Friday, February 23, 2007

general motors investor warning

"As I've written in The Digest, the daily e-letter I send to subscribers, GM is already bankrupt. Over the last 10 years, General Motors has been unable to make a profit selling cars. Its gross profits have declined by 46%, from $40 billion in 1996 to only $22 billion in 2005. It hasn't been earning enough money to pay for its overhead, capital expenses (upkeep of factories), or dividend payments. The result? An exploding debt level. In 10 years, the company's total liabilities have grown from $199 billion to more than $450 billion.
GM has been burning the family furniture to keep the furnace running. It has gone past the point of no return. General Motors will never earn enough money selling cars to repay these debts. In fact, the company cannot make enough money to merely service these debts. The final nail in the coffin came in 2005, when GM's credit rating was first downgraded to 'junk' status. Since then, as its obligations have come due, the company has had to refinance at steadily increasing rates of interest. Its financing costs have soared. Over the last three years, GM's annual interest expense grew by 77%, from $9 billion to $16 billion.
GM can downsize, it can close factories, it can lay off union workers and renegotiate pensions. But its debts cannot be downsized. And its bondholders aren't going to settle for less than the full amount they are owed. GM cannot pay. Its shareholders will be wiped out, and its bondholders will end up owning the company. GM will be bankrupt within three years – or perhaps sooner if the economy slows.

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