General Motors and the U.S. government have several characteristics in common. Both are unwieldy behemoths which have become debt-laden, wealth-destruction machines. Their workers are overpaid and under-productive (for Federal employees, counterproductive is a more apt description). Foolish creditors have kept these monstrosities afloat and will eventually end up regretting ever having lent these debt addicts a dime. Yet, each one is a public-relations machine preaching to the citizenry that it is indispensable. The Federal government, accordingly, is working with General Motors on a rescue plan which entails exchanging debt and other liabilities for equity. If this exchange offer is successful, President Obama will be hailed, by the mainstream media, as a visionary leader with the good sense to override the impersonal phenomenon known as the free market. Isn’t it true, after all, that what is good for General Motors is good for the country? Not anymore.
What is good for the United States is an unhampered free market. In a free market, successfully anticipating and meeting the needs of consumers are rewarded with profits and wealth creation. Conversely, when a business consistently loses money it must either adjust its business model in order to compete more effectively (before its financial condition becomes too weak), or face liquidation. Failure is not the end of the world as the resources tied up in a failed company can be freed up for entrepreneurs to use in other productive ventures.
In all my years as a financial analyst, I have never seen a company as grossly mismanaged as General Motors. This automaker’s financial destitution indicates GM’s management team, laborers, and related union executives may be the most incompetent in U.S. history. It is abundantly clear Americans love automobiles. Hence, it is a no-brainer that the U.S. is a market where a company could become hugely successful and wealthy by manufacturing and selling cars. Since GM’s founding in 1908, it has managed to accumulate — as of fiscal year-end December 31, 2008 — a deficit working capital position of $32.7 billion and a deficit equity position of $86.2 billion. So in the course of 100 years, General Motors has sold millions upon millions of automobiles and has managed to become profoundly insolvent. The Three Stooges could have done a better job of running an automaker.
Within a free market, a company with such shockingly poor financial indices could never be reorganized — it is plainly too far gone from a financial perspective. Thus, it would be liquidated with secured and unsecured creditors doing whatever they can to recover a percentage of the monies they are owed. Common shareholders would be wiped out.
In looking over the details of the above-mentioned exchange offer, I have no doubt this is merely a stop-gap measure as GM would remain deeply insolvent. Here are key points of the exchange offer:
- Common stock plus accrued interest in cash offered for $27 billion of outstanding public debt
- Successful exchange to result in at least $44 billion reduction in total liabilities from bondholders, U.S. Treasury, and VEBA
- Bondholders to own 10 percent of GM after successful exchange offer
- Exchange contingent on VEBA modifications and U.S. Treasury debt conversion conditions resulting in at least $20 billion reduction in liabilities
- Expect to seek bankruptcy relief if the exchange offers are not consummated
What if the exchange offer is successful and total liabilities are reduced by $44 billion? This would still leave GM with an equity position of negative $42 billion. No company can continue to operate when it is so incredibly broke. To be sure, this implies GM would remain a ward of the state and the U.S. Treasury would continue to lend it money; thereby perpetuating this wealth-destruction machine.
To further drive home the point, as to how broke GM is, let’s do a quick thought experiment. If Supreme Commander Obama decided to simply give GM a "gift" of $100 billion, would all be well at General Motors? Undoubtedly, you know the answer is "no." Even with such a generous gift, GM would still be a precariously leveraged company with a total liabilities-to-equity ratio of nearly 13 to 1 — using GM’s 12/31/08 balance sheet as the basis for this analysis. It should be obvious, therefore, that the aforementioned exchange offer is merely placing a bandage on a mortally wounded company.
This is why I cringe when I hear politicians and financial reporters mention any kind of reorganization for General Motors (including Chapter 11 Bankruptcy reorganization). Any such reorganization would automatically imply massive Federal guarantees that will come at enormous taxpayer expense; which also indicates that productive citizens are viewed, in Washington, D.C., as mere abstractions born to serve the needs of America’s political elites.
The marketplace has spoken; GM has failed and it should be liquidated. New entrepreneurial and wealth-creating opportunities most likely will emerge from such a liquidation. To continue down the present path assures more wealth will be destroyed by the financial black hole known as General Motors.
