Is GM About to Crash?

Dear General Motors (NYSE: GM  ) Shareholder,

Breathe. C'mon, deep breaths. There you go.

I know you've seen a lot. You've witnessed superior foreign operators Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and Nissan (Nasdaq: NSANY  ) grind away at Motown for years. You saw Rick Wagoner, Bob Nardelli, and Ford's (NYSE: F  ) Alan Mulally called in front of Congress like petulant children. And now this. The death throes.

Trust me, I know this has been tough -- I received your hate mail. Those nasty bondholders said no to a debt-to-stock swap that would have helped GM avoid bankruptcy court. And yesterday, I even went so far as to tell you that your shares were on the brink of becoming worthless and that you should sell immediately.

But what of today's news? Sloppy reporting and a less-than-crystal-clear GM 8-K filing have contributed to a torrent of ill-formed conclusions, jerking GM's shares to and fro. But what is actually happening? Let's review.

The facts
Here's what we definitively know. Again, I recommend reviewing the 8-K filing if you're a GM shareholder.

  • If GM enters bankruptcy proceedings -- which I see no avenue to avoid, and Bloomberg is reporting as being on the horizon -- the U.S. Treasury will own 72.5% of shares in the "New GM." Seventeen and one-half percent will be owned by a new voluntary employee beneficiary association (VEBA) for GM employees, and 10% will go to "Old GM" investors, which the 8-K implies as being GM's debtholders.
  • The same group of stubborn debtholders who pooh-poohed the previous "offer" have accepted the terms of this one.
  • There is no direct mention of current GM shareholders owning any of a new, post-bankruptcy GM. Presumably that means current shareholders will be wiped out entirely upon the company's restructuring.  
  • Seeking clarity on that last point, I've lobbed in a call to GM's investor relationships department, and they are currently working through my request for clarification. At the time of publication of this article, however, I'm still waiting for a response.

The scenarios
Frankly, I'm flabbergasted that GM's shares are trading for anything more than pennies apiece. Again, let's review the possible outcomes:

Overwhelmingly most likely: GM files for Chapter 11 protection within the next week, and current shareholders are completely wiped out.

Possible, but unlikely: GM files for Chapter 11, and current shareholders keep some slices of pie, though likely at only a fraction of their current value.

Deeply, seriously, incredibly unlikely: GM avoids bankruptcy, though current shareholders are diluted so many times over so as to render their investments still close to worthless.

Your choice
From rumors to hard news to common sense, every sign points to a GM bankruptcy being imminent. And, again, that almost certainly equates to a total loss on GM's shares.

Some of you might be thinking that hanging onto your GM shares makes sense. You've lost practically everything on them already, you say, and they might pop if GM somehow avoids bankruptcy.

If you're honestly thinking that, please, get a grip. You can sell your shares for more than a dollar right now. More likely than not, they'll be worth $0.00 within months. As Steve Miller would say, take the money and run.

Love,
Joe

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Joe Magyer does not have any positions, long or short, in any of the companies mentioned in this article. You can view his holdings here. Nissan Motor is a Motley Fool Global Gains selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (37) | Recommend This Article (66)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 28, 2009, at 4:01 PM, NoMoeMoney wrote:

    Actually, your shares will be worthless and you'll still be dumping money into GM because Uncle Sam will be using your tax dollars to run it.

  • Report this Comment On May 28, 2009, at 4:12 PM, FinancialFellow wrote:

    Against my better judgement I picked up a small amount of GM stock in "better days" when it was trading at about $6 a share. Good question as to why GM isn't trading for pennies. My guess is that you still have plenty of folks (probably older) that continue to hold GM because they have an old, outdated mentality of GM. They still think of GM as a great, large company who will recover. I honestly don't think a lot of people understand how much trouble the company is truly in.

    After I sold my depleted shares I took the remaining sum and moved it another investment that touts a 9% annual return: http://financialfellow.com/2009/04/22/peer-to-peer-lending-o...

  • Report this Comment On May 28, 2009, at 4:13 PM, portefeuille wrote:
  • Report this Comment On May 28, 2009, at 4:17 PM, TMFJoeInvestor wrote:

    Yep, I agree there's a "greater fool" theory element at play here. Of course, that doesn't change that these shares are almost certainly to end up worthless. For a great read on the dangers of investing in bankrupt companies, I can't recommend enough this classic piece by Bill Mann: http://www.fool.com/news/foth/2002/foth020129.htm

  • Report this Comment On May 28, 2009, at 5:13 PM, CAPTAINWACK wrote:

    So why did they go through the roof today?

    Insider information that isn't being told to the masses?

  • Report this Comment On May 28, 2009, at 5:17 PM, tomd728 wrote:

    It's over for the existing common.....period.

    These mutts in D.C. will see to it that GM issues

    a new common down the road not additional common.

    If anyone else tried the maneuvers the Fed dictated on the Bonds they would be thrown in the Fed slammer and not let out until their beards were grey and touching the floor.The two stumbling old bags in ZZ Topp would look clean shaven.

    Hey Bernie...........

  • Report this Comment On May 28, 2009, at 5:19 PM, TxTom wrote:

    GM shares are worthless. GM, however, is in great shape. They will come out of this smelling like the proverbial rose, and will be able to compete on a level playing field with all other auto companies.

    In fact, GM won't miss a beat throughout the bankruptcy. They are currently building new Camaros in Canada, and can't keep up with earlly demand. Reports are that there are over 14,000 early orders for these cars, and growing by the day. The icon lives.

    My SS is on the assembly line, and I can't wait to take delivery. Workmanship is GM's new top priority, as it should been all along. Even the new V6 engine is one of the most technologically advanced on the planet - great mileage with lots of ponies....

    Yes, our generations-old number one car company will live to shine again, and that process has finally started.

    Buy GM (not the stock) and help put our American companies back on the path to recovery! Go USA!!!

  • Report this Comment On May 28, 2009, at 5:44 PM, tbarth88 wrote:

    I purchased 100 shares at just below $3 late last year as I couldn't see a company like GM being allowed to fail. After all, we bailed Chrystler out in the '70s right? Wrong! I was able to cut my losses and got out at $1.11. Not my best investment but certainly not my worst either.

  • Report this Comment On May 28, 2009, at 6:46 PM, TMFBreakerRob wrote:

    Good article, Joe. Its too bad about the current shareholders, but I've read posts from a number of folks around the Fool excited about the "opportunity" that the low share price delivers with respect to this former American icon. Those folks just keep coming. Well....education can be cheap or it can be expensive...and its often determined by the choices we make.

    I view the unraveling of GM with alarm. Losing GM Europe will be like a person getting a limb blown off, very painful and with permanent effects. The company desperately needs high quality small vehicles...and Opel has them. Where will GM find the resources (financial and technical) to replace that product development engine? They won't. They'll have to limp along.

    Yes, GM has a number of high quality new vehicles (sometimes in niche segments though), but they're also being weighed down by older, uncompetitive ones they are struggling to replace. It may not be apparent to those outside the industry, but the company is delaying and even canceling programs in the effort to conserve cash.

    In the auto biz, that's like saving money by not buying cancer medication....maybe it seems like a necessary choice, but it also has consequences.

    Rob

    former GM employee and GM supplier

  • Report this Comment On May 28, 2009, at 7:11 PM, wwskinn3 wrote:

    I used to hold on to my stock to see what would happen. Anybody want to buy some ENRON or IRIDIUM Stock?

  • Report this Comment On May 28, 2009, at 7:36 PM, biotechmgr wrote:

    CNBC says the filing will be Monday.

  • Report this Comment On May 28, 2009, at 7:37 PM, wyrfox wrote:

    Perhaps living on the west coast gives me a different view, but in many random samplings as I drive all over Northern California, I can't help but think no one will notice nor care about GM's demise. It is apparent that they do not make cars that people want to buy. I see more old (Opel based) Saturns than new Chevys, Buicks or Pontiacs. I drive a 2005 GMC Safari, because I can't find an equivalent new van. Perhaps letting the company be sold in pieces would let new ideas, new designs, and customer responsive marketing develop in Chevy,Cadillac and Chevy (GMC) Trucks - the only divisions that might be worth saving.

  • Report this Comment On May 28, 2009, at 7:38 PM, biotechmgr wrote:

    My first CAPS bankruptcy. I feel so .... jubilant ... with taxpayers picking up the tab for many more Billions...

  • Report this Comment On May 28, 2009, at 8:51 PM, rolly707 wrote:

    Dear Joe,

    Excellent review of the real situation that we stockholders will have to face, in this mess.

    Just the raw truth !! This article is of great help for us members, in order to decide to sell those worthless pieces of paper!! Congratulations, I love your direct and informed style.

  • Report this Comment On May 28, 2009, at 9:30 PM, PatientJC wrote:

    Why do people hold on to shares that at best will be fractions of pennies?? And why does CAPS show GM ending at $3.11 today when it actually ended at $1.12??

    Good review!!

  • Report this Comment On May 28, 2009, at 9:46 PM, airfido wrote:

    Well, like you fellas always like to say: "A stock is pretty much correctly priced at any given time." No one seems to want to talk about the politics of a GM bankruptcy on Obama's watch. Especially with his debt to organized labor. Hmmm...My spider sense tells me Obama has another plan to stick me with another taxpayer funded bail-out.

    On a side note, anyone who has owned a Suburban knows what a fine machine it is. I hope they survive just so I can have a lifetime of uninterrupted ownership of this quality vehicle. One call from the hospital and all that gas you saved by putting your family in the latest imported tin can won't mean a thing.

  • Report this Comment On May 28, 2009, at 11:16 PM, clnauert6 wrote:

    The same group of stubborn debtholders who pooh-poohed the previous "offer" have accepted the terms of this one ---- This is just NOT true ---- Some hand-picked by Obama group decided to ACCEPT the bond offer --- we individual investors that said NO to the previous deal --- did not get to vote nor did we get to pick the people that would represent us. I understood "the Bond Holders had accepted" the morning and wondered how I had accepted the new deal ????

    If individual Bondholders had been allowed to vote we would have driven GM into complete bankruptcy and would have ended this stupid cash drain. Now, I am going to get 5 cents on the dollar after I pay my taxes and MY tax money is used to pay me.

    How wonderful for me (I am told).

    Clint

  • Report this Comment On May 28, 2009, at 11:41 PM, TMFBreakerRob wrote:

    Re: "GM doesn't make what people want to buy"

    It amazes me to hear that kind of talk. It indicates ignorance of the subject (sorry, but its true). GM (at least for now) is the #1 selling set of brands in the US and has been since taking the lead decades ago.

    Rob

  • Report this Comment On May 28, 2009, at 11:53 PM, ITLDO wrote:

    As a child I grew up admiring the GM products. Googling at them and eventually owning several Chevy's, Pontiacs, Buicks, etc. You get the idea. The ICON is gone. The rich get richer and us little people get stuck paying the bill. Yes GM will survive this and thrive again. Ofcourse the well to do will not fair badly. However, those hard working blue coller workers are the ones that are truely suffering here. The blue collar worker's are the ones that buy the GM products. With all our jobs going overseas it is very likely that we as a Americans can consider ourself not world leaders anymore or a place financially that the rest of the world looks up too!!!! Dream big in America and your jobs get taken away due to poor management by overpaid SUITS. The government allowed to many tax breaks for jobs to go overseas etc. Their is a long laundry list of reasons that the GM ICON has failed and the blue collar worker will never be the same. Basically this is the ARMAGEDEN of the blue collar worker. Get rid of GM shares and put the rest in your childs college savings account. Good luck blue collar workers. No body is gonna bail us out.

  • Report this Comment On May 29, 2009, at 12:35 AM, Johnnnymac66 wrote:

    Two things have been apparent to anyone on the planet with connecting neurons and a driver's license: 1) The only true way for GM to emerge from the steaming pile of dinosaur doo they've created for themselves is to fully declare Chapter 11 bankruptcy, and 2) The UAW has destroyed the United States Auto industry.

    Just like any parasite, the UAW can only survive as long as its host stays alive. However, the UAW is a non-evolving parasite. It cannot survive without the only host that will feed it, the obsolete & dead American auto industry.

    If only we could find such an effective cure for cancer as Chapter 11's application to the UAW.

  • Report this Comment On May 29, 2009, at 5:05 AM, Danatompkins wrote:

    What is the difference between GM and Chrysler? Chrysler went into bankruptcy, and it's shares didn't plummet.

  • Report this Comment On May 29, 2009, at 7:08 AM, dividendnut wrote:

    in the mean time, Ford kicks butt.

  • Report this Comment On May 29, 2009, at 10:04 AM, owup74 wrote:

    Its to bad what happend to GM but it was self inflicted. The management was living in a plastic bubble for the last 5 decades fantasying that americans will buy their products and did not heed warnings when Honda and Toyota were improving their products but by the time they realized that thinking was not working when the younger generation was buying the imports it became to late. Of course when they were stupid enough to export jobs they obviously did not realize the price to be paid latter when their customers are out of a job. Hopefully with the colaps of GM it will bring about a new GM. Maybe one that things smart and listens to their consumers. Be better and smarter and maybe keep jobs in the US (hehe yeah right like that will happen) but then again they probably will not learn and end up back where they are now. Maybe the Volt will help with redfining of GM and will raise up to give Toyota a run for its mone but we shall see.

  • Report this Comment On May 29, 2009, at 11:46 AM, bear1010 wrote:

    One big reason for GM's demise is the UAW. Because Obama and the Dems control GM, the UAW will be fine in bankrupcy with taxpayer money. It angers me that most working Americans make much less in pay and benefits than the UAW yet their tax dollars are going to subsidize the wages and benefits of the UAW. A big wake-up call for the Gov. and GM would be a national boycott of all vehicles made by the UAW.

  • Report this Comment On May 29, 2009, at 1:02 PM, PricePro12 wrote:

    There once was a story about 2 mice. They got trapped in a bowl of milk. the first mouse quickly gave up and drowned the second mouse kick its legs so hard it turned that milk into butter and got out.. Which is GM??

  • Report this Comment On May 29, 2009, at 10:52 PM, HarryCarysGhost wrote:

    I saw that Gm was at $3.12.

    Figured there must have been a miraculus recovory.

    Franticly called my broker to buy 1000 shares. Wanted to get in before it skyrockets further.

    Oh Joyous day happy days are here again, with this kind of recovery I can't help but believe all are troubles are over.

  • Report this Comment On May 30, 2009, at 4:12 AM, automaticaev wrote:

    naw gm is fine in fact its a strong buy according to all indicators.

  • Report this Comment On May 30, 2009, at 12:39 PM, IIcx wrote:

    Thanks Joe - good article.

    CNBC announced that shareholders will receive 1% of the chapter 11 settlement but they didn't go into detail. I'm assuming it's 1% of the debt and the common shares will be worth less then a penny but who knows.

    Any word from GM?

  • Report this Comment On May 30, 2009, at 1:13 PM, ctangus wrote:

    The wsj article above makes sense - basically lots of speculators in on the game. It certainly holds little to no intrinsic value.

    Also, index funds will have to continue to hold GM until it gets de-listed which might be driving some demand. I can't imagine it will stay on the Dow once the chapter 11 paperwork is filed.

  • Report this Comment On May 30, 2009, at 7:55 PM, Rick429CJ wrote:

    If GM goes down the toilet, it may make a nice market opportunity for former European GM subsidiary Opel, who do make exciting cars

  • Report this Comment On May 31, 2009, at 3:41 AM, Netteligent09 wrote:

    First it was Union. Then GM Management. Now it is GM Bondholders. GM is not Crashed..It is BUSTED.

  • Report this Comment On May 31, 2009, at 3:31 PM, jomueller1 wrote:

    Do I remember this right? Insanity is doing the same thing and expecting different results.

    GM and Chrysler will disappear, perhaps taking FIAT with them. Both companies are going downhill since about 30 years. Opel missed to build quality vehicles since 40 years, not because the German workers are bad but because GM paid dividends when there were no profits. Instead of improving operations they played the nice guys with the shareholders. Daimler-Benz (now Daimler) tried to work with Chrysler but those guys just did not understand the stubbornness of Chryslers management and workers and not the stubbornness of the US consumer either who for whatever stupid reasons needs a V8 engine with 300 or more horsepower. Then they drive like they had a VW Beetle.

    Obama wants fuel efficiency and the buyers want gas guzzlers. I would not touch automotive stock for investment, may be here and there for an option play - instead of playing poker.

  • Report this Comment On May 31, 2009, at 6:11 PM, booyahh wrote:

    "Obama wants fuel efficiency and the buyers want gas guzzlers."

    Really? Is that why GM's market share has been sinking, both in the US and in the world ? Meanwhile, Honda, Toyota etc have been increasing their market share, year after year.

  • Report this Comment On May 31, 2009, at 10:26 PM, nickey2009 wrote:

    i think there are good chances that Gm gets bankrupt and if it does then again there will be a severe downfall in auto sector shares as well as others

  • Report this Comment On June 01, 2009, at 12:52 AM, kellogg9 wrote:

    Call me silly but i had held out hope for the resurrection of GM back 2 months back. Now i am sitting on a worthless collection of paper shares :( Good bye and good ridence.

    Kelly

    http://www.stockcoupons.com/

  • Report this Comment On June 02, 2009, at 5:34 PM, TeeTimeKidd wrote:

    Is anyone else thinking of what im thinking? GM goes to .15/.20 a share buy $500 and wait 5 years and it will be back to $20 a share? $500 becomes $50K. Easy money im thinking? What is everyones thoughts on this?

  • Report this Comment On June 03, 2009, at 3:51 PM, automaticaev wrote:

    Im putting a strong short term buy on gm. Its sure to skyrocket over the next 2 weeks then sell and you make lotta moneys.

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