GM Will Go Bankrupt: Why That May Actually Be Good For The General

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I'm not the first person to say it. After yesterday's 31% drop in the price per share, news outlets talking to the right people this morning are already saying it, albeit fecklessly, like thus: "Will GM declare bankruptcy?" All I'm doing is removing the question mark. The pundits saying "bankruptcy is not an option" are completely ignorant of the facts, living in an alternate reality or parroting the GM PR public line (a line I don't begrudge GM for pushing given the need to be positive or else face a rush for the hills), because let's be clear here — if the marketplace for credit does not change in the next year, bankruptcy is not only an option, it's the only option. Yes, GM will be forced to declare bankruptcy. Although yesterday's drop in share price had more to do with the release of the short-selling ban on GM stock than anything else, it's indicative of the bigger picture. It's the same one facing every major company in the United States today, and every consumer looking to buy a house or a car — an inability to get a loan. For GM, those loans are what they'll need to go about doing business on a day-to-day basis and it's a problem that looks to not be fixing itself anytime soon. But the "b-word" may not be a curse word for the General. In fact, it could potentially be one of the best things to happen to the automaker in years. Here's why and how. For the first time in the history of the company, the crisis isn't product. It's clear GM's figured out the need to design and build high quality, fuel efficient and attractively-designed vehicles. Not only have they realized the need to do it, they're actually doing it. Even the most jaded auto enthusiasts, journalists and industry analysts with even the slightest clue have to admit they've stepped up their game in the past few years. But, that won't stop bankruptcy at GM — just like it isn't stopping bankruptcy at their dealerships, as the recent failure of Bill Heard Chevrolet showed us last month. Although the automaker has the cash to go about doing business right now, we've been told in the past the company needs $11 billion in working capital on hand at all times to remain in business. Right now, they've apparently got somewhere around $20 billion. With a "burn rate" (god, we SO didn't miss that term from the dot-com bubble) averaging over $1 billion a month (and a greater spend in recent months thanks to increasingly lower auto sales) and an inability to raise more cash (other than whatever minor deals they can come up with like refinancing buildings like their Renaissance Center HQ in downtown Detroit), the automaker will hit that $11 billion mark pretty darn quick. When that happens, there's no more crazy deals they'll be able to come up with to avoid declaring bankruptcy. What's that you ask — what about the $25 billion in Federal loan guarantees? GM's cut of that pie will give them a few billion, yes, but nobody's expecting that money to hit the General's accounts until sometime next year and anyway, they may not even make it that far. What about the open markets? Well, S&P just made it much more difficult yesterday, claiming it was reviewing GM for further long-term credit downgrades — ratings that already indicate their bonds are below investment grade. So don't expect help to come from the capitalist-loving marketplace. So what happens when they hit that wall and actually have to throw down the B-word? Nobody knows for sure, and anyone who claims they do is full of more bull than Bank of America after swallowing up Merrill. But, one thing's clear — any form of court-mandated reorganization allows GM to reevaluate all sorts of deals — like the one recently signed with the UAW, with suppliers and most importantly, with creditors seeking repayment on the $43 billion in debt and $80 billion in other liabilities on the books at the General — potentially allowing the automaker to wipe some of that out. More importantly, just like the airlines, it'll give them the time to continue selling their ever-better vehicle lineup. True, many folks may be scared of buying vehicles from a company that's declared bankruptcy but of course, that didn't stop people from piling into Northwest planes after the airline did the same. And that's where they and we, have got some hope.