Saturday, November 08, 2008

General Motors' Massive Negative Equity

Yesterday, I discussed the possibility of General Motors going bankrupt. But what few have noticed is that by some measures, General Motors should have been declared bankrupt for some time now. I mean, there have been several years since GM made a profit. Year after year have passed by with loss after loss reported. And moreover, until just a few months ago, GM was actually incredibly enough paying dividends.

The result of this is that GM now has negative equity-and we're not talking about small sums. As you can see here, on June 30, General Motors had assets to the value of $136 billion and liabilities of $193 billion, implying a negative equity of $57 billion!. And with the loss they reported for the third quarter, equity is presumably even more negative now. And given how dire the outlook is for car sales, can anything but increased losses be expected?

Ford's situation is BTW not quite as bad as General Motors', but they too have negative equity as assets stood at $265.3 billion and liabilities/debts at $267 billion. And as Ford continues to accumulate losses, their negative equity should get bigger and bigger.

GM and to a lesser extent Ford are broke and run operations which are simply economically unviable. They really should therefore go bankrupt and have their assets liquidated. But I doubt that the future President Obama will let that happen considering how many auto workers who would become unemployed in a time when unemployment is already rising fast and considering the support Obama has gotten from unions (Detroit auto workers are heavily unionized).


Blogger flute said...

I couldn't agree more. I'm simply amazed every time I look at GM's balance sheet. How can anyone in their right mind actually want to lend money to a company like that?
Since one or more lenders are obviously still lending to GM, I would really like to know who they are. And what is their reason to lend? Are they just crazy or are they very "patriotic"?

8:53 PM  
Blogger Flavian said...

Probably those who lend GM money believe that the US government will not allow GM to go bankrupt.

9:41 PM  
Blogger Enginerd said...

One could make similar arguments about the "systemic importance" of GM and Ford to the economy as a whole. Obviously one would like to let them fail, but letting it happen now could be extremely dangerous. The option of keeping them alive for a year or two might work out being cheaper.

This should've been addressed earlier, because GM has been insolvent for years. The reason their 2007 income statement was so bad is they had to write off a deferred income tax benefit of $30 billion. That was being carried as an asset for a few years. Without it they would've been bankrupt. And now they are.

5:29 AM  
Anonymous Anonymous said...

How is it actually possible to have negative equity. Doesn't that imply that the stock is worthless???

7:18 AM  
Anonymous Anonymous said...

> How is it actually possible to have negative equity. Doesn't that imply that the stock is worthless???

If this world were entirely rational, then yes...

9:59 PM  
Anonymous Anonymous said...

I grew up in Cleveland in the 60's. Even had my HS after-prom at the UAW hall. Back then, the UAW worker's idea of QC was slashing tires of imports. They have produced such garbage for so many years. Now they want my hard earned money to pay for their mismanagement? I don't think so....

10:10 PM  
Blogger greywale said...

I say let them go bankrupt and get reorganized.Toyota operates in the USA and makes money! Less than 1/2 the plants and 1/3 the employees!
GM has 265,000 employees aprox. and Toyota has 86,000 ! And toyot truck doors don't sag as chevey have for at least 40 years. Time to clean house!

4:53 PM  

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