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Inside GM: Why It's So Bad

Admit it.

When you see the headlines of GM warning it could be forced into chapter 7 bankruptcy and liquidate, you likely have two reactions.

First, you say "Duh! These guys have been hanging on by a thread, of course they could go under."

Second, you're probably thinking, "There's no way the Federal government will let this company sink."

Both reactions are right on the mark. Which is why, strange as it sounds, GM's annual report doesn't really change anything. It doesn't make it more or less likely the Treasury Department will lend another round of billions to GM. And it doesn't change the cutbacks in production and jobs at the auto maker.

Why?

Because this report was a snapshot of GM at the end of last year, when the company made it very clear it was days from bankruptcy if it didn't get a lifeline from Washington. We knew back then that GM was truly on the edge. The company said on February 17th its cash level at the end of December was $11-14 Billion, the bare minimum needed to run the company day to day. In fact, in it's annual report, GM says, "In the fourth quarter of 2008, our available liquidity dropped below the level necessary to operate our businesses." So this report essentially confirms what we've known, what Wall Street has known, and what President Obama's Auto Task Force has known for some time.

That's the reason why many believe the Federal government will not let GM go under. It has already sunk $13.4 Billion into the troubled auto maker. That money is not just a loan, it's the government's unspoken word that it will keep GM from imploding. Oh sure, we will hear the President and political leaders in Washington issue public warnings that if GM can not get it's act together, it won't be propped up by the Treasury Department. Tough talk aside, the reality is that Washington has committed to restructuring GM outside of bankruptcy court with Federal loans. It has little choice but to do so.

The banks don't have enough money, or for that matter the gumption, to provide the billions in debtor in possession (DIP) financing needed for a chapter eleven bankruptcy. Without that DIP financing GM would have to go into a Chapter 7 liquidation which could trigger other bankruptcies in the auto industry, cause more jobs to be lost, and in general create a disastrous situation for an economy already in a recession. The bottom line: If Washington were to throw GM into bankruptcy right now, it would be running the risk of blowing an even bigger hole in the economy.

So why is this warning from GM getting so much attention?

It's because the company has spelled out the sobering reality of just how close it is to falling apart. Any time a company the size of GM talks about liquidating, we sit up and take note. For months, we've heard the same thing from GM executives, analysts, consultants and anyone either in or close to the company.

They weren't crying wolf.

As GM burned through almost $85 million a day in the fourth quarter the auto maker was sliding closer and closer to bankruptcy. Now we see just how close it is.

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