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.