General Motors is on schedule to get $13.4 bn in federal bailout money, as it is now technically insolvent because its net worth, its assets minus liabilities, are a negative $59 bn.
But GM faces another serious challenge: Fixing its history of regulatory problems.
Namely, financial mismanagement, problems that are deeper than previously thought, due to the sleuthing done by the independent stock research firm Disclosure Insight of Plymouth, Minn.
Disclosure Insight scours public company filings as well as documents from the Securities and Exchange Commission it gets after successfully filing Freedom of Information Act requests (www.disclosureinsight.com).
Founded by John P. Gavin, a money manager and chartered financial analyst, Disclosure Insight's work on companies like GM often shows that management oversight of a company's operations and books are typically worse than expected.
Disclosure Insight's recent findings on GM raises the question: What are taxpayers getting for their bailout of the automakers? "A potential taxpayer money pit, if GM's wide array of internal problems are not fully vetted," Gavin says.
And its history of regulatory problems should make taxpayers think twice about whether GM will meet the March 31 target deadline to prove to the US government it can be economically viable and therefore should get more taxpayer money beyond its emergency $13.4 bn loan.
GM's Painful History With Regulators
In just the past five years, GM has taken $32 bn in impairments, charges, and reported losses against $6 bn in gains, while at the same time has contended with at least four investigations by the Securities and Exchange Commission and three internal accounting investigations, the report from Disclosure Insight says.
GM has also had a history of internal controls issues dating back to at least 2004, as well as three accounting restatements, three chief financial officers, subpoenas on two separate Federal grand jury matters, multiple reviews of its books by the SEC, most recently ending in July 2008, as well as a separate in-depth SEC review of its auto finance unit GMAC in 2007.
GM's internal controls over financial reporting were so ineffective, the company noted in 2007 the problems could make it difficult to execute its business plan. And its accounting restatements have often led to deeper losses. For example, an accounting restatement in 2005 quintupled its reported loss to $10.5 bn from an initial loss of $2 bn.
GM's Problems in Detail
Disclosure Insight notes that GM has faced as many as four SEC's investigations, all of which appear to be ongoing as of November 2008, and cites company filings which suggest they relate to "some serious issues" including: Pension and other post-employment benefits; exposure related to Delphi [the auto parts company]; supplier price reductions or credits; transactions related to precious metal raw materials used in manufacturing; and accounting for unspecified foreign exchange derivative transactions.
Disclosure Insight notes that three of the four investigations involved SEC subpoenas, which "suggests GM tends to take a combative stance" with investigators, adding that "protracted battles are often undertaken by management teams fearful over the consequences of failure."
GM's Accounting Problems
GM has disclosed off and on since November 2005 that it has had material weaknesses in its internal controls when it comes to its accounting for income taxes, employee benefits, and other period-end financial reporting. The issues range from potentially misreporting the carrying value of its investments, its cash flow statements, contracts, and its derivatives.
Disclosure Insight found GM had three internal accounting investigations in the past five years, related to booking supplier credits, cash flows at its mortgage lending arm ResCap and its accounting for derivatives.
In fact, its misreporting of cash flows from certain mortgage transactions at ResCap caused GM to miss a filing deadling for its annual report with the SEC, putting it in technical default of some $32 bn in debt.
Grand Jury Subpoenas
GM received a subpoena from a federal grand jury on loss mitigation insurance products in October 2005, and another subpoena on supplier credits and transactions in precious raw materials in March 2006, as well as tax issues with the IRS and various foreign countries.
The government has already agreed to give carmakers General Motors and Chrysler $17.4 bn in emergency loans to avoid massive job losses and potentially deepening the recession.
Ford says it will forgo emergency funds for now, watching to see if the market deteriorates further.
The end game: Proving to the US government they can clean up their act and book a positive net worth by March 31stin order to get more taxpayer money.
However the deadline is not a mandate, it's a target, likely a moving one, given that GM has a negative $59 bn in net worth and Chrysler, which is private (so no public disclosure), is likely on the verge of running out of money.
The Treasury Department is investing $5 bn dollars in GM's car finance unit, GMAC, in return for nonvoting, nonconvertible preferred interests in GMAC yielding an 8% annual dividend. GMAC also won approval to become a bank holding company, which would give it access to the Federal Reserve's discount window for temporary borrowings, among other central bank vehicles.
GM has blamed the credit slump for its woes, even GM posted a $10.5 bn loss in 2005, a near record year for car sales.
Car sales continue to plunge at both US and Asian manufacturers. December sales dropped 31% at GM, 32% at Ford Motor, and a breathtaking 53% at Chrysler, owned by the private equity shop Cerberus Capital Management, run by former Treasury Secretary John Snow. Toyota, Nissan and Honda got socked, too.
Annual car sales peaked at about 17 mn in 2006. Industry analysts used to think that a one-time dip to 14 mn would be a catastrophe. In 2008, total sales fell below that, to about 13 mn.
Just 13.2 mn cars were sold last year, the worst showing since 1992, versus 17 mn car sales at the height in 2006.
PricewaterhouseCoopers, an accounting and consulting firm estimates that light vehicle sales in North America will drop a further 17% to 10.8 mn this year.
Given that consumer confidence is at record lows thanks to the housing and stock market implosion which has erased $13 tn out of the net worth of Americans since the height of the bubble, and given that layoffs are mounting and the unemployment rate could surpass 8%, versus 6.7% now, it's worth asking whether consumers frantic about job losses and shrinking salaries will shell out needed cash to buy a new car.
Detroit has way too much infrastructure. One of the car companies may vanish before the year is out.
As a March 31stdeadline looms on their $17.4 bn bridge loan, General Motors and Chrysler are now trying to wring concessions out of dealers, suppliers, bondholders, and the United Auto Workers' union to persuade Washington they can return to viability.
Already, the UAW is balking at the demands in the Bush bailout, saying it expects a "more balanced" approach under President-elect Barack Obama.
Major Sticking Point
To get taxpayer funds, GM promised Congress it would "significantly reduce" the debt on its balance sheet.
But convincing existing bondholders they should agree to GM's plans to convert about 70% of its debt into equity is a painfully high bar. Bondholders are balking, as a bankruptcy would vaporize the value of any new shares.