The General Motors Farce

This was forwarded to me some time back in 2014. Sorry I'm late in getting it on my blog site.  Merle

Subject: THE GENERAL MOTORS FARCE

This is sort of long but bear with me as I think you can save some money on your next car and also know a little more about politics, unions, and how the system works. 

If you are thinking about buying a nice used car wait a few months, or even a year, as used car prices are going to be dropping just like housing prices dropped in 2008-2011.  Why? For the same reason. Too many people bought a house who couldn't really afford it and now too many people have bought a car they can't really afford. 

I started noticing a few months ago that an increasing number of people were coming into the shop and seemed to really want a nice piece of furniture, but said "I can't really afford it." I said "oh" and looked outside to see that they had a new car or truck worth $20 to $30,000.  "Oh again and I gave it the Italian salute!"

Then in January I read where GM had shipped huge inventories of cars to dealers and the dealers didn't have to pay for them until they were sold (not an unusual practice). What was unusual was that GM booked the sales, which made their profits look much better. "Oh", a third time and I happened to mention to Paulette that GM stock was a short sale (meaning you borrow the stock, sell it and if or when it goes down you buy it back at a lower price. So far it is down 12% and going much lower, I believe.) 

So what else did I learn in the meantime, and why do I say wait to buy a good used car or even a new one?  Read below:

"Almost 90% of GM's borrowers are sub prime. And that's not all.

The amount of credit GM offers car buyers more than doubled during 2013. You can see the amount of "consumer receivables" – that's outstanding car loans – in the chart below. The total amount of outstanding debt on GM's cars increased by more than $12 billion in one year.

GM's impressive receivables growth was fueled by relaxing credit standards. Just as loan quality was seriously deteriorating... GM began loaning a massive amount of money to sub prime buyers. Not surprisingly, the amount of GM loans in default has begun to soar – nearly doubling in two years.

The worst thing you can do at the end of a credit cycle is extend massive amounts of extremely low-quality debt. This is what drove Lehman out of business. This is what bankrupted Bear Stearns, too.

In 2010, roughly 70% of GM's loans were sub prime and total lending was around $8.6 billion. Today almost all of GM's outstanding loans are sub prime and the total outstanding amount is more than $22 billion.

It is no exaggeration to say that the entire rebound in General Motors is built on sub prime lending. And those loans are about to collapse."  End of quote.

Not only that but GM is a festering sore left over from the "give the company to the unions back in 2010 and screw everybody else including the bond holders." Today GM is controlled by the unions and more or less run by those same unions and the politicians.  

If you don't believe read this quote:

"When General Motors emerged from bankruptcy 40 days after it entered in 2010, the Obama administration had a lot riding on a turnaround in the car business. Some of these interests were obvious: The federal government had invested around $50 billion in the company. It wanted to be repaid. (It would eventually lose around $10 billion on this bailout, far more than it lost anywhere else.)

When car sales fell by 30% between 2007 and 2009, the decline in autos made up about half of the total decline in retail spending.

And then there were the unions.

They'd gone into the bankruptcy proceedings holding GM common stock as the backing for their voluntary employee beneficiary association (VEBA) health care trusts. The shares were worthless. GM's pension was also underfunded by almost $30 billion. Without a massive turnaround at GM, the Democratic Party's second-largest and most loyal constituency (after the teachers unions) was going to suffer a complete economic wipeout. The Ratt (Steve Rattner, the "car czar," implicated in public corruption suits, and disgraced former private-equity manager) was put in charge of making sure that, no matter what, the unions got their money back.

His solution was simple: Give the unions everything. He left the pension fund completely untouched by the bankruptcy – not a single penny was cut from the company's funding burden. That's unlike every other bankruptcy in American history. Normally, obligations to pension funds were treated like other unsecured creditors. But in GM's case, legitimate bondholders received only 10% of the value of the business post-bankruptcy. The U.S. and Canadian governments took roughly 40% of the value of the business, earning back about 80% of what they had loaned the company.

The unions, though, were paid in full. Owed $20 billion in VEBA funding, they got 17.5% of the new stock, $6.5 billion in preferred stock (that paid a 9% coupon), and a note worth $2 billion. Their huge position in preferred stock guaranteed that virtually every penny the company would make for decades would end up with the union."

So,now if you've gotten this far you not only do know why car sales are going to drop but lots of used (repossess) cars are going to be coming onto the market.  Not only that but car sales are going to drop like a rock when the bad credit spree ends, just like the housing spree ended. And, with that the economy slows and the stock market drops. Remember the old saying? "So goes GM so goes the country." Well, that time is almost here and I don't think it's going to be pretty. Check back with me in a year or so and we'll see how this all turns out.

Sometimes investing is just common sense. You keep your eyes open and see what is happening around you. Then you gather a few more facts to back up your observation. If I had done that when my daughter first starting buying Starbucks coffee many years ago I would have a lot more money today -- but I didn't.  

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