Monday, March 26, 2007

ResCap's CEO Resignagion Likely Means Trouble Ahead

Selling off a contolling interest in GMAC had one primary objective: Lower the cost of borrowing for GM's huge financing arm.

When GM's debt was downgraded to junk it meant that the interest GMAC had to pay on financing for the hundreds of billions of dollars worth of real estate and car loans it was making. Within GMAC, ResCap was given an extra special protected status with capital guarantees that allowed it to receive AAA credit ratings.

After a very short tenure, the CFO of ResCap is stepping down. As usual, the company is saying that it is for personal reasons, but in the coporate world the resignation of a CFO is almost a sign of rats leaving a sinking ship. ResCap includes Ditech, which was one of the most aggressive lenders around during the housing boom. Undoubtedly the loans that ResCap is now responsible for are going bad at an alarming rate. Please view this blog to see things are going in the mortgage portfolio of another aggressive lender.

As ResCap's losses mount, GMAC has to make up for missing capital to keep the credit rating alive. This in turn hurts the profitability of GM. The real estate housing collapse still has a very long way to go, and GM will continue to feel its share of the pain via GMAC and ResCap.

Monday, March 19, 2007

Is GM's Automotive Division Profitable?

The question and answers section of the most recent conference call was broken into two portions. First the analysts got to ask their questions, then the reporters. One of the reporters asked bluntly if GM made money selling cars in Q4 and if they made money selling cars in North America. It was a good question in concept (although it was easy for management to twist the numbers to show profitability in the division because of all the recent write-offs). Since a majority interest in GMAC has been sold, GM's automotive profitability becomes especially important.

In the 2004 10-K, GM reported the following #s for "Automotive and Other" division:
2002 -$146 million
2003 +$995 million (would have been negative if not for a $1.179 billion gain on sale of discontinued operations)
2004 -$89 million

Meanwhile, all the company's profits were in GMAC:
2002 +$1,870 million ($544 million mortgage profits)
2003 +$2,793 million ($1,254 million mortgage profits)
2004 +$2,913 million ($1,108 million mortgage profits)

In the 2005 10-K, Auto showed a huge loss on write-downs:
2005 -$12,816 million
while GMAC reported another big profit:
2005 +$2,356 million ($1,345 million mortgage profits)

In the 2006 10-K, Auto showed another big loss:
2006 -$3,168 million
while GMAC reported another net profit:
2006 +2,175 million

Maintaining an appearance of profitability will be essential for keeping GM's creditors happy going forward. If (and how long) they can do this will be the subject of future posts.

Sunday, March 18, 2007

Negative Book Value

In GM's 2005 10-K, in the risk factors section, the following statement is made:

"In addition, the Financial Accounting Standards Board (FASB) has announced that it is considering changes in the accounting rules for pensions and other postretirement benefits. The rule changes that are expected to be proposed in March 2006 would require a company to include on its balance sheet an additional net asset or net liability to reflect the funded or unfunded status, as the case may be, of its retirement plans. In light of the unrecognized losses associated with our pension and OPEB liabilities under existing accounting rules, if these expected proposed rules had been in effect as of December 31, 2005, the substantial additional liability that we would have had to include on our balance sheet would have caused our total stockholders’ equity to be negative."

The FASB went ahead with that rule change, and now GM's equity is indeed negative. See the line from the bottom, where total stockholder's equity has gone from a positive $14.653 billion to a negative $5.441 billion:

Based on the following table from GM's 2005 10-K, it could have been much worse based pension and benefit plans that appeared to be almost $70 billion underfunded with over $60 billion in unrecognized losses:

It appears that the huge employee buyout program implemented during 2006 saved the company many billions in future pension liabilities.

GM hopes to get further concessions from the union that would presumably allow them to reduce their pension liabilities and bring their equity up. On the other hand, GM's assumptions with regard to their pension plan performance may end up being too optimistic (this is how they ended up with so many unrecognized losses in the first place). Time will tell how much trouble GM's past pension plan accounting will cause for the company down the road.

On the asset side of the balance sheet, GM is including over $30 billion in deferred tax assets with $10.2 billion having been added as a result of the new pension and benefit accounting. For these to end up being of value the company either has to become highly profitable or somebody needs to buy out the company. With GMAC now out of the company's control and struggling because of its subprime lending operations, and with the company's negative equity, the stated value of deferred tax assets may have to be marked down in the future:

Will GM be able to achieve postive equity in the future?
Will GM be profitable?
Will GM go bankrupt?
You'll have to judge for yourself.