Wednesday, March 16, 2005

General Motors And The Housing Bubble

To expand on my earlier post, I believe the meltdown in GMs stock today has a lot more to do with the debt and housing bubbles than auto manufacturing. After a little research, some facts stand out.

GM has been described as a "financial firm now producing cars as a hobby." The financing branch, called GMAC, has $260 billion of debt, second only to the GSEs. It seems that a good chunk, some $40 billion, will need to be refinanced in the next 18 months. But with debt downgrades coming left and right, the costs of refinancing are soaring. The action today will result in an additional $78,000 of cost for every $10 million held by creditors.

The Financial Times wonders if "the slump in General Motors' bonds could signal a possible turning point in the credit cycle..does it mean the credit market rally is unwinding?"

Although the firm is no longer a manufacturing giant, its past is playing a role in the crunch. It has reportedly under funded its pension obligation by $17 billion, in fact having more retired employees than those working. So todays announcement that GM is still posting losses on its car sales really just brought this situation to a head. And should the bond market take a big hit, interest rates would spike up and clobber the housing market.


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