General Motors Death Watch 112: The Three Headed Dog Days of Winter

Robert Farago
by Robert Farago
general motors death watch 112 the three headed dog days of winter

GM CEO Rick Wagoner was once the automaker’s Chief Financial Officer. So why has GM twice delayed filing its 10-K financial statements (reporting their earnings for the fourth quarter and the ‘06 financial year)? You’d think that they’d be ship shape by now. "These are big complex businesses,” Wagoner told a reporter in Geneva yesterday. “When you do transactions at the end of the year it adds additional complexity." Fair enough. But Wagoner’s no dummy. The real reason for the delay is a fight over cash.

On November 30, 2006, General Motors sold 51% of their finance unit, the General Motors Acceptance Corporation (GMAC), to Cerberus Capital Management. Actually, Cerberus bought the net asset value of a large number of GMAC’s financial securities, with little value ascribed to the enterprise itself. Equally important, GM didn’t realize $14b. So far, GM’s net payoff is around $5b. This lump sum will soon be less.

Even as Cerberus was negotiating their GMAC purchase, the U.S. housing boom was going bust. So the money men at Cerberus included a “valuation period” before the closing statement. This last loving look at GMAC’s books will determine the final purchase price for Cerberus’ 51% GMAC buy-in.

Suffice it to say, things have not gone in GM’s favor. In the last six months, the U.S. housing market has tanked. In January, new house sales fell 16 percent. The situation is exacerbated by the fact that GMAC put $57b worth of its eggs– some 77 percent of its loan portfolio– into subprime mortgages. The current default rate: around 14 percent.

Fourteen percent of GMAC’s money is not about to disappear; the loans are collateralized against bricks and mortar. But all that defaulting does nothing for GMAC’s profitability. To wit: GMAC’s subprime subsidiary, Residential Capital, is laying off 1000 employees.

All of which means GM’s 10-K filing delay isn’t so much an accounting issue as a Mexican standoff. Cerberus and GM are locked in a dispute over the exact amount of “blowback” GM owes the investment group. There’s Wagoner’s “complexity.”

Lehman Brothers analyst Brian Johnson reckons loan-loss provisions and mortgage securities write-downs could end up costing GM $900m to $950m in cash charges– in the first half of this year. The easiest and most likely way for GM to pay off Cerberus: surrender more GMAC shares to Cerberus. TTAC’s Deep Throat estimates another 10% should do it.

But even after the dust settles and GM’s accounts are finally filed, the dust may not settle. Lest we forget, GM still owns 49% of GMAC. A sustained housing market downturn would eventually reduce GMAC’s once bounteous cash to a trickle. Eventually, because GM gets its GMAC money in the form of dividends, and the GMAC sale eliminated dividend payments for two years post-sale.

If you’re beginning to get the idea that the GMAC transaction has turned into something of a headache for one of the “partners,” consider this.

You know those “zero percent to anyone with a pulse” finance offers GM’s used to move the metal? To “buy down” the obvious risk on these deadbeat deals, GM has made as-yet-unspecified payments to GMAC (an amount that probably begins with a “b”). You can bet that Cerberus will be taking an even closer look at these car finance deals in the days ahead, looking to further limit their exposure and protect their profits.

Meanwhile, GM Car Czar Bob Lutz has been predicting that one of his cross-town rivals is about to go belly-up. He’s not wrong. But GM’s determination not to file for Chapter 11 will take a major hit when The Glass House Gang seeks the court’s protection. FoMoCo will restructure its dealer network, shed its OPEB (Other Post-Employment Benefits) and force a new deal on the UAW. The disruption to parts provision and the Blue Oval Boyz’ huge cost advantages would eventually force GM to follow Ford into bankruptcy court.

Is waiting out Ford the “real” plan? Not according to Maximum Bob. "We're approaching the end of the beginning of the transformation of GM," Maxi Bob proclaimed.

I don’t think so. Yes, GM’s cut about as much fat as they can from their cost structure. Yes, their earnings will improve. But this year’s cash flow will remain negative. To stave off Chapter 11, General Motors needs many things to go right and, more importantly, nothing to go wrong. A GMAC meltdown, a strike at Delphi, a sudden gas price hike, a Ford bankruptcy, a supplier revolt– The General simply doesn’t have the financial strength to withstand a major attack on its cash reserves.

Like a sub-prime borrower looking at the loss of their home, GM is at the end of the line, hoping that its luck will hold out long enough for it to climb out of a hole– of its own making.

Join the conversation
2 of 84 comments
  • My12by60 My12by60 on Mar 11, 2007

    Raymond, I am no expert in the auto industry. And I don't know exactly how the blame for the current situation at GM should be shared between labor and management. But I do know that the blame should be shared in some fashion. That says nothing about your dad who may have been a great employee. But when you suggest that some of us here in this forum want to see benefits be "taken away" from folks, that is simply not true. Most here are simply making the observation that benefits will be taken away, not that we necessarily want that to happen. And who is the party responsible for taking away these benefits? The answer is auto consumers, as mentioned by the prior poster. Auto consumers are simply unwilling to pay GM enough for its products so that GM can afford to pay all of its wages, benefits and other costs. That is what has GM headed for a BK court.

  • TireGuy TireGuy on Mar 12, 2007

    shamu wrote: I am not a huge fan of GM or the Detroit product line in general, but I feel compelled to speak out against all the union-bashing. Aren’t our beloved BMW’s, Porsches, etc. built by German autoworkers that are in a union that is more polwerful than the UAW (board seats.) I drive a bulletproof Mazda 626 that was built by UAW labor- many Corollas are built in Cali by UAW labor…..I submit that unionized transplant factories would still produce wondeful products…after all, both Germany and Japan are more collectivist societies than the US, yet their autos are admired. ____ You are right, that in Germany the unions have a strong position, especially in the automotive industry. And here, as in the US, the workers at VW, BMW, DCX etc. get paid better than other workers, according to the housetariffs. However, the Unions have always been willing to negotiate in case a company runs into problems. They agreed with VW the 4 day week. They have agreed moderate pay increases in the last years, etc. In the US, the relationship is absolutely confrontational. The UAW is known for having thrown quite some companies into bankruptcy, even though they had the chance before to negotiate some cost reductions which helped the companies to survive. A big problem in Chapter 11 will be that if GM asks the court to set aside the labor union contracts and the health and benefit contracts, the obligation on the union to keep peace terminates immediately after the judge grants consent. Therefore the UAW can go on strike. Altogether, the hardliner UAW union and the risks arising out of this scenario have probably also kept the GM Management away from Chapter 11. Even if they file, it will be difficult to come out in good shape. As was stated before - who will buy a car with a 5 year warranty if he doesn't know whether the company will then still be there? When BenQ Siemens filed for bankruptcy in Germany last year for their mobile phone business, people stopped buying there mobile phones, the oparator companies delisted then, etc. - there was nothing left to be reorganized after a few weeks. No business any more.

  • Ollicat I have a Spyder. The belt will last for many years or 60,000-80,000 miles. Not really a worry.
  • Redapple2 Cadillac and racing. Boy those 2 go together dont they? What a joke. Up there with opening a coffee shop in NYC. EvilGM be clowning. Again.
  • Jbltg Rear bench seat does not match the front buckets. What's up?
  • Theflyersfan The two Louisville truck plants are still operating, but not sure for how much longer. I have a couple of friends who work at a manufacturing company in town that makes cooling systems for the trucks built here. And they are on pins and needles wondering if or when they get the call to not go back to work because there are no trucks being made. That's what drives me up the wall with these strikes. The auto workers still get a minimum amount of pay even while striking, but the massive support staff that builds components, staffs temp workers, runs the logistics, etc, ends up with nothing except the bare hope that the state's crippled unemployment system can help them keep afloat. In a city where shipping (UPS central hub and they almost went on strike on August 1) and heavy manufacturing (GE Appliance Park and the Ford plants) keeps tens of thousands of people employed, plus the support companies, any prolonged shutdown is a total disaster for the city as well. UAW members - you're not getting a 38% raise right away. That just doesn't happen. Start a little lower and end this. And then you can fight the good fight against the corner office staff who make millions for being in meetings all day.
  • Dusterdude The "fire them all" is looking a little less unreasonable the longer the union sticks to the totally ridiculous demands ( or maybe the members should fire theit leadership ! )