What To Do Before General Motors Fails

Exactly four years ago, I warned Washington and Wall Street that General Motors (GM) is “likely to collapse … the consequences for investors will be far-reaching … and millions who depend on the company’s value and retirement income will suffer shattering losses.”

Repeatedly and unambiguously, I issued the same warnings in our Safe Money, in special reports, and in this column. (See, for example, “GM Headed for Bankruptcy,” October 11, 2005.)

I emailed my warnings to hundreds of thousands of investors; posted them on the Web; distributed them to over 1,000 media outlets; and sent them to AP, Dow Jones, and Reuters.

I begged readers to unload their General Motors shares, dump their General Motors bonds, and sever ties with the company or its subsidiaries. I used every piece of evidence and every ounce of reason I could muster to make my case and shout it from the rooftops.

Fortunately, a lot of people received my warnings. Unfortunately, only a very small minority did anything about them.

Instead, many followed investment tycoon Kirk Kerkorian, who confidently upped his stake in the company. Others were soothed into complacency by Wall Street’s lullabies. And despite well-known troubles …

Nearly Everyone in the World Believed General Motors Was “Too Big To Fail.”

This belief prevailed even after Moody’s and S&P, despite conflicts of interest that sugarcoat their grades, downgraded the company’s bonds to “junk.”

This belief continued to prevail even after the rating agencies belatedly downgraded the company to levels that implied “high risk of failure.”

And even after the company’s executives jetted to Washington last year - confessing to their imminent doom and begging for a government bailout - the overwhelming majority of Americans STILL did not believe General Motors would ever truly wind up in bankruptcy.

In less than two weeks, however, that’s precisely what’s going to happen.

There’s no stopping it now. Indeed, without a Chapter 11 filing, the termination notices GM sent to over 1,100 dealers last week have no legal validity.

And regardless of government efforts to cushion the blow, the impact on the economy is already devastating. It’s largely because of auto industry layoffs that unemployment is surging again. And it’s because of the Chrysler and General Motors bankruptcies that you’re bound to see this crisis …

• Gut the nation’s auto dealer network, employing over 1 million Americans …
• Cause a chain reaction of failures among auto makers and parts suppliers, employing another 1.7 million …
• Drive GMAC so far into the red that even the Obama team will balk at pouring more good money after bad to bail it out …
• Wipe out any positive effects from the economic stimulus package …
• Drive an even larger hole in the balance sheets of America’s largest banks, and …
• Sink the U.S. economy into a new, hair-raising decline.

GM bond investors who did not heed my warnings years ago and who sell out now will be lucky to get ten cents on the dollar; stock investors, little more than a penny. But the moral of my story today is not about how so many people were so wrong about General Motors. That’s water under the bridge.

The real lesson to be learned is that the government cannot and will not be the economy’s ultimate savior. So the first thing you must do BEFORE GM fails is to learn this lesson.

Why will the government ultimately fail to come to our rescue?

Because the crisis is too big - enveloping 195 sovereign nations … 6.7 billion people … over 100 trillion in debts … more than a half quadrillion in global derivatives.

Because the government’s resources are too limited - by politics, by internal conflicts, by bureaucracy, and by the extreme difficulty of financing its follies.

And because no one - not even the most powerful government on Earth - can control the accelerating chain reaction of events.

Ultimately, much as it has failed to prevent the demise of General Motors - despite unprecedented, herculean efforts - the government will also fail in its endeavor to

• prevent the collapse of some of the world’s largest banks,
• avoid a second Great Depression, or
• stop a FAR deeper decline in financial markets.

But no matter how dark the days ahead may appear, it is not the end of the world. We’ve been through worse before, and we survived. You can survive this episode as well, provided you take prompt action!

If you’re among the few who took prompt action when I first warned about General Motors, I trust you are on high, safe ground today.

But if you’re among the many who did not, please don’t repeat that error today.

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