Brace for default impact

GM bondholders have been bracing themselves with the increasing likelihood of a default. What has caught them off-guard is the speed of the decline, which government intervention has failed to arrest. They are now facing up to even lower recovery rates, possibly in the 20 cent on the dollar range.

The above recovery rate explains why this business is spent - when the assets of the business are worth such a small fraction of its debt, any further cash to fund GM is simply money down the drain. Other commentators have been hammering this away since the crisis began, but Washington blinked in the face of the political dead-weight of bankruptcy.

I think there is no longer an "if" on bankruptcy proceedings, merely a discussion on the form of these proceedings. It is hard to be optimistic that GM can suddenly face up to its 20 year lag behind its Asian and German rivals and make cars that a) work, b) have style and c) incorporate 21st century manufacturing processes.

Sadly, it's best to admit that it's over. Wind this spent force down as soon as possible. If something can be salvaged from the wreck of GM, so much the better. But General Motors' time has passed - prolonging the agony is quite cruel in the long run.

Das (Car) Kapital

I'll admit to being surprised to see General Motors in the weekend press. Not the fact that they are in deep trouble; that's been a well-trodden story over the past few years.

Isn't it interesting that there's no talk about cars, merely about how fast automakers are burning cash? When you look at GM's accounts, their pension and benefit liabilities are a cast-iron millstone around their neck. Any cash they make from that quaint activity of selling cars rushes out of the door to fund those liabilities. Add anaemic sales (at best) and you have a recipe for disaster. It was merely a matter of time before reality caught up.

We might be nearing that point. The bizarre part of the story (aside the impact on their employees, of course) is that policymakers are contemplating a rescue of automakers from...you guessed it, the rescue fund for financial institutions (also known as the TARP Fund).

Yes, the fund set up to rescue financial institutions might get raided to prop up automakers. My question is where will this end? OK, it'll end when the $700 billion is spent, but who will win the race to grab a slice of the taxpayer pie? Airlines? Farmers? The TARP's terms kept its remit to financial firms only, although in these politically charged times the temptation to broaden the terms might be overwhelming - who'd have thought nationalisation would become fashionable?

Absolute madness. On a closing note, I tried to get a copy of the TARP Bill text from the US Treasury web site. The web link at the Treasury pops up a fitting message: "Sorry...is not a valid site". I couldn't have put it better myself.