We've been covering the deteriorating picture at GM (NYSE:GM) for a while. When it engaged in the price wars with Ford (NYSE:F) and DaimlerChrysler (NYSE:DCX), we said, "Watch out. People are going to come to expect deals all the time." And they have.
In the face of actual profits from pesky foreigners, such as Toyota (NYSE:TM) and Honda (NYSE:HMC), we've said GM needs to quit with the sales gimmicks and get profitable closer to the top of the income statement. (And it wouldn't hurt to issue a little straight talk about stuff as important as major earnings restatements.)
Until GM gets some game, many of us have said that investors ought to ignore the smart, billionaire money, take a look at the spooky parallels with Delphi, and put their dough to work elsewhere.
That kind of infectious pessimism has sent GM shares to a multiyear low and spawned hundreds of other less-than-joyous estimates of the company's future prospects. On Thursday, CEO Rick Wagoner seemed to have had all he could stand. He can't stand no more.
So, Wagoner made an attempt to rally his troops and give his critics a slap. He told employees, thousands of whom will need to be sacrificed at the altar of restructuring if the company is to survive, "I'd like to just set the record straight here and now: There is absolutely no plan, strategy, or intention for GM to file for bankruptcy."
Now, I'd say the current ideas (Have another sale! Give 'em some free gas for their guzzling SUVs!) add up to a pretty good prelude to bankruptcy, but I've been known to wag an impertinent tongue. Maybe my colleague Stephen Simpson paraphrased it more aptly. "Folks, pay no attention to the bankers behind the curtain. We're solvent."
But what's lurking back there isn't some benevolent trickster, a happy little man pulling switches and levers in order to do good deeds under the guise of the steaming, omnipotent Oz. No, what's behind GM's curtain is more like a few dozen of those angry winged monkeys. Bankers, bondholders, and so on. (OK, so they're wing-tipped monkeys.) But the reality is the same: They're holding a LOT of GM debt, and their patience, though great, won't be infinite, and it won't be cheap.
That's why the junk ratings matter. They raise the cost of borrowing. (Hey, when we're cutting deals out back of Zucca's, we always charge Lefty more for a loan when we figure he might welsh on the deal.)
But it's also why the sell-off of the financing wing looks so screwy. Get rid of the only profitable part of the enterprise? Sure, you might be able to raise your rating out of junk, and borrow more cheaply, but the goal here should be to avoid having to borrow so much! When you run the entire business on borrowed funds, you're running on borrowed time.
Which is precisely why Wagoner's feel-good speech does not matter and shouldn't inspire any investor rally. Deeds, not words, are needed. And the deeds need to include deals with labor that are substantially more robust than those that usually appear when you're dealing with an entrenched, fed-up union: slim cutbacks designed to staunch the worst of the bleeding, not stop it entirely. Otherwise, GM will need to come up with a plan for bankruptcy, sooner or later.
Related Foolishness:
- Sigh. Again with the sales .
- GM's deal with Tommy Lee is a start.
- What's $400 million between friends?
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Seth Jayson has a shiny Chrysler minivan, but at the time of publication, he had positions in no stock mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
