GM To Report Losses Of $31 Billion For ‘08, $9.6 Billion For Q4

Just a few days after I suggested that GM (GM) would require more money than they’re currently asking for, comes this story of a “higher than expected ” Q4 loss of $9.6 billion.

From The Financial Times:

General Motors on Thursday said it expected its auditors to study whether there was “substantial doubt” it could continue as a going concern, as the US carmaker revealed a full-year net loss of $30.9bn

It said it expected the auditors to give their opinion when the GM files its annual report with the Securities and Exchange Commission next month, since the company plans to take advantage of a 15-day extension to the deadline for filing.

The top executives at America’s largest carmaker are due to meet later on Thursday with an auto industry task force headed by Timothy Geithner, US Treasury secretary, and Larry Summers, President Barack Obama’s chief economic adviser, to discuss their request for more aid.

The company is seeking to avoid a bankruptcy filing on grounds that its failure would put hundreds of thousands of jobs at its suppliers at risk.

GM, which made a larger-than-expected $9.6bn net loss for the fourth quarter, is surviving thanks to a $13.4bn US government emergency bridge loan. It burned through $5.2bn in the fourth quarter and confirmed that its cash holding had fallen to $14bn as of end-December - it has said it needs a minimum of $11bn to $14bn to stay in business.

“GM and its auditors must determine whether there is substantial doubt about GM’s ability to continue as a going concern… GM requires [funding from governments] in 2009 to continue operations until global automotive sales recover and its restructuring actions generate benefits, resulting in the company being able to fund its own operating requirements,” it said in a statement .

In a report to the Treasury last week, GM asked for up to $16.6bn of additional emergency government aid, saying that auto demand and credit market conditions had deteriorated in the two months since its initial bail-out request.

It projected that because of “tough industry conditions” it would burn through $14bn of cash this year.

GM says it needs $2bn of bail-out funds in March and another $2.6bn in April to stay in business…

…GM lost money in all of its global regions in the last quarter. Its pre-tax loss including special items was $3.5bn in North America, $1.9bn in Europe, $181m in Latin America and $917m in Asia.

From the WSJ:

…The results represent the second-worst financial performance in its 100-year history and push the cumulative net loss to $82 billion since GM Chief Executive Rick Wagoner began an intense restructuring of the auto maker in 2005…

…Mr. Young, the CFO, warned investors that GM may not be able meet its auditors’ “going concern” requirements, meaning the  company could break covenants on billions of dollars in debt in coming months. These defaults could increase the amount of bailout funds the government would have to deliver to GM.

GM’s auditors must make a decision on the company’s “going concern” status by the end of March. Mr. Young said further government funding would help the auditors reach a positive conclusion.

Here is a key thing to take away from the above: GM has lost $82 Billion since 2005, their problems are not new/a function of the credit crunch and are a function of problems that have existed for years if not decades. In the state GM is now even if they can cut their losses by 1/2 (in comparison to ‘08) for 2009 and half again for 2010, they still stand to lose $22 billion more dollars over the next two years.

OF course it goes without saying that it’s not very likely that GM will be able to pull that off, not when you consider rapidly declining sales, the costs from shuttering brands, etc.

At this juncture I think the government has two choices:

Choice A: they can continue to support GM and hope that the company is able to turn it around, without shedding a lot of its liabilities and more or less keeping the same bloated, inefficient model intact. This “solution” effectively amounts to not only subsidizing the company, but hoping that it can solve it’s problems by treating symptoms as opposed to root causes.

Sounds like a non-starter to me, there is no point in investing into that which is futile.

Choice B : they can work with GM and its suppliers to execute as painless a bankruptcy proceeding as possible. While I understand that there will be some fallout and damage from this process, the alternative doesn’t make sense if you’re going to either delay the inevitable or subsidize 11 figure losses for the foreseeable future. In other words: the company is destined for collapse without continual government subsidies, so doesn’t it make sense to take decisive action that will fix the company as soon as possible?

Yes bankruptcy is painful, difficult and will be (quite frankly) a national embarrassment, however the benefits of separating the good parts of GM from the bad outweigh all of those negatives. The old model died years ago, it’s time to pull the plug and remake GM into something viable again.

You can read more here(FT), and here(WSJ).

Sources:

The Financial Times: “GM future in doubt after $31bn loss” — John Reed, February 26, 2009

The Wall St. Journal: “GM Posts $9.6 Billion Loss, Burns Through $6.2 Billion in Cash” — Sharon Terlep, John D. Stoll, February 26, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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