400 million, but the final amount hasn't been determined.

GM is currently under investigation by the SEC for financial irregularities. Rumour is they’ve been hiding debts and loans Enron style

For every one point that interest rates rise, refinancing GM's debt will cost an additional $3 billion in annual interest

According to management GM has only 1000 days left of liquidity. A gross exaggeration given the billions of hidden losses which exist.

Bankruptcy is inevitable according to Wall Street analysts.

The worse case scenario is the workforce striking over Chapter 11 dealings with Delphi which would lead to financial anarchy. Even with orderly bankruptcy proceedings 1.1 million Americans stand to lose their pension, insurance and health care. The threat to the dollar cannot be overestimated. 100,000 US jobs could be lost at a stroke as could jobs indirectly linked to GM numbered conservatively at 100,000.

http://business.guardian.co.uk/story/0,16781,1647003,00.html

http://www.usatoday.com/money/autos/2006-0...on-freeze_x.htm

http://business.guardian.co.uk/story/0,3604,1589111,00.html

http://www.tpmcafe.com/story/2005/11/21/111032/05

http://www.whiskeyandgunpowder.com/Archives/20051115.html

http://www.wsws.org/articles/2005/may2005/gm-m09.shtml

Edited by Baz63

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I can't see any way out for GM. Their liabilities are astronomical. There is a joke in America that GM is a provider of health and retirement benefits with a small sideline in vehicle manufacturing.

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America is completely screwed. And the sad thing is that the population are so brainswashed that they can't possibly see it. A conversation last night just reinforced it.

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Oh well I've never been a fan of Vauxhall anyway .... says a Ford owner. :o:lol:

i shouldn't be too happy about it

if GM goes bust or into chapter 11 then presumably Ford will follow as i understand that they are just as deeply in the mire :(

is the situation similar to that of US airlines? - there is a domino effect as due to chapter 11 as the remaining airlines cannot compete against those in chapter 11 and are therefore forced into it as well

Edited by gasket37

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if GM goes bust or into chapter 11 then presumably Ford will follow as i understand that they are just as deeply in the mire :(

True ... I really wouldn't want to see Ford go under though. Their latest concept car looks very like an Aston Martin, except that it will be the basis for the next Mondeo. Wouldn't mind being seen in one of those. :)

Oil price is not good for cars, whichever way you look at it. Ford has a new Focus which uses Flexi-Fuel technology but it appears you can only fill it up in Norwich !

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i shouldn't be too happy about it

if GM goes bust or into chapter 11 then presumably Ford will follow as i understand that they are just as deeply in the mire :(

is the situation similar to that of US airlines? - there is a domino effect as due to chapter 11 as the remaining airlines cannot compete against those in chapter 11 and are therefore forced into it as well

Ford are in deep trouble too. They are laying off 30,000 and face similar, if not as heavy, liabilities.

The domino effect is something I failed to highlight. Yes, it is similar to the airlines. And you are correct,IMO, that other car makers will be unable to compete if GM go into Chapter 11.

Why?

Because a company in Chapter 11 is allowed to operate but can also renege on all contractual obligations which means they can operate with greatly reduced costs.

The issue is how the workforce will react to Chapter 11 negotiations. They are very militant I understand.

Edited by Baz63

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Actually most of the motor manufacturers are in trouble. There has been a massive amount of cost cutting over the last 5 years or so, and it's visible in everything from closures of many regional offices (centralising everything at head office), down to penny pinching in the canteen. When a company charges you per filling in your sarnie, and you pay extra for thick bread...worry!

Ford and GM are the headline grabbers, but take a look a Fiat, VAG, DC, even the Japanese (though I think Toyota are still doing fairly well).

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You make a good point there Baz about Militancy. My company manufactures in the North of America, and we recently acquired a competitor in the States who manufactures in the South at a very new, efficient plant. So they decided to close (albeit with regret and very generous payoffs) the factory in the North, and move the production to the South. Job relocation offered with costs met if you are willing to move the 800 miles etc and don't want the Golden handshake.

The Response?

Immediately the workforce went in and sledgehammered the toilets so they couldn't work. Once they were fixed, same levels of sabotage happened again. Its now at the stage of Armed Guards patrolling the plant to dissuade this sort of behaviour. This has seriously jeopardised a whole branch of the company with the knock on effects of delivery on product and vendor penalty.

Militancy on a grand scale there.

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Wealth is shifting Eastward to countries that actually produce things and produce them cheaper.

The sun may well be setting on the West as India and China take their place as the powerhouses of the new world economy.

America, at least, has a huge capacity to produce food and holds jointly with its neighbour Canada the world's largest oil reserves. The UK, at leasst, has its special relationship with its former Colonies and that fact alone may keep it in good stead when things get rough.

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Militancy on a grand scale there.

Indeed.

And I was going to say in my post above that I cannot believe the union would not agree to negotiate in Chapter 11, even if it meant swinging redundancies and substantial loss of pension and medicare benefits.

The point being that some company is better than no company. The unions would not cut off their noses to spite their faces would they?

Its possible. When they see directors walking away from Chapter 11 with their millions in share interests and pensions relatively intact then the union may go into kamikaze mode. Take the bosses and company with them.

I can see the power in that argument now.

Blimey! I've turned militant.

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Ford are in deep trouble too. They are laying off 30,000 and face similar, if not as heavy, liabilities.

The domino effect is something I failed to highlight. Yes, it is similar to the airlines. And you are correct,IMO, that other car makers will be unable to compete if GM go into Chapter 11.

Why?

Because a company in Chapter 11 is allowed to operate but can also renege on all contractual obligations which means they can operate with greatly reduced costs.

The issue is how the workforce will react to Chapter 11 negotiations. They are very militant I understand.

I have thought for a while that the whole chapter 11 idea might need to be changed. All it seems to do is recycle companies that are inefficient and should close at the expense of their competitors and general public.

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I'd like one of the New (DB9) Mondeos. Hope Ford go for a little longer.

You mean the Iosis* ?

f3q-f.jpg

If GM go bankrupt then Ford must follow, at the moment each company is equally hobbled, if one is relieved of its millstone then it puts the other at a disadvantage.

It's worrying to read that news about the irregularities at GMAC, that was basically the only decent thing keeping GM's head above the water, over recent years GM has basically been a finance company with car plants attached. If they've been cooking the books then there's basically nothing left.

* Iosis is an ancient alchemy term referring to the mythical final stage of the transformation of base metal into gold. i.e. it may never go into production :)

Edited by BuyingBear

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The point being that some company is better than no company. The unions would not cut off their noses to spite their faces would they?

Since when have unions considered the future rather than the present? I doubt the union leaders will be out of work for long -- their mates wil get them another job somewhere -- so they don't have to care.

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Since when have unions considered the future rather than the present? I doubt the union leaders will be out of work for long -- their mates wil get them another job somewhere -- so they don't have to care.

Not as unrealistic as it may sound to some. BMW and Mercedes already have manufacturing facilities in the US along with the mainline Jap manufacturers. Car production will simply shift to better brands under International ownership gving US workers the same jobs.

GM is no longer the giant it was-GE, Microsoft and most of the oils have much larger market cap.

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Not as unrealistic as it may sound to some. BMW and Mercedes already have manufacturing facilities in the US along with the mainline Jap manufacturers. Car production will simply shift to better brands under International ownership gving US workers the same jobs.

I don't think it's that simple, nobody wants to locate to Detroit and take on all that baggage. The Japanese manufacturers have established highly efficient new plants in the deep south and they're staffed with non-unionised workers with defined benefits.

No company in its right mind would take on such an open-ended mess, especially learning from Daimler-Chrysler.

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if GM goes bust or into chapter 11 then presumably Ford will follow as i understand that they are just as deeply in the mire :(

Ford's position almost mirrors that of GM

http://news.bbc.co.uk/1/hi/business/4297305.stm

It is the world's third largest carmaker, and sells more than 6.5 million or $140bn (£70bn) worth of vehicles every year Although the company made a $3.5bn profit last year, most of its revenues came from selling car loans and other credit - it made relatively little money from selling cars.

And if interest rates rise, those revenues could dry up.

"Ford's total liabilities for healthcare are about $24bn, pensions are something similar," says motor industry analyst Graeme Maxton. "The total value of the business is only around $17bn. So the liabilities are much, much greater than the value of the business."

Some commentators believe that it is only Ford's iconic status which is allowing it to keep operating in the current climate. "If the name wasn't Ford, it would be filing for bankruptcy by now," says outspoken credit ratings analyst Sean Egan.

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Didn't they get Homer Simpson to design them a new car? :blink:

http://en.wikipedia.org/wiki/List_of_vehic...in_The_Simpsons

The Homer

In "Oh Brother, Where Art Thou?", Homer finds out he has a half-brother, Herb Powell, who owns a car company. His brother asks him to build a car for the average man. Homer orders the design team to include three horns that play "La Cucaracha", shag carpeting, bubble domes, extremely large cupholders, and a separate compartment with restraints and muzzles for the children. The resulting vehicle, The Homer, is absurd and way too expensive ($82,000) for the average man to afford. The spectacular failure runs Powell into the ground, forcing him to sell his company, declare bankruptcy, and live on the street.

Shades of Ford and GM methinks.

Right-I'm off down the pub, otherwise I'll spend the rest of the night on here. I've already missd the first half of the rugby.

Thehomer.jpg

post-67-1142705976.jpg

Edited by Baz63

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Wealth is shifting Eastward to countries that actually produce things and produce them cheaper.

The sun may well be setting on the West as India and China take their place as the powerhouses of the new world economy.

America, at least, has a huge capacity to produce food and holds jointly with its neighbour Canada the world's largest oil reserves. The UK, at leasst, has its special relationship with its former Colonies and that fact alone may keep it in good stead when things get rough.

The US and Canada have quite limited reserves of accessible oil, relative to their consumption. You forget that the bulk of these "huge" oil reserves are oil shales which take a great deal of investment to develop. This is because they require large input of heat and water to separate the oil from the shale. With focus, and nuclear plant to provide heat, Canada might be able to produce 3-5mb/d of oil by 2020 from oil shales, but this is relative to consumption at present of about 23mb/d (USA + Canada). I doubt that Canada will forever feed the USA its oil and gas.

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GM and Ford are being hit due to the increases in fuel and fierce competition from other makers. I just watched a good docu-film called "The End of Suburbia". It mentions what a big mistake it was to develop large out of town dwellings and the urban sprawl associated with them. With peak oil not far off these areas will become less attractive as fuel prices surge. There will be a need for people to return back to towns and cities and smaller dwellings. Real Estate property is likely to collapse outside of the big urban centres.

Journeys are not the only thing to get expensive. There will have to be lots of changes re mass consumption that there is now. My feeling at the end of the film was that from peak oil and the decades after it - globalisation will suffer badly and there will be a return to local manufacturing and farming within countries.

The film mentions how the world leaders are not doing much about it. 60% of the oil left is in the Persian Gulf so there is likely to remain conflict in that area for many years to come.

Interestingly the film barely mentioned China and the other developing nations who need more oil to develop their economies and the airline industry (which must cut back).

One thing is for sure over the next 40 years there will be big changes and quite possibly a prolonged economic slump. Oil will be around for some time to come but will be a luxury for the few (e.g. Mad Max).

At least everyone will be in the same boat and property prices and pensions will be the last things on everyones minds as people in the west battle for survival during the great global levelling!

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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