General Motors Is Expected to Declare Bankruptcy Within Hours

Your statement that GM ‘has finally succumbed to the extraordinary pressure put on its balance sheet by unsustainable pension and health care promises, benefits, and wages given to the unions over the years’ is not accurate.
The problems at GM, and with the overall economy, were caused by debt. People are not buying cars like they used to. This has hit home for all auto makers. Things were especially bad for GM because they have been so poorly run. They make cars that people do not want. These cars cannot compete with Japanese cars because they are not as efficient and well built.

As you say, the free market did come crashing down on this Detroit dinosaur. But it has nothing to do with the meager salaries and benefits paid to deserving employees. The blame rightfully resides further up the chain.

I’m sure you mean well, but you’re confusing the symptom with the cause. Take a few hours and go through the annual reports for the past five or six years – they are still available in PDF on the General Motors site.

For decades, General Motors has been unable to fund its operations with cash, forcing it to rely on debt, because most of the operating cash flow was dedicated to funding pension funds, health care trusts, and employee benefits. The outflows for these entitlements are unbelievable in their scale and scope.

Go through the cash flow statement – if those outflows had existed at the same level of their Japanese competitors, GM wouldn’t have required debt funding to meet its shortfall. Thus, the mountain of debt wouldn’t have existed. Yes, debt killed GM. But the debt existed because they used their cash for unsustainable employee benefits.

You are absolutely correct in one regard – management is just as responsible, if not more so, than the rank and file employees because they were the one who approved the benefits because pension accounting didn’t require them to recognize the full cost of their decisions until long after they had retired.

Found it!

Check out page 7 of last year’s annual report:

“Consider that from 1993 through 2007, GM has spent at a total of $103 billion in the U.S. to fund legacy pensions and retiree healthcare – an average of about $7 billion a year – a dramatic competitive and cash-flow disadvantage.”

Blaming the debt would be like telling someone who went bankrupt because of their credit card balances that the problem was the credit card company. No, the reason they are under the crushing debt is because they spent more than they made. If you always spend less than you make, it doesn’t matter that your income fluctuates with the economy.

There is no way GM could compete with Japan when they have a $103,000,000,000.00 hurdle to overcome. That number is staggering.

That was an insightful and original comment, Joshua, thank you! Its amazing what you can find in the online filings if you are willing to read through the data.

Great comments Joshua. I admired your tactful reply to the comment describing GM’s union compensation packages as “meager” and your willingness to find the data to back it up.

You hit the nail on the head when you said “Blaming the debt would be like telling someone who went bankrupt because of their credit card balances that the problem was the credit card company” It’s sad to see how many people actually do blame it on the banks.

I came out of school with $15K in credit card debt, but I learned to live within my means I and paid back every last cent. Now I don’t live that lifestyle anymore! Hopefully GM (and the union) can also learn from experience.

I have a question. Is it ok to start buying GM stock now, or will i loose it all when the restructure???

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