Is this the end? GM posts massive first-quarter losses

Earlier today, General Motors (GM) posted first quarter losses of $5.9 billion dollars. Although significantly less than the $6.7 billion that many analysts anticipated, the losses were devastating. Some are suggesting that this may be the ailing automakers final revenue report.

The losses came out to $9.66 per share, a quantum leap over last year's first quarter losses of $381 million, or $0.67 per share. The automaker has attributed its falling revenue to a 40 percent drop in the number of units produced over the past year. This has been linked to a 47 percent decline in domestic sales and a 28 percent decline in global sales. Ultimately, the plummeting sales figures led to a $20 billion drop in revenue.

Ironically, the car maker simultaneously posted its best year yet in China, with sales rising 50 percent over last year. In April alone, GM sold 151,084 cars in the emergent market, compared with 172,150 in the United States. These successes are largely due to partnership with Chinese automakers, combined with government tax cuts designed to stimulate car purchases.

GM cut costs by approximately $3 billion, but the austerity measures were insufficient to offset its losses. In the first four months of the year, the automaker borrowed $15.4 billion from the federal government, a move that helped cost CEO Rick Wagoner his job.

GM is pinning its hopes on a restructuring plan that it unveiled in April. Under this reorganization, the automaker would convert much of its debt to stock. This paper, in turn, would be handed over to the United Auto Workers Union and the federal government, giving them a combined 89 percent share in the company. Bondholders, in turn, would get 10 percent of the stock in return for $27 billion in debt, leaving the final one percent of GM to be divvied up as common stock.

In the wake of Chrysler's bankruptcy filing, many analysts feel that GM's demise has slowly transformed from a question of "if" to "when." Amid talks of a "painless," pre-structured bankruptcy, some bondholders with credit default swaps have come to embrace the abyss, in the belief that the structure of their debt will at leave them in a better position. This could be right, as swaps usually do insure that the holders get their money in a bankruptcy. In fact, one of the key questions underlying the restructuring is just how many bondholders hold the swaps; given that the Treasury is hoping to get 90 percent of bondholders to accept a debt-for-equity exchange, it would only take about $2.8 billion in swaps to derail the deal.

Some analysts have suggested that there may be approximately $2.7 billion in credit default swaps out on the market, which suggests that the automaker's restructuring could squeak by. In the meantime, GM's partnerships with Segway and Chinese automakers may point the way to a productive and self-sufficient future ... if it isn't too late.

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