Saturday, March 19, 2005


General Motors

On March 16, I wrote about General Motors' big fall. I read that the company owed $100 billion. I have since learned that the figure is almost $300 billion. But the story is worse than that! From The Death of the Dollar
GM has $300 billion in debt ...and has a market cap, now, of $16 billion. See the problem there? The bondholders could buy the company nearly 20 times over if they used their money to buy stock instead of loan it to the company. The implication is clear--that GM is headed towards bankruptcy, and will default on the bondholders, who will then own a company worth less than $16 billion dollars!

For every one point that interest rates rise, refinancing GM's debt will cost an additional $3 billion in annual interest payments -- money that they clearly do not have! Where is GM going to get another $3 to $6 to $9 billion as interest rates rise by 1%, 2%, and 3% more? Selling cars? Nope. Selling stock? Unlikely in this market! Borrowing more? From whom?


So, therefore, GM will soon be a $300 billion dollar blow-up!

How big is that? It's bigger than Enron, Global Crossing, LTCM, K-Mart, and the IRAQ war all put together!

In addition to long term debt there is a significant longer-term challenge posed by the company's large retiree base and the resulting high level of health care costs.
At year end 2003 GM's unfunded OPEB liability was $57 billion (exculding the $4 billion Medicare subsidy), and annual health care costs approximated $5 billion. Moody's believes that this burden will represent an increasingly material competitive disadvantage for GM as health care costs continue to rise.
From The Pension Catastrophe by Gary North
The problem facing every company with a defined benefit program is that current pension obligations must be factored into retail prices. Consider the auto industry.

... The results of a Prudential Financial study state that pension and retiree benefits represent $631 of the cost of every Chrysler vehicle, $734 of the cost of every Ford vehicle, and $1,360 of the cost of every GM car or truck. In contrast, an article in the Detroit Free Press reported that pension and retiree benefit costs per vehicle at the U.S. plants of Honda and Toyota are estimated to be $107 and $180, respectively."


But costs do not determine prices. Supply and demand determines prices. If a new supplier comes along who is not burdened by past pension fund obligations, this supplier can undersell the firm that made such promises. For American and European firms, the four-letter word that confronts them is "Asia."

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