NINETY EIGHT REGENCY

Detroit Death Pool

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Detroit Death Pool

Jack Brynaur, QuiteContrarian.com 05.23.07, 11:00 AM EST

Anyone who has spent any time in Detroit recently will tell you it is by all apparent indications a dying city. Crumbling buildings, widespread decay and a population in flight make for a depressing landscape. Detroit's fortunes have always been tied intimately to the fortunes of the U.S. auto industry. So it's hardly surprising that a look at Ford's and General Motors' balance sheets will show just as much decay and devastation as a trip through Detroit's worst slums. The only real question is, Which automaker will declare bankruptcy first?

Let's start with GM (nyse: GM - news - people ). Instead of talking about its autos, I'll just focus on the numbers. Over the past decade, GM's gross profits have declined from $40 billion to $22 billion, while its debt has increased from $199 billion to over $450 billion, all during a period of historically low interest rates.

The low rates won't last forever, though. Just over the past three years, GM's interest expenses have risen 77% from $9 billion to $16 billion and are projected to rise to $18 billion this year. Rates are still very low by historical standards.

One of the reasons the Federal Reserve cuts interest rates is to make it easier for companies to get the cash they need to finance growth. Unfortunately, free-flowing cash also makes it easy to dig yourself into a hole. GM supposedly took on all that debt to get its profits back on track, but as you can see, the opposite has occurred.

The simple truth is that GM can't make enough money selling cars to pay for its overhead, upkeep, salaries and dividend payments. Its solution has been to take on more and more debt, rather than spending its cash reserves, so that it can show a "profit" on quarterly income statements. In other words, GM is kiting checks all over town, using its MasterCard to pay off its Visa, burying itself ever deeper under a crushing mountain of debt.

At present margin levels and interest rates, it will take more than 20 years to pay down its debt load. Imagine what will happen when rates return to their long-term average level, as they inevitably will. With inflation looming, the Fed will have no choice but to raise interest rates at some point. It's only a matter of time.

Plus, GM's credit rating has been downgraded, meaning future rate hikes will hit it even harder. GM couldn't get its act together during an era of cheap, easy money. What reason is there to believe it will be able to do so when the ocean of capital dries up?

Ironically, GM's recent divestiture of GMAC relieved it of its only hedge against rising rates, while leaving it on the hook for any and all default risk. It's a no-win deal for GM, the sort only a desperate company would agree to. The fact that this deal went through at all is enough to show that GM is a company in crisis, but it's only one indicator among many.

GM can try closing plants, renegotiating its union contracts, laying off workers and asking for a government bailout of its staggering employee medical care expenses. In fact, I predict it will try all of the above. Doubtless it will be watching Chrysler's private-capital transformation like hawks. If Chrysler squeezes any concessions out of the unions, you can bet your bottom dollar GM will demand the same. But none of this will erase GM's massive and ever-growing debt burden.

GM has had its chance to save itself. It has taken liberal advantage of plentiful cheap, easy capital, and matters have only gotten worse.

The bottom line is, in order for GM to survive, it needs to make rapid, substantial gains in profitability. Of course, this was just as true three years ago as it is today, and the results speak for themselves. Whatever its massive PR machine may say, GM is already effectively bankrupt. All that remains is for the company to admit it.

A visit across town to Ford (nyse: F - news - people )will do little to improve the gloomy atmosphere. The situation is dire indeed for GM, but Ford is no better off. Ford's balance sheet is overflowing with red ink from unfunded pension and health care obligations. According to The Wall Street Journal, even assuming Ford somehow manages to negotiate with unions a 25% decrease in its health care costs, it will still face a $58 billion deficit, which adds up to well over three times its total market capitalization. The book value of Ford's non-car assets including cash and equity holdings comes in at about $52 billion.

Ford predicts it will burn through $17 billion of its cash over the next three years. Assuming Ford's predictions are correct, that leaves $35 billion in assets apart from the car business. Subtract $48 billion in liabilities, and you are left with a value of negative $23 billion for everything Ford owns except the car business. In other words, Ford's car business would have to be worth $23 billion simply for the stock to have zero value. In order to justify Ford's current market cap of $16 billion, its car business would have to be worth close to $40 billion.

Is Ford's automobile business worth that much? Not likely. For a number of years, Ford sold cars at a loss in order to subsidize its more profitable SUV and truck models. Now, just like in the '70s, the big gas guzzlers are falling out of favor with consumers, who are turning to more efficient Asian models, like those sold by Nissan (nasdaq: NSANY - news - people ). The results have not been pretty. SUV sales are down in excess of 30%. Ford can no longer rely on high-end models to prop up its profits. It will have to learn to make money selling cars again if it is to survive, and as of yet there are no promising new models with the potential to fulfill this need.

According to the same article in the Journal, Ford can only realistically hope for about a 2% pretax margin on its car sales. 2006 sales were $132 billion, but Goldman Sachs predicts Ford's sales will decline for 2.5% annually for at least the next three years. Frankly, I believe even this estimate is optimistic, but let's go with it. That leaves sales of $122 billion. A 2% margin on this gives $2.44 billion in pretax income.

If I value the business at 10 times its annual pretax income, that means Ford's car business is worth about $24.4 billion based on pretax earnings. Subtract the $23 billion deficit from the rest of Ford's balance sheet, and you're left with a valuation of $1.4 billion. Subtract taxes, and Ford is worth less than zero. It's difficult to imagine how Wall Street justifies a $16 billion market cap for this company.

Perhaps the most telling sign, however, is Wall Street's reaction to recent rumors that the Ford family was considering selling some or all of its stake in the company. The family now controls about 40% of the outstanding shares. When rumors of a possible sale began circulating, the shares went up 4.8%, the biggest jump in over six months. This despite repeated statements by the Ford family that the rumors were false. That kind of a reaction to a potential unloading of the Ford family's 40% voting power speaks volumes about the confidence level of the investing public in the the company's current owners and managers. The sum total amounts to roughly the same as Ford's true valuation: less than zero.

In sum, Ford and GM are both effectively bankrupt. Whether they end up declaring Chapter 11, or undergo a massive "restructuring" that amounts to the same thing, is hardly material. The only real question is Which will go first?

Attorney Jack Brynaur writes the Contrarian Perspective, available at his Web site, Quite Contrarian.

Send comments to newsletters@forbes.com

Edited by NINETY EIGHT REGENCY
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anyone have a lead pipe? this guy could use one up his butt.

nice little side story..friend is getting her job outsourced to India soon. So much for that education and years of service.

All because someone can save a few bucks.

Edited by regfootball
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More Blah,blah,blah from the financial peanut gallery.

Not a lick of news in that and not worth the time it took to read it.

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........... More paper shuffling BS. Sometimes I wish Wall Street would slide into the ocean. This is why I distrust accountants and lawyers so much. Nobody has been talking about bankruptcy at GM for about a year now and its share price has quadrupled from 18 months ago..but all this guy can do is blabber that Detroit is doomed.

If you keep predicting the sky will fall, eventually it will.

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I wonder what kind of wild, spastic, tribal-esque dance this guy will do if BOTH declare bankruptcy?

It's almost as if a great portion of the public would feel a lightening of guilt (and a dash of euphoria) if the American industry suddenly closed down. 'See, I HAVE to buy foreign brands; there are no American brands left!'

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I mean seriously...

Attorney Jack Brynaur writes the Contrarian Perspective, available at his Web site, Quite Contrarian.

Yes, he's obviously qualified to declare Ford or GM will soon be declaring Ch. 11. I mean, lets totally disregard the fact that PROFESSIONAL analysts stopped the drum beating a year ago.

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I don't like this guy either and his doom an gloom is a little heavier than needed but.......

GM still has a lot of work ahead and is not entirely out of the woods yet and Ford is really hurting and I will be suprised if in 10 years any the Ford family will hold much of the company. Ford is really in debt and their new models just are not working to the degree they need to pay anything off.

I don't expect either company to vanish and I still expect big changes in both in the future. Some may not be all that fun to watch but it will be what ever is needed to save the company.

It will be interesting if Chrysler's sale will save them or finish them. The people who own them now are only worried about making money. If they don't make money they they eliminate the loses including large companies if needed.

Sad to say we could be driving Chevys built in China if things in North America don't improve. Good news ia we may be behind but it is only the bottom of the 7th and not too late to get a save here.

I have my fingers crossed and will still support GM, Rick and Bob with my money. I just hope enough others notice their new improved cars and do the same.

Edited by hyperv6
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Sad to say we could be driving Chevys built in China if things in North America

Funny you should say that.. I have secretly felt if GM fails and falls apart Shanghai GM or some Chinese company would buy it.

I have this odd feeling they are waiting and waiting too. I am not referring just to the Chinese either....

And on another note, what is it going to take for consumers to realize you are killing your own country? I am not talking about "buy American". I am talking about our economy period.

See.. they do not see the big picture. Until it hits home they do not "feel" it. When they "feel" it it will be too late. It all goes back to this me attitude and un-forgiveness people hold in their hearts. If they cannot forgive GM and Ford and Chrysler who are they willing to forgive? People have been let down before by friends and family and it cost them something. So do people hold grudges? I am not saying excuse GM and Ford and Chrysler for over 20 years bad behavior....

Wouldn't you want another chance to show you have changed?

People treat Ford, GM and Chrysler like some ex-convict. He gets out of prison wanting a fresh start. Who will hire him?

Same scenario with the American public.

People operate in fear.

False

Evidence

Appearing

Real

The media uses this. The guys like the author of this article uses this. Hitler and so many others after him used it too. They used fear to control people. I often say to myself about the Honda and Toyota buyers if your friend jumped off a bridge would you do it?

That is how blindly loyal some are to them. They do not have the facts. They know what someone else told them. What is funny to me is this....

People will have a Honda or Toyota car in the driveway and have a GM truck or suv in the driveway and say they will not buy an American car.

Hello!!!! You bought the truck!!!

To them Honda and Toyota and Nissan can do no wrong. The other day I read an article about Toyota. You know what they recently told their dealers to do?

Add service bays at the dealerships. The dealership service bays are not that busy. So why if you are so great would you tell your dealerships to add service bays??

Hmm............

If GM and Ford and Chrysler went away do they think we all would go buy Toyotas and Hondas?

1. The only thing that comes close to what I have from them is the Avalon, and I do not like nor want that car.

I can assure you most of us here would do what I am doing drive GM and keep on driving it.

Would people buy GM cars if the Chinese bought it?

The scary scenario is it being bought and sold off in parts...

Already a majority of engineering jobs are heading off shore. A lot of jobs are gone to out sourcing. The funny thing is international students come here to the United States and go to college. They take that knowledge back home. I work at a university and I assure you this is true. They want to get more American children in schools to get in fields like engineering and math and science. Sadly, our society places value on the wrong things.

The youth honestly believe the only way they can make a lot of money is one of three ways:

1. hip hop or music star

2. athletics

3. being a movie star

I count on another fact. Anything that goes up must come down. Anything that is down, must come back up. NBC used to be 1 number in television for years. I personally was sick of them being number one. They got too successful. Now NBC is at the bottom. I was rooting for CBS and ABC to come back up. They have.

Despite GM's short comings and what they did to Oldsmobile, I still have hope for them. I can forgive them. I did.

My rant is over.

Thank you.

Edited by NINETY EIGHT REGENCY
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Whether you agree with the author or not, it is still a somber story. Personally I don't see any problem with buying Chevys built in China if it allows GM to survive. It's a global industry and must do what it takes to survive in this market. Being a nimble company is a prerequisite to survive -- something neither GM nor Ford are known for.

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Who the F**K has GM and/or Ford pissed off at Forbes recently.... The $h! talking is never ending from that rag, and the doom and gloom perspective keeps getting worse. It's almost as if the magazine is like some stupid little kid in a school yard skit;

"See, I told you so!!! I told you that we've run them out of business!!! It don't matter what they say, we showed them!!!"

Seriously?!?! Who needs $h! like this??? Articles that are printed for the sole reason of DISCOURAGING or HINDERING stuggling sectors of our economy that have MAJOR impact on our country. It's pretty much just done to stir stuff up, it' UN-aMERICAN and it could be considered terrorism IMO. (Fear culture)

It's past the point of getting angry and pretty much to the extent of; "MY GOD, WHEN WILL THESE IDIOTS WHO HAVE NO CLUE OR BACKGROUND ABOUT WHAT THEY'RE SAYING, JUST SHUT THE HELL UP?!?!"

I especially loved the part where he referenced Nissan in a positive light against Ford.... Umm, yeah, been out of the business for a few years there, right bud? Nissan isn't doing so hot themselves lately AND the Edge is continuously outselling the Murano each month. How's the for sales of fuel efficent models?

The Street wants the Ford family to bail simply because that is the last step to push the company into bankruptcy. The media has already gloated that Ford would've went into chapter 11 a couple of years ago had the family not been there and had the company not been a household name.

People like this will continue until they either destroy our industry or until something drastic happens the other way... Chrysler is pretty much out of the game now as it will probably eventually be split or whored to another country (The asians) Ford is all but dead after being attacked ruthlessly since 2001. the ONLY thing that is keeping them around is that they've been around for 100 years (I say, give it 10 more and they're finished) They tried to break GM, and almost have; I'd say GM either has about 15-20 years left as they are slowly chipped away, or something catasrophic will happen and break the company into 100 pieces which will cause people like this guy to cream their pants.

It's nothing but anti-Detroit/anti-american rhetoric

Edited by FUTURE_OF_GM
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The rise and increase in sales of Hyundia is proof the average American cares less where there cars come from and only care how much it cost.

They even have the folks in Japan worried. They know if the Korean's can do it just think what the Chinese could do.

GM has foot holds in China and Korea both will be very important for GM to survive.

I think the days of the UAW as we know it are even more at risk than a possible loss of GM. GM can go else where in the world as the UAW is here and has no where to go.

If UAW would try to go to China which camp do you think they would lock them up in? It might make them think more of working with GM here?

Any way I think the Daewoo Chevys may just be proof of where a lot of this is leading.

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And who would miss the UAW? Only the members who'll be wondering where their golden goose has gone. I personally picture a bunch of little ducklings wondering around crying out "MA MA... MA MA..." Bush had the right idea when he used the word "relevance" except as usual it was too big a word for him to understand and he should have been using it to refer to the UAW and not Detroit.

The rise and increase in sales of Hyundia is proof the average American cares less where there cars come from and only care how much it cost.

They even have the folks in Japan worried. They know if the Korean's can do it just think what the Chinese could do.

GM has foot holds in China and Korea both will be very important for GM to survive.

I think the days of the UAW as we know it are even more at risk than a possible loss of GM. GM can go else where in the world as the UAW is here and has no where to go.

If UAW would try to go to China which camp do you think they would lock them up in? It might make them think more of working with GM here?

Any way I think the Daewoo Chevys may just be proof of where a lot of this is leading.

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GM won't go bankrupt, China will not allow it. Seriously!

OTOH, many here are GM's biggest supporters, yet still drive a 1995ish GM car bought used. And they tell others they should buy domestics. Where is your new GM car to support the company/economy??

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GM won't go bankrupt, China will not allow it. Seriously!

OTOH, many here are GM's biggest supporters, yet still drive a 1995ish GM car bought used. And they tell others they should buy domestics. Where is your new GM car to support the company/economy??

College students and college counselors can't afford them. Sometimes I wonder if GM's problem is that its cars mainly appeal to people who can only afford them used, while European and Japanese cars appeal to the more affluent who can afford new cars.
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College students and college counselors can't afford them. Sometimes I wonder if GM's problem is that its cars mainly appeal to people who can only afford them used, while European and Japanese cars appeal to the more affluent who can afford new cars.

BINGO!

Chris

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As long as they drive a car from the Big Three I hold nothing against them. Seriously I have only purchased one new GM car in my life. The 2001 Impala the rest were all slighty I mean like under 10,000 miles on them and current model year so like new. Give them credit for driving GM and supporting them. Hell man I would love a new Diamond White 08 DTS and Torrent GXP, even a new G8 GT that doesn't mean I am getting them My son would also like a new G5 GT with a 5spd...

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And who would miss the UAW? Only the members who'll be wondering where their golden goose has gone. I personally picture a bunch of little ducklings wondering around crying out "MA MA... MA MA..." Bush had the right idea when he used the word "relevance" except as usual it was too big a word for him to understand and he should have been using it to refer to the UAW and not Detroit.

The UAW has had a big hand in this but so have the Auto makers.

I don't think Goverment help is ther answer till they do a little more to get their house in order. Also I don't think the UAW will give in if Goverment help is given. The Auto makers need the help after the UAW yells uncle.

I think Chrysler proves Goverment help is not the answer. You have to fix the leak in the boat before you start bailing it out.

The best thing the Goverment could do right now is to work better with the Auto makers and be realistic with their regulations on Emmisions, Mileage and Safety. Get some people involved in making the laws that really drive cars and check their own oil and not a bunch of special interest lobbiest and politicians who want to make a name for themselves.

The greed runs in every group involved and the greed is what will make a strong country like ours weak. Everyone wants to be a millionaire but no one wants to pay for it.

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GM won't go bankrupt, China will not allow it. Seriously!

OTOH, many here are GM's biggest supporters, yet still drive a 1995ish GM car bought used. And they tell others they should buy domestics. Where is your new GM car to support the company/economy??

My new car history:

1987 Chevrolet

1990 Chevrolet

2001 Chevrolet

2002 Pontiac

2004 Pontiac

2005 Chevrolet

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OTOH, many here are GM's biggest supporters, yet still drive a 1995ish GM car bought used. And they tell others they should buy domestics. Where is your new GM car to support the company/economy??

I drive a 1995ish GM car bought used because of my hiterto limited financial means (22 years old being the primary factor), so I'll use my father's recent new car history:

1984 Cutlass Supreme Diesel

1987 Oldsmobile Toronado

1998 Buick Regal GS

2000 Pontiac Bonneville

My next car will likely be new and will likely be a LaCrosse Super.

So, many of us do co-locate money with mouths.

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My new car history:

1987 Chevrolet

1990 Chevrolet

2001 Chevrolet

2002 Pontiac

2004 Pontiac

2005 Chevrolet

Wow that is a lot of depreciation. You should have bought a BMW in 2001. (Assuming you didn't buy a Corvette) you would have had a much nicer car and you would most likely have been better off financially. Sure, you would have been taking it in to the shop a lot, but likely no more than the chevys/pontiacs that you bought.

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College students and college counselors can't afford them. Sometimes I wonder if GM's problem is that its cars mainly appeal to people who can only afford them used, while European and Japanese cars appeal to the more affluent who can afford new cars.

I think what you write has a lot of merit. Those with financial sense will not buy a new domestic as they know that within three years they will likely have lost >60% of the car's value (as compared to ~45% with a BMW/Honda). But the flip side is true. Those you can pick up a 5 year old Malibu at 25% of new value wereas an 5 year old Accord/Camry would be 35% of new.

With the exception of a few models, buying a new domestic car is a bad financial decision (even relative to other new cars). The only way they make any financial sense is to buy them when they are a few years old and the heavy depreciation has already hit, or to own them for 7+ years when things start to even out.

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Wow that is a lot of depreciation. You should have bought a BMW in 2001. (Assuming you didn't buy a Corvette) you would have had a much nicer car and you would most likely have been better off financially. Sure, you would have been taking it in to the shop a lot, but likely no more than the chevys/pontiacs that you bought.

Is he going to tow or plow with his BMW?

And now he has a car that's better than a similarly priced BMW... a GTO.

Edited by CaddyXLR-V
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I haven't bought any new cars(yet) but I'm also 22, and I'm working my way up. My GTO is the newest car I have owned. My next car will be bought new, as long as GM makes what I want when I'm ready to buy. I could've bought a brand new GTO, but I figured buying a house was a better choice first.

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