April 7, 2006
My Quote in the Economist Magazine
I was quoted in the Economist Magazine of April 6th on GM's sale of GMAC. The quote was a tongue- in- cheek response to GM's situation. As I have noted here, GM is bleeding cash and, unless something is done, will bleed it huge cash reserves until it becomes insolvent in 2007. In Chapter 11 the company can reorganize and attempt to make itself viable. The sale of GMAC gives the company more cash and a bigger cash cushion and delays bankruptcy a bit longer. This is not then a positive. Unless GM makes radical changes, the sale simply delays the inevitable. Yet the changes GM needs to make may only be possible in Chapter 11; GM may not be able to restructure its legal obligations to workers in any other way. GM needs to cut workers salaries significantly to make automobiles that are price competitive and this does not appear possible outside of Chapter 11.
This is an awful position - the firm seems locked into a strategy that requires it to burn up all its cash before it can heal itself. I suggested to the reporter, with tongue-in-cheek irony, that we would be better off if GM could give its extra cash to shareholders (rather than burning through it) and then reorganize in bankruptcy sooner rather than later. He published the quote; some may take it more seriously than I intended. I recognize that an extraordinary dividend or a share buyback program could be set aside in bankruptcy as a fraudulent conveyance (or preference) if the payment itself makes the firm insolvent (and directors could be personally liable under state corporate codes). Any extraordinary dividend would have to not cause insolvency (nor cause GM not to be able to pay debts as they become due). I can see the extraordinary dividend strategy as a possible scenario (and a very risky one at that) only if the dividend were to be coupled with massive cost cutting (layoffs), breaking the causal tie of the dividends to insolvency.
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The other thing that GM could do, which would be comparable, but less legally objectionable, would be immediately to start winding up business as an entity, selling some divisions, and shutting others down.
GM's current situation is reminicent of LTV before its bankruptcy. A couple years before it went under it had considerable cash reserves but an operating loss. As the last years of the company progressed, it simply ate through its cash reserves steadily until it ran out. Shareholders would have been better served if it had liquidated, and its competitors might not have faced a simlar fate that took down the vast majority of the industry in the U.S. had this competition from an industry giant disappeared sooner.
Posted by: ohwilleke | Apr 12, 2006 10:12:18 AM
On a slightly different topic ...if GMAC remains a seperate unit, would you not agree that GMAC bonds could be a great investment if GM goes bankrupt. Would laws involving / disallowing substantive consolidation not keep gmac as a seperate entity and therefore untarnished by the situation at GM?
Posted by: joe giustino | Apr 14, 2006 12:11:27 AM