GM Still Doesn't Get It

For decades, GM has held a rather bizarre business model. Deceive the customer and the shareholder, while pleading disability to various levels of government in order to qualify for incentives and interest free loans. And too many governments said "yes", not realizing their acquiescence simply delayed the inevitable death of GM and worse, took money away from valuable pursuits.

GM had gotten so dependent on hoodwinking governments that when it came to their own investor base, they figured they could hoodwink them as well. So yesterday, GM offered its bondholders the chance to swap debt for GM stock. It was a hollow and illusory offer, just like GM's "negotiations" for bailouts. The problem for GM is that the bondholders saw through it in 5 seconds and simply said "no". Here is why they turned down the offer.

Yesterday, GM's debt was worth about 10 cents for every $1.00 held. So GM came up with a plan to exchange $1.00 in debt for about 48 cents worth of shares. It was a sham. Within 5 minutes the investment community had calculated the true offer which was $1.00 in debt for 5 cents in shares. Since the debt was already worth 10 cents per share, why would anyone in their right mind agree to the exchange? The same question could have been asked to the government regarding the bailout. But here is the difference: the government is playing with other people's money, the investors are responsible for their own money. "No deal," said the investors, a foregone conclusion for everyone except GM management, the employees and the union LOL.

GM's death is just a few weeks away. The deadlines imposed by the financial markets are unlike the collective bargaining deadlines GM is used to. In collective bargaining, a deadline of Friday, midnight is imposed; bargaining occurs "round the clock" and out comes the midnight oil. The deadline passes with no settlement in site, so the deadline is simply reset, a new supply of midnight oil comes out and the bargaining continues. GM is now up against a financial markets deadline. In June, GM will run out of cash. GM has no access to money. So GM will stop paying its employees, and stop paying everything else. Midnight oil does not grease the wheels of the financial markets.