GM: The Threat of Bankruptcy

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Negative Stockholder Equity

GM spokesman Tony Cervone says that kind of speculation is simplistic. He notes that GM has already made huge gains in cost reductions with labor that will start paying off in 2010. "Our cost of sales will be 25%, and that is better than Toyota is today," said Cervone.

GM, in the most recent quarter, has a negative $58 billion in stockholder equity on its balance sheet. That's how much the liabilities exceed its assets. That compares with negative $42 billion it reported a year ago.

The aspect of a GM bankruptcy that worries some analysts and legislators is the ripple effect that would impact Ford and Chrysler as well as numerous auto suppliers. Grant Thornton's Rodriguez says that Ford and Chrysler, in the event of a GM bankruptcy, would also be quickly driven to bankruptcy court because their costs would be so much higher than GM's, "they'd quickly find themselves uncompetitive." Too, there could be such a disruption to auto suppliers that the auto companies' production of vehicles would be interrupted as if their workers were on strike. Seventy percent of GM's suppliers also supply critical parts to Ford and Chrysler, and there is no new credit or loans for those companies outside of the government.

A Little Breathing Room

The best-case scenario, says Rodriguez, is for government loans that give GM the time and space it needs to work through the recession, the way a bankruptcy court gives relief from creditors.

"The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree health-care expense, and a substantial downsizing of capacity and headcount," analyst Kid Penniman of independent research firm KDP Advisors wrote in a report. "Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in an even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees," he added.

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Kiley is a senior correspondent in BusinessWeek's Detroit bureau.