AFSCME 3357-HOF'S BLOG

From the "Is this anything?" file
GM Takes $39 Billion Noncash Charge

There are lies, damn lies, and General Motors accounting. Yesterday I read that General Motors announced that it would report a $39 billion quarterly loss. That loss is dominated by a $37 billion noncash charge against assets based on a writedown of tax-loss carryforwards held as assets. The company stated that the company's cash position and business prospects weren't affected, and the market yawned, with the stock going down less than two dollars in afterhours training. Even this morning, there has been no Exodus from the stock.

The news stories that came out yesterday were garbage, basically. There was no analysis or scrutiny of the company's statement. It was no coincidence that General Motors released the statement on an election day, a near holiday with many journalists off or covering other things. Cash or no cash, $39 billion is still real money to me, so I'll tell you what I make out of this, whether it is a hat, a broach or a pterodactyl.

So far, the Detroit Free Press has done the best at putting this in perspective. The full GM spokeshole press release is here at jalopnik.com. Cash or no cash, this is the largest quarterly loss in automotive history. As I write this, GM stock is trading for about $34 and some change per share. This quarterly loss alone amounts to $68.90 per share according to freep.com.

It may be true that the paper loss does not affect GM's cash position. (Although the company's cash hord did go down $2.5 billion in the quarter.) It may also be true that GM's business prospects are unaffected. That doesn't mean that this is insignificant, especially if you are a GM shareholder. It's also important if you are a GM employee who now has a vested interest in GM stock thanks to your brand new VEBA.

To explain the significance, you have to understand the asset that GM wrote down. General Motors held on its balance sheet credits for past losses that it could use as credits to reduce future tax liability. According to Generally Accepted Accounting Practices, this type of paper asset must have some reasonable possibility of being converted into a useful cash type asset at some reasonable point of time in the future, otherwise this asset should not be given the same status as a real asset, such as cash. The write-down by General Motors is a tacit admission that they have no reasonable prospects of making profits in the near term that would make this asset useful. In other words, the company is saying that it really doesn't have the foggiest idea when it's going to be profitable again. Why announce the change now? Did the accountants suddenly get religion? Or did they realize that the leg's going to have to be cut off anyway, so they might as well bite the bullet.

I believe that General Motors may be salvagable, but virtually none of the future earnings of the company will go to current shareholders, no matter what. For the company to be successful, it will have to recapitalize at some point, and that will mean issuing new stock. Already there will likely be dilution of ownership based on the VEBA.

Speaking of VEBA, the UAW was sold a deal based upon GM's books during the negotiations. For the company's financial officer to announce suddenly that $39 billion on the books was an imaginary asset is highly suspicious, and it may end up being the subject of litigation. I'm sure the professionals that the UAW hired to look at the books realized that there was $37 billion of bullshit sitting in GM's asset column, but the union members were never explicitly told that their retirement healthcare was going to be financed to a large part based on company stock, and the company stock is supported by imaginary but worthless assets equal to twice the stock price.

In the wake of all this it is almost anticlimactic to mention that $1.6 billion of GM's quarterly losses came from losses at GMAC. It's not a record or anything, but it's half of what it would cost to develop a new car model, and there's no guarantee that things are going to be better next quarter.

If you have any investment in GM stock, what are you doing still reading this? you need to get busy. If you want to read more about this, I'm sure Robert Farago at thetruthaboutcars.com will have a new GM Deathwatch momentarily.