My mind is utterly blown. After being told that their shares would be diluted to next-to-worthlessness, General Motors (NYSE:GM) shareholders proceeded to drive up GM's shares yesterday by over 20%. Sorry if this is harsh, but …

What freakin' planet are you people on?
Ahem. Look, I don't mean to dance on anyone's grave here. I love America, apple pie, and all that Norman Rockwell nonsense as much as the next guy.

Then again, I'm also a realist, and I can't fathom what would possess someone to own shares of this scrapheap. Let's consider the overwhelmingly likely outcomes for GM shareholders from this point forward:

  • Heads: GM stays alive, and you're diluted 100-times over via a new restructuring plan.
  • Tails: GM ends up filing for either Chapter 11 or (gulp) Chapter 7, and you lose all of your investment.

The bitter irony here is that, should this proposed exchange offer proceed (90% approval from GM bondholders is the big sticking point), GM would emerge a much leaner company, far better prepared to duel with cross-town rival Ford (NYSE:F) and more efficient Japanese rivals Toyota (NYSE:TM), Nissan (NASDAQ:NSANY), and Honda (NYSE:HMC).

That's great, but keep some perspective: Current shareholders would own only 1% of the new-and-improved GM. The other 99% of GM's equity will be divvied up among the U.S. government, a trust for GM's employees, and bondholders. So, sure, GM might start cranking out something close to respectable earnings as early as 2011, but current shareholders' sliver of the pie would be close to zero. It's like you're trading in a rusted-out Bonneville in exchange for the right to share a new Caddy with 99 other people. That's news to celebrate?

GM's shares currently trade near $1.90, with about 610 million currently outstanding. That values GM's current equity at about $1.1 billion. But if this restructuring goes through, these shares will represent only 1% of GM’s total equity pie. Would you pay $1.1 billion dollars to own 1% of GM? Me neither. Color me skeptical, but that implies an incredibly rich valuation considering the still cut-throat nature of the auto biz and the fact that GM is dramatically slashing its production capacity.

But then, all of that assumes the bondholders swallow this bitter pill. There's a good chance they won't, in which case your shares probably will end up worth nothing. Literally.

My hunch is that GM's shares are in for a sharp correction once Mr. Market comes to his senses regarding the epic dilution we could witness. The shares look grossly overvalued here -- especially given the high likelihood of bankruptcy. Unless you've seen something I'm missing, or you're confident in an economic miracle bailing you out, there's absolutely no reason for you to own GM shares.

Think I'm wrong? Let's hear your argument in the comment box below. Fool on!