Jun 01, 2009 -- General Motors files for bankruptcy
The collapse of General Motors -- the largest failure of a capitalist enterprise ever -- almost defies description. Their debt stands at $172.81 billion, while their (very questionable) assets are at $82 billion.
Here in America, we used to have something called capitalism. If a business got in trouble, it could either fail or reorganize in bankruptcy with DIP (debtor in possession) financing.
If a business could get DIP money, it then shed its assets and renegotiated its business arrangements. Next, it looked for exit financing, where a lender who believed in the company would lend money so the company could exit bankruptcy.
Of course, as a practical matter, most businesses never saw the light of day ever again once they entered bankruptcy.
But in the case of GM, former President Bush gave them $13.5 billion in federal money during his last days in office. He also bailed out the company's lending arm GMAC. Then current President Obama gave them additional money, which took them up to the $20 billion mark, and also axed GM's CEO.
Now the government is looking at a minimum of another $30 billion going into GM.
So what happens from here? The government has already decided to guarantee GM warranties. That's the least they had to do in order to instill buyer confidence.
4 out of 10 dealers will close in the wake of the failure. The remaining ones will make tons of money. However, servicing at remaining dealerships may be more difficult in the interim as the survivors are flooded with business.
There's no denying that the deals on dead GM brands like Saab, Hummer, Pontiac and Saturn will be great. But if you buy, be sure you keep the vehicle for 10 years or longer; the resale value on orphan brands is very low.
Ultimately, GM will emerge from bankruptcy; they're going to shed nearly $80 billion of debt. But then over time, the marketplace will have to decide if their products are good enough to buy again.
And for those who are wondering if now is the time to buy GM stock, Clark answers with a resounding no! We already own about 60% as taxpayers.
