Thursday, October 27, 2005


A chill wind blowing? Rumored GM bankruptcy would have major fallout.

There are always rumors about the stock market. There are, fairly often, crashes. For larger investors or for investors in for the long haul and receiving an outside income, it's not a big deal. In fact, for really big investors, for whom the 5% of the portfolio in money markets represents $100 million, crashes are buying opportunities. For people who get squeezed, whether because they rely on the income stream or because they need to cash out in the short term, crashes are a nightmare. A $100 shortfall from expected dividends might mean that one lose one's $250,000 home or delays a necessary operation. The same principle applies to panics. If a creditor finds himself holding paper that suddenly might be worth much less than he thought or that he fears may become illiquid, he may dump it. He may find buyers, but in the process, the market becomes less liquid. If the company involved is large enough, it can cause a problem. Therefore, it is alarming to read that: General Motors (GM: 27.64, -1.53, -5.3%) announced that it had received subpoenas from the Securities and Exchange Commission related to its dealings with bankrupt parts supplier Delphi. Among other issues, regulators are examining GM's pension and benefits obligations to current and retired Delphi workers. Delphi, now operating under Chapter 11 protection, was once owned by GM. The SEC is also looking into bookkeeping at GM's highly profitable GMAC finance unit. This is exactly the sort of thing that sets off panics: uncertainty involving large sums of money that is likely to be protracted because accounting and legal action are involved. Add in the likely economic impact of a reorganization, which will probably be intermediate between a Wilma and a Katrina, and we may be looking at recession. All stocks that are in any way cyclical immediately look less attractive. And there's the economic multiplier effect. Many of GM's suppliers are domestic. The ripples around GM could be the signs of a blip or it could be the beginning of a crash. No one knows. But my prediction is that this is the onset of a long, hard rain. And, as Johnny Angel pointed out, all of this began with the stubborn refusal of the Republicans to allow universal healthcare. This raised the costs of companies like GM and weakened the soundness of their pension funds. They may have looted their pension funds through accounting gimmicks, and now their past tricks are starting to return home in the form of flaming bags on their doorstep. What goes around comes around, a principle that some people never learn.
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