Monday, 13 April 2009 01:00

The GM Bankruptcy Should Spark a Return to Fundamental Reality

From CNBC: The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing:

The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite GM's public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend.

Fritz Henderson, the new chief executive of General Motors , says the company may still be able to reorganize without bankruptcy.


The goal is to prepare for a fast “surgical” bankruptcy, the people who had been briefed on the plans said. GM, which has been granted $13.4 billion in federal aid, insists that a quick restructuring is necessary so its image and sales are not damaged permanently.

The preparations are aimed at assuring a GM bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly $28 billion in debt into equity in GM and with the United Automobile Workers union, which has balked at granting concessions without sacrifices from bondholders. No matter how you add it up, GM bondholders are going to get the shaft. The most recent asset manager featured in my intelligence note is one of the largest bondholders, both on behalf of clients and as itself. Guess whose going to have a run on assets? To make it even more interesting, this particular company's share price ran up significantly in the most recent bear rally. This can start smelling like opportunity to follow the market price of this stock down to fundamental reality!

President Obama, who was elected with strong backing from labor, remained concerned about potential risk to GM’s pension plan and wants to avoid harming workers, these people said.

None of these people agreed to be identified because they were not authorized to discuss the process. GM declined to comment and the Treasury Department did not comment.

One plan under consideration would create a new company that would buy the “good” assets of GM almost immediately after the carmaker files for bankruptcy.

Less desirable assets, including unwanted brands, factories and health care obligations, would be left in the old company, which could be liquidated over several years.

Treasury officials are examining one potential outcome in which the “good GM” enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing, a person who had been briefed on the prospect said last week.

The rest of GM may require as much as $70 billion in government financing, and possibly more to resolve the health care obligations and the liquidation of the factories, according to legal experts and federal officials. In other words highly insolvent! It is highly unlikely you can strip the best assets from this company, then subtract $70 billion dollar and come up with a positive number.

Since replacing Rick Wagoner on March 31, GM’s chief executive, Fritz Henderson, has sent increasingly clear signals that bankruptcy is probable unless agreements are reached with labor and the bondholders by the administration’s June 1 deadline.

Unlike Mr. Wagoner, who refused until his final days at GM to consider a Chapter 11 filing, Mr. Henderson has deployed staff to work with legal and government advisers, although he does not agree a bankruptcy is inevitable.

Last week, he said GM was proceeding on a dual track, hoping to restructure out of court, but also preparing for a filing.

“If we need to resort to bankruptcy, we have to do it quickly,” Mr. Henderson said in an interview with the Canadian Broadcasting Corporation.

John Paul MacDuffie, an associate professor at the Wharton School at the University of Pennsylvania, said he saw little chance of an out-of-court restructuring, given that the Obama administration had rejected GM’s proposed revitalization plan in March. It was submitted without the concessions that were required from bondholders and the union, and which have still not been reached.

“The simplest way to frame it is that they took the loans, there were conditions on the loans, they didn’t prove their case for financial viability, and they didn’t meet the deadline, either,” Professor MacDuffie said. Sometimes the hard way is the best way.

Lawyers for GM and the government have much work to do before any bankruptcy case can begin, executives with bankruptcy experience said last week.

First and foremost, GM would have to formulate a business plan that addresses virtually every aspect of the company that it hopes to transform while under bankruptcy protection.

It would have to show how it would save billions of dollars through agreements with its bondholders and unions, how many dealers it plans to keep, and the plants and offices it plans to either close or preserve.

The plan also needs to give a candid forecast of the car market, a tricky prospect given the sharp falloff in sales over the last few months, these executives said.

Treasury has hired the Boston Consulting Group to help with the business plan, according to a notice posted April 8 on, a government procurement Web site.

Participation from banks also may be needed, and because of the weak economic climate, lenders are likely to insist that GM wring as much out of its operations as possible....

Finally, legal experts said, GM would have to try to prevent panic among consumers in the event of a bankruptcy filing. The government has said it will guarantee GM’s vehicle warranties.


GM faces an unfunded liability of about $13.5 billion for its plans, which had $84.5 billion in assets and $98 billion in liabilities as of Dec. 31. That amount could sink the pension agency, requiring its own bailout before a GM case could be resolved.

General Motors unsecured debt holders would have to accept two-thirds less than the face value of their bonds which would result in and additional 33% loss. Resultantly, some of the biggest holders of GM debt including Franklin Resources Inc., Fidelity Investments and Capital Research & Management Co might have to record significant losses.

However most of the above losses would not be borne directly by asset manager shareholders' but by investors in the Assets Uner Management since majority of fixed income investment is towards AUM. As of December 31, 2008 the asset manager we analyzed had $132 bn investments in fixed income (total AUM of $439 bn) of which US fixed income was at $30 bn. In contrast the company had total investment of $2.4 bn including Equities, US treasuries and other debt securities. However the company would be impacted via its $0.80 bn investment in Sponsored investment products (investment in own AUM) which would take a substantial hit following decline in bond prices. In addition the company would also get impacted on account of lower AUM fee through greater outflow of funds resulting in lower AUM fee and lower profit sharing fee.

Subscribers can download the relevant research below. I will be issuing updated research using my stress testing methodology for this asset manager as well. Spreads will most likely widen, I have the model and stress test complete and we are just tightening up the assumptions before I release it to subscribers. There is much, much more content on the way. I advise those who are risk adverse to stay out of the markets for the time being, but those who have a longer term horizon and an appetite for risk and hunger for fundamentals may see a big profit horizon coming.

pdf Asset Manager Intelligence Note 2009-03-09 11:01:30 351.07 Kb

Last modified on Monday, 13 April 2009 01:00


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  • Comment Link greenja1 Tuesday, 14 April 2009 15:33 posted by greenja1

    Let's focus on near-term profits, namely my own. Major bond holders of GM and Chrysler will get nipped quite badly when the crap hits the fan over GMs MASSIVE debt load. Obama is no fan of the automakers (hahaha, go figure - they should've been swindling people with AAA-rated crap, it seems, to get his love), and it seems the bondholders of both firms are going to take it like scared sheep. How big of a hit will the bondholders take and who has the biggest exposure. The time is ripe for long-term puts - I intend on spending my summer watching the blood FLOWWWWW.....

  • Comment Link phirang Monday, 13 April 2009 21:41 posted by phirang

    China is building nuke plants and aircraft carriers.

    Our stimulus is an epic FAIL.

  • Comment Link NDbadger Monday, 13 April 2009 21:39 posted by NDbadger

    interesting data, but if GM goes bankrupt, unemployment will almost certainly spike.

  • Comment Link phirang Monday, 13 April 2009 21:15 posted by phirang

    the reasons are obvious.

    If you put yourself in their shoes, this whole rally is not only predictable but frankly trivial. Now watch what comes tomorrow during Dear Leader's Speech.

    Time to load the U-Boat...:D

  • Comment Link NDbadger Monday, 13 April 2009 20:12 posted by NDbadger

    I agree whole-hartedly on FAZ. I got in at 20 and it's been cut in half. I plan to pick some more up after JPM reports the bull.

  • Comment Link phirang Monday, 13 April 2009 19:55 posted by phirang

    not apt's.

    doesn't matter: they're building 3 aircraft carriers now.

    bears should start sharpening their claws and get ready for a raid. Tomorrow may be an interim top.

  • Comment Link shaunsnoll Monday, 13 April 2009 19:53 posted by shaunsnoll

    China property prices ‘likely to halve’

    By Jamil Anderlini in Beijing

    Published Financial Times: April 13 2009 10:39 | Last updated: April 13 2009 18:19

    Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data.

    The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade and the slumps in both have taken a heavy toll.

    Cao Jianhai, professor at the Chinese Academy of Social Sciences, a leading government think tank, said an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.

    He told the Financial Times he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008.

  • Comment Link shaunsnoll Monday, 13 April 2009 19:31 posted by shaunsnoll

    good stuff here, smarter than the average board i would say here.

    PS: not trying to discourage or disrespect phirang, good to have your perspective too, i just have an alternate long term view.

    thanks, cheers!

  • Comment Link gwizz Monday, 13 April 2009 19:18 posted by gwizz

    Goldman Earnings. Let's see, FASB changed the M2M rules effective for the 2nd quarter. However, they made it permissible for firms to use this new valuation in the 1st qtr. So, Goldman shows a profit Jan-Mar, and a loss in December. I wonder if the M2M change had anything to do with this? Will the MSM question their earnings and how they arrived at them? How did they value their assets for the 1st qtr.? Coincidental?

  • Comment Link cube660 Monday, 13 April 2009 18:36 posted by cube660

    Can someone please 'splain this to me....
    if Goldman reported earnings of 3.39 for Jan-Mar and a LOSS of 2.15 for DEC, then my math says their earnings should be 1.24, a miss from the expected 1.63... so what are all these faux "Goldman crushes the street" headlines all about??

  • Comment Link phirang Monday, 13 April 2009 17:58 posted by phirang

    This will begin with few bears and end with few bears.

  • Comment Link BloodInTheStreets Monday, 13 April 2009 17:55 posted by BloodInTheStreets

    I respect Soros, I'm just throwing my amateur opinion out there. The market has looked extremely bullish recently, with Cramer even calling this the end of the depression. Normally, I'd view him as a contrarian indicator, but herd behavior is contagious and you can easily get trampled trying to short this rally. Like the saying goes, the market can stay irrational longer than you can stay solvent.

    Btw, enjoy your forum postings shaunsnoll. I'm still learning so I appreciate you sharing your analysis.

  • Comment Link shaunsnoll Monday, 13 April 2009 17:16 posted by shaunsnoll

    yeah, time decay is a biatch. you're right, his commodity calls have only been decent at best. Soros also thinks this is a bear market rally that will fail.

  • Comment Link BloodInTheStreets Monday, 13 April 2009 17:06 posted by BloodInTheStreets

    I like Jim Rogers, but he hasn't been right all along. He's been bearish on the U.S. dollar and tried to short treasuries when Bernanke was threatening to buy them. He also missed the downturn in commodities. I don't doubt his long-term bearish views, but this rally could go on for longer than most of us think. Which won't be good for those of us negative theta via puts, myself included.

  • Comment Link shaunsnoll Monday, 13 April 2009 17:06 posted by shaunsnoll

    also, i'm going to go out on a limb and say that the FAZ easily breaks 50$ at some point this year, the timing is not perfect now, but its getting there, i'll kick a whole in my wall if FAZ doesn't offer another "trade of a lifetimes" in 2009

  • Comment Link shaunsnoll Monday, 13 April 2009 16:59 posted by shaunsnoll

    saying that "C will eat their lunch" may be a bit aggressive though. C is sort of like the fat kid playing dodgeball with all these other banks, i think if GM decided to get into banking they'd probably eat C's lunch.

  • Comment Link shaunsnoll Monday, 13 April 2009 16:58 posted by shaunsnoll

    hahaha! "Hmm... honestly, they're pikers in fraud compared to WFC." what a bunch of amateur thieves! they are really going to have to get better at this if they hope to steal with the big boys! (P/E of 15 seems stupid high as does P/BV)

  • Comment Link phirang Monday, 13 April 2009 16:37 posted by phirang

    book value... probably really half what they state.

    they have 0 chance in commercial banking. JPM, HBC, C, etc will eat their lunch.

    Hmm... honestly, they're pikers in fraud compared to WFC.

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