Monday, March 30, 2009

GM Bankruptcy Is Inevitable

Obama says that he is determined to rescue the U.S. auto industry but that it can't be allowed to become permanent wards of the state.

That sounds nice, but at least as far as GM goes, these two goals are incompatible. It's not that GM is broke. It's not. It's worse than broke.

GM has $86 billion in negative equity. Do note the "negative" in that. Normally, companies of course have a positive equity, and in many countries (Though obviously not the United States) companies with negative equity are automatically considered bankrupt. And it's only going to get worse and worse as long as it continues to operate. GM lost a full $31 billion in 2008, of which $9.6 billion was in the fourth quarter.

A company like that simply can't survive unless it either somehow magically achieve a quick and very dramatic turnaround or it becomes a basically permanent ward of the state.

In order to return to profitability, GM needs both a cyclical recovery and a reduction of labor costs to levels comparable to its Japanese competitors. Neither of these things are likely to happen anytime soon, so in order for GM to avoid bankruptcy it will have to remain a ward of the state for a long time.

It remains to be seen whether the Obama administration will choose to let GM go bankrupt or whether it will in fact become a ward of the state. But it seems very clear that for the foreseeable future, it will have to choose one of these two alternatives. It can't avoid both.

BTW: I explained here why bankruptcy really wouldn't be as bad as many of you probably thinks.


Blogger Ke said...

Will Obama fold to the UAW and all of the pleas from the people in Michigan?

11:45 PM  
Blogger Wille said...

4-5 years ago I was analysing GM, and at the time I thought "wow, this company would be worth more broken up and liquidated than it would as a going concern".

Note: that was 4-5 years ago. I'm guessing things could have been a lot better for them if that had actually happened back then..

10:35 AM  

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