"We Continue to Wonder How GM Will Continue to Remain in Business Given the Tough Credit Markets and GM's Aggressive Cash Burn"

Robert Farago
by Robert Farago

Speaking at the Reuters 2008 Restructuring Summit, default expert Edward Altman dismissed the impact of $25b in low-interest federal retooling loans and pegged GM’s chances of avoiding C11 at 50 – 50. Or worse: 55 – 45. “A bankruptcy filing may be the best option for GM to protect its assets and further reduce costs, said Altman, professor of finance at New York University’s Leonard L. Stern School of Business. “If we have a global recession, you know autos are going to get hit and get hit hard, not just GM, and it’s looking more and more like a global recession.” To set the odds for GM’s ability to avoid C11, Altman used his “Z-Score.” The formula for predicting corporate bankruptcies pegs GM at “CCC-minus” or lower, one of the last rating categories above default. “Some [unnamed] studies have shown an accuracy rate of more than 80 percent for the Z-Score.” Which is obviously better than 50 – 50. Too bad the SEC says you can’t short GM (or Ford) until October 2. Anyway, GM responded with its usual iceberg, what iceberg? “We’ve been very clear that bankruptcy is not something that we’re considering,” spokeswoman Renee Rashid-Merem said.

Robert Farago
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  • Eh_political Eh_political on Sep 27, 2008

    @ mel23: No question about labour rights. And unlike the EU, only some classes of person may obtain visas to work in other countries--or consult. Skilled, highly educated business types and consultants are sucked into high paying jobs in the US, and US managers migrate freely to branch plants in Canada and Mexico. I guess the issue is that Mexican labour does benefit, and that since NAFTA employment levels in all three countries have been stable and low. Do Mexican labour costs depress the standard of living in North America? It's possible, but it pales to insignificance in comparison with the unbalanced trade with China. It's hard to envision a less reciprocal trading relationship.

  • Robert Schwartz Robert Schwartz on Sep 27, 2008

    I have been trying to get a grip on this situation. I found this report by the Department of Commerce: "The Road Ahead for the Automobile Industry" 2008 [PDF], which contains lot of good information on the state of the industry. Also, "U.S. Automotive Industry Employment Trends" 2006 [PDF]. First the totality of the industry (the OEMs). In 2001, 17.1 million new vehicles (cars & light trucks) were sold in the US, of which 11.7 million were manufactured in the US. In 2007, the numbers were 16.1 and 10.5. This year they will be less. In 2001 the industry employed about 280,000 people down from 290,000 a few years before. In 2007, it was about 225,000. I looked at Honda, because they have new plants, no union contracts, and they just plain know what they are doing. They have published nice summaries of their North American operations. Honda has the capacity to manufacture 1.8 million vehicles, from 12 Plants employing 25,000 workers. The plants cost almost $11 billion. On that basis, a 12 million vehicle per year industry (assuming that we eventually get back to 2001 like numbers) would consist of about 80 plants and employ about 170,000 people and have a total cost of about $72 billion. If the Big 3, were half of that they would have 40 plants, 85,000 employees and have a total investment of $36 billion. The $25 billion is clearly quite meaningful in that context -- but, they cannot afford to spend that kind of money on legacy costs like pensions for people who worked there years ago and job banks for people who have nothing to do. This is where Chapter 11, could provide them with a clean start. Unfortunately, Chapter 11 cannot get them smart management.

  • Potemkin Potemkin on Sep 28, 2008

    eh_political I agree trade between Canada and the US is a good thing, however, I do not believe trade between Mexico and the US and Canada benefits anyone other than the companies CEO's and shareholders. Canada and the US have similar social and economic structures. They have unions, somewhat similar wage levels, respect for the individual, etc. Mexico on the other hand has few unions, significantly lower wage levels, little respect for the individual, etc. The US and Canadian workers cannot compete with the Mexican worker on wages and so loses work to Mexico. NAFTA appears to be a one way street with our jobs going to Mexico but no Mexican jobs coming north.

  • Eh_political Eh_political on Sep 28, 2008

    @ Potemkin: In the longer term, a prospering Mexico is a growing market for all manner of US goods and services. The more prosperous Mexico becomes, the less of an issue illegal migration becomes. A stable, thriving Mexico is of great benefit to America. Now compare this with China. Wages are a fraction of those in Mexico. Trade is parasitic and mercantilist in nature. This is the real example of a trading relationship that benefits only CEO's and shareholders...and the politicians they persuaded to go along with this lopsided relationship. The only reason middle and lower class people have not noticed the decline in wages is because of artificially cheap goods from China. It was the classic British method of annihilating competition. It will be interesting to see how all of this plays out. And by interesting, I mean horrifying. Most of the world will come to mourn the passing of American hegemony. It has been a comparatively uneventful 68 years.