Here's a fake letter from an investment newsletter I subscribe to. The author has penned a few of these over the last 2 years, and while they are obviously not from the chairman of GM, they contain real facts and figures. The author's subscribers made a lot of money shorting and buying put options on GM.
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My Last Letter
By the "Chairman" of General Motors
Apparently $50 billion was the magic number...
As the CEO and chairman of General Motors, I'm now responsible for more than $50 billion in losses ? in only the last three years. I thought they'd fire me after the first $10 billion ? when Kerkorian was trying to force me out. But I survived. Considering what has happened since, it's hardly a victory I can celebrate. Off the top of my head, I can't think of any American executive in history who has lost as much money as I have ? ever.
My legacy will be the bankruptcy of one of America's greatest corporations ? at one time the wealthiest and most powerful in the world. Until the 1970s, GM sold roughly half of the cars built in the world. How could GM have been destroyed so quickly, while its sales volumes are still so large? I'll explain one more time. But this will be my last letter to the subscribers of Stansberry Research.
Privately, the board told me the gig is up. The announcement of my "retirement" won't be made for a few more weeks. Publicly, of course, I keep spouting off the same nonsense I always have ? useless comments about how pleased I am with the way our 'turnaround' is going.
"Our actions over the past several years, and today, position us not only to survive this tough period, but to come out of it as a lean, strong and successful company..."
It's pretty amazing what you can get away with saying as the chairman of a public company. The press actually takes that crap seriously. Not a single newspaper reporter in America can read a financial statement... luckily for me.
Here's what I should have said:
"We don't have a prayer of saving this company and, really, we never did. It is impossible to repair the fatal damage done to our great company by the enormous pension and health care liabilities promised to our workers decades ago. The best we can do now ? by suspending our dividend, cutting health care benefits for all white-collar retirees, and 'postponing' our required union health care funding ? is keep the lights on another two or three quarters."
Of course, these sad facts aren't news to Stansberry readers. About a year and a half ago, (when our stock traded for more than $40), I began writing these letters to you. I wanted you to know the truth ? we had no way to avoid bankruptcy, as I explained in the opening paragraph of my first letter.
We own one of America's proudest companies, whose heritage and reputation far exceeds its operational capabilities today. We have infrastructure and employee obligations that outpace what we can afford given our greatly reduced profit margins and debt load. Our ongoing results reflect these important structure problems, which may be beyond our best efforts to fix...
?"A Letter from GM's Chairman," March 14, 2007
GM suffers from two insurmountable and interconnected problems: rising debts and declining market share.
Even now, in the last innings of this horrible game, GM's overall debt load increased by $1.5 billion last quarter. And our global market share declined by another percentage point, to 12.3%. This is the terrible trap I've been describing to you, quarter after quarter. There is no escape. Our debts make it impossible to invest enough capital to upgrade our manufacturing capabilities. And our inability to upgrade the styling and performance of our cars causes us to lose market share, little by little. Since 1992, our share of global car sales has fallen from 30% to about 12%. Meanwhile, our debt load quadrupled.
Why did this happen? How could GM's executives ignore the noose being laid around our necks? Are we really as stupid, lazy, or greedy as certain newsletter writers have claimed? Why didn't we think to pay down our debts as our market share fell and our pricing power evaporated?
We had no choice.
In the last 15 years, GM has spent $55 billion on pension plans ? compared to only $13 billion in dividends. Cutting our dividend to zero 15 years ago wouldn't have made much of a difference in terms of our solvency today. It would have bought us another year of operations, at most. What bankrupted America's leading manufacturing company wasn't inept or greedy management. What bankrupted GM (and what will soon bankrupt the United States government) are unlimited pension and health care promises whose costs cannot be contained and could not have been estimated at the time they were granted.
As I told you in my last letter, GM is now in a death spiral. In the most recent quarter, we lost more than $15 billion. Our sales volume fell 20% from last year. We even lost $2.4 billion on leases ? which indicates bigger problems to come. We're no longer offering leases on most of our cars, a move that will decrease revenues further. About 10% of our sales volume comes from leases.
We are now down to $21 billion in cash. As I've told you, we must have between $10 billion and $14 billion to keep operating. Given the rapid decline of our operations and revenue, I think we'll be very lucky to survive 2008. There's no way we can last through the end of 2009 without filing for bankruptcy. We're doing everything we can to conserve cash, but it won't make much difference.
We've been steadily losing around $3 billion in cash reserves per quarter since the third quarter of 2007. All of our efforts to staunch the bleeding have ended up being overwhelmed by our deteriorating credit quality, rapidly declining market share, and the losses from our 49% owned financial subsidiary GMAC (which was a major originator of subprime mortgages).
If you remember from my first letter, I warned that as our debt matured it could only be refinanced at much higher rates. This has always been the supreme risk to our shareholders ? our Sword of Damocles. It was only a matter of time before it fell on our head.
In mid-2007, our company was downgraded from an investment-grade credit all the way to "junk" status. Currently, our near-maturity bonds (the 7.2% 2011s) are trading at $0.60 on the dollar, yielding 32%. This implies the credit market expects us to default on these bonds ? to file for bankruptcy. This makes it impossible for us to roll over our existing debts ? we cannot afford to pay 32% a year on our obligations. In 2008 and 2009, we have around $5 billion in debt coming due. We have no way to refinance these obligations and no way to repay them. We will file for bankruptcy. And quite honestly, the sooner we file, the better.
How can we fix GM?
As I told you in my last letter, "A company cannot suffer 40 years of bad decisions, bad ideas, and bad debts and expect to compete with the rest of the world's automakers." In our noble efforts to make the lives of our employees better, we have bankrupted our company and made it impossible for GM to compete in the North American market. Before GM can do good for its workers and pensioners, it must first do well in the car business.
All of GM's stakeholders will pay a price in GM's eventual restructuring. Its shareholders will be wiped out. Its bondholders will suffer defaults and losses. Its employees will face declining wages, and its pensioners will lose benefits.
Yet the greatest risk to America is this restructuring won't be allowed to take place. GM will face enormous political pressure to maintain its pensions and its labor agreements. But if GM's bloated cost basis is simply passed from shareholders to bondholders through bankruptcy, GM will emerge no stronger than it is today. It will simply have a clean balance sheet on which to stack more losses and more bad debt.
Please believe my warning: What has happened to GM will soon happen to America as a whole. How we face these challenges during GM's bankruptcy will be an indication of how we will face them in the future as a nation. Will we go on making promises we cannot afford? The retirement years of many public and private sector workers vastly exceed the number of years spent working. Retirement incomes, when health benefits are added, are now frequently a multiple of current working wages. Far from being a small amount of money to help support workers in their old age, retirement has become a lifestyle choice for millions of Americans. Like it or not, as a nation we simply cannot afford the size of these obligations. Will we squander America's wealth and impoverish our children by giving away unlimited benefits to our retired workers?
Or... will we see that in order to grow the wealth of our nation we must be competitive with the rest of the world? To maintain our standard of living we must find more efficient ways of taking care of our elderly workers and delivering health care. We need to adopt sensible pension guarantees that promote saving and investing, rather than adding an unlimited expense to our largest corporations and public coffers.
There are no easy solutions. But one thing is certain: If we do not take steps to reform our health care and pension guarantees, GM will not be the last great American company to go bankrupt. And in only 15 to 20 years, our entire federal government will be bankrupt as well.
Best regards,
Your chairman
