GM Better Off Bankrupt? My Opinion

By Francine • Mar 5th, 2009 • Category: Latest, Pure Content

Ron Silberstein and I met on Twitter. Every day I meet more and more interesting people there on a virtual basis, for now, and in person as I did during my recent trip to Baltimore and Washington DC.

Ron is a Principal of Maddox Ungar Silberstein, PLLC a CPA firm in Michigan. He heads up their SEC and Franchisor audit departments. He commented recently on my post about the Northern Trust and the PGA tour event held at Riviera Country Club. He assures me that as a former CFO and Chief Administrative Officer of Pro Golf of America, Inc. (an international franchisor of retail golf stores) and related companies for 4 1/2 years (including ProGolf.com) he does know golf. (Ron has no direct investment in NTRS or GM.)

He saw a recent Tweet of mine on GM (there have been many) and responded with a contrary opinion.

It made me realize that I should probably defend my opinions regarding a GM bankruptcy in a little more detail.

Point One: Job loss

Many commentators cite potential catastrophic job loss as a reason for preventing a GM bankruptcy. But hasn’t this job loss already occurred? And could the figures often cited by the media be overstated?

The impact of a Big-3 bankruptcy and restructuring would be severe, but frequently-quoted job loss figures are misleading and overstated, according to a new projection by the University of Maryland’s Inforum economic research unit.

The economic condition of Detroit and Michigan in general is already horrible and keeping unhealthy, insolvent, illiquid companies like GM on life support just prolongs the agony and delays the acknowledgement that a completely new economic base must be developed.

General Motors (GM: 2.18, 0.18, 9%) reported a 52.9% plunge in February sales from a year ago, its worst February since 1967.”

Chicago Tribune January 29, 2009

It may be tough to get financing for a new car these days, but in Detroit you can buy a house with a credit card. The median price of a home sold in Detroit in December was $7,500, according to Realcomp, a listing service…Detroit displays only islands of prosperity amid a dismal landscape. Neighborhoods have suffered, and foreclosures have aggravated the long-festering ill of abandoned homes.

“A lack of vision has held us back,” said Nicholas Hood III, another mayoral candidate. “The auto industry was so dominant—too dominant—and we never prodded ourselves and the business community to a more expansive vision.”

GM’s suppliers such as Delphi are already bankrupt and surviving only with infusions of cash from GM, at taxpayers’ expense. Good money thrown after bad, thrown after bad, again.

Delphi Corp. (PINKSHEETS: DPHIQ) today announced several agreements reached between Delphi and General Motors Corporation (GM) in order to supplement Delphi’s liquidity position and to substantially complete Delphi’s portfolio transformation…

Point Two: Continuity of service

It’s often stated that in the event of a GM failure, most everyone will stop buying its vehicles. Parts have to be available, warranties have to be honored, etc. If there is doubt you’ll buy another brand. If GM fails, it’s said, their suppliers will also go down.

GM Today received a “going concern” opinion from its auditors, Deloitte. It’s been a long time coming. GM has been a problem child for a while. (Deloitte was also auditors for bankrupt Delphi, GM’s red-headed stepchild.)

According to Bloomberg:

“The “going concern” ruling, means there’s substantial doubt about the automaker’s ability to survive, according to the filing. GM has renegotiated terms with its lenders to avoid violating loan conditions with the designation, it said.

GM reiterated that if it’s unable to restructure successfully and has to file for bankruptcy without government support, it may have to liquidate under Chapter 7 bankruptcy protection because of the lack of private debtor-in-possession funding.”

From Robert Salomon’s blog:

“The fact is that a GM bankruptcy would be very different from a “traditional” bankruptcy. As Mr. Wilkinson points out, in the case of GM, the federal government will act as the DIP financier. With the federal government as the DIP financier, GM not only has the explicit backing of the US government, but the implicit guarantee that it shall continue as a going concern. Moreover, the federal government can stand behind GM warranties. Those stylized facts alone are enough to diminish consumer flight.”

Point Three: Retiree impact

The PBGC will end up with the GM pension burden. Under the circumstances, I’d rather that than an indirect subsidy to GM pensions via the taxpayer money being sent them now. There hasn’t been anywhere near the accountability for the money already sent that there should be. It’s better, in my opinion, to have the government take care of those retirees directly rather than waste having the money go through GM and the unions.

As far as the health care costs, current and retiree, this may sound cruel but I think it’s about time the unions see how the other half lives. President Obama is spearheading a major restructuring of the healthcare system to provide a minimum level of care for everyone. If the GM workers and others come into this population, there will not only be a stronger impetus to get it done and done quickly but the economies of scale will be served by having the costs and risk spread over a larger population.

Point Four: Lead time

Many would like the automakers have more time to change over to developing fuel efficient, high quality vehicles for now and for the future. American consumers are fickle – gas goes up to $4.25 a gallon and we scream for fuel efficiency, SUV’s languish on the lots. Goes back down and we’re back buying gas guzzlers. GM needs more time to see results of “progress” they’re making.

Unfortunately, time has run out on GM. They need a new attitude. They need new management. I think that will now happen. I hope that will now happen.

Point Five: Maintain global image as manufacturing leader

The US has always seen themselves as a world leader in manufacturing. A forced bankruptcy is viewed as a forced failure, and many feel that GM is “too big to fail.”

Unfortunately, it looks the economy will have to survive the demise of GM. It’s been dead for a while, but we’ve been reluctant to bury the body. Like a lot of other people in this current economy, the auto industry, its employees, and those dependent on it will have to shed false pride and concerns about their “image.”  We all have to reinvent ourselves. It’s always better to undertake those reinvention projects on your own time rather than to be forced.

But in this case, GM has been denying the reality and bringing many others along on the fantasy ride for too long. The employees, customers, vendors and suppliers to GM need a change. The City of Detroit, State of Michigan and United States need a change. And given GM’s presence around the world, the change that will come of this will be good in the long run for those communities too.

Note on the photo:  My first car was a 1976 Oldsmobile Cutlass, with an eight-track player.

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14 Responses »

  1. Let GM fail. Let anyone that’s going to fail, fail. There’s a reason some companies are surviving (and thriving even, see Walmart) and some aren’t. Otherwise you’re telling GM that whether or not they sell any cars they’re going to get paid. That’s not going to lead to progress. Chapter 11, fix their union FIASCO, and we’ll see where they land after they stop pushing so many freaking trucks down our throats. We don’t want trucks right now, thanks though!

  2. I’m sure there are many people who saw this coming. GM, along with Ford and Chrysler, has been around since our grandparents were born. These companies have had so many opportunities to get it right. Meanwhile, their competitors overseas have figured it out several years ago and realized that innovation and re-invention are key. It should be no surprise that GM is suffering simply as a result of its decision to stick to tradition and conventional models.

  3. Give credit where credit is due. At least D&T gave the right opinion

  4. [...] Francine McKenna is debating the rights or wrongs of letting GM go to the wall. It’s an ongoing debate in the US where GM has become a source of national pride and reputation. The thinking Francine exposes is neither logical nor sane: The economic condition of Detroit and Michigan in general is already horrible and keeping unhealthy, insolvent, illiquid companies like GM on life support just prolongs the agony and delays the acknowledgement that a completely new economic base must be developed. [...]

  5. I’d love to know how Gov. funding affects an Auditors eventual opinion. Don’t think this is the first kind of Co. that will go belly up either, so we’ll get to see how auditors deal with those cases.

  6. J Bonelli,

    According to what I’ve seen on the OMB website, the stimulus dollars will flow out in one of three ways: contracts, grants, and loans. I don’t think that the auditors will have any trouble reviewing the accounting for any of those activities. In some cases, liabilities will have to be recognized to offset funding received (e.g., advance payment on a contract, receipt of a loan, etc.). I understand that cash flow is the key concern (as opposed to the balance sheet); I don’t think this is going to be too much of an issue.

    – Tenacious T.

  7. To post #3:

    If GM didn’t get a going concern paragraph after last year, then Deloitte would’ve been run out of the accounting business. I’m sure they spent hours upon hours trying to figure out how they could avoid it to help GM out. Auditing is a joke. The whole system of auditing is broken. The Going Concern paragraph had to be there. No credit is due for D&T for putting it in.

    The choice is easy: Let companies fail or force the entire US economy to fail (including those companies you tried helping).

  8. GM is like the big oak in your yard that got hit by lightning. you love the tree, it’s older than your house, but it’s dying on the inside. it seems such a waste to cut it down, but no matter how much you spend pruning and propping it up, it’s going to die. You can either drag it out or let it fall. by keeping it up nothing can grow underneath it. cut it down, and let’s see what springs up in its former shadow.

  9. [...] ahead, trade the rumor.  But in this environment, these companies, like GM and others will fail when you least expect it, in an “unpredictable” way, and [...]

  10. [...] discussion with Ron Silberstein was the inspiration for my previous post on the question of a GM bankruptcy.  Now he’s written a rebuttal.  It’s reprinted here, in its [...]

  11. The Most important challenge GM faces is to win back the trust of the tax payers. Giving away billions of tax payer money is not going to go under good sights of the consumers

  12. Failure is the stepping stone of success. So, there is no doubt that GM will climb to the top. Here it is quoted that, financing for a car is tough, rather than buying a house. I don’t agree with this point, only people experiencing difficulties when buying a house knows the truth lying behind that. Do someone possess efficient knowledge on foreclosure home deals in Canada?

  13. [...] in the grand scheme of things, although we know now how well that assumption turned out for GM and GE. There’s absolutely a higher risk in smaller companies for fraud and malfeasance due [...]

  14. [...] Reporting Issues conference, I taped a spot for The Street.com on the November 18th GM IPO.  I was against the GM bailout. I’m embarrassed by how the administration has manipulated this “resurrection” of [...]

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