Why Is GM So Much Worse Off Than Ford? Its Debt Ratios Are Horrendous

[Median Democrat]

I was wondering why Ford and GM being treated so differently by the Federal Government, and why Ford was able to reach an agreement with its workers, and why GM is demanding additional concessions from its employees. So, I took at look at its debt ratios, and wow! What a difference. My question is why?

We often talk of the auto industry as a single unitary entity, but at least with respect to debt, GM and Ford seems world's apart. Anyone have some insight as to why they have such different levels of debt?

Here is Ford (Choose Ratios and Returns):

http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=F&tab=searchtabquotes

Here is GM (Choose Ratios and Returns):

http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=GM


The first tool you use is called the current ratio. A measure of just how much liquidity a company has, this number is simply the current assets divided by the current liabilities. As a general rule, a current ratio of 1.5 or greater can meet near-term operating needs sufficiently. A higher current ratio can suggest that a company is hoarding assets instead of using them to grow the business -- not the worst thing in the world, but it's something that could affect long-term returns.

Ford: 1.3
GM: 0.6

Second, Quick ratio = (current assets - inventories) / current liabilities. Most people look for a quick ratio greater than 1.0 to be sure there is enough cash on hand to pay bills and keep going. Like the current ratio, the quick ratio can also vary by industry. It always pays to compare this ratio to that of peers in the same industry to understand what it means in context.

Ford: 1.3
GM: 0.3

This is why it is a misnomer to treat the entire auto industry as a singular entity, as the press and politicians often do. Ford may not be setting any profit records any time soon, but it is not going out of business immediately but for government assistance. However, GM is really a dead corporation several times over, and it needs to either cut (1) its debt obligations or (2) it expenses to get those ratios so that they approach normalcy. This may explain why bankruptcy and a reorganization may be necessary. Bond holders needs to take a larger haircut than they have been willing to offer, and any government bailout without such concessions is essentially a transfer of money from the government to the financial industry all over again.

I do think Obama is doing the right thing in insisting on a real plan or path to solvency, because the best long term solution may be to use BK to force a cram down of debt for the bondholders, to get the ratios into reasonable territory, then offer bailout money that does not automatically go to GM's creditors, which can be used to restructure the company and pay employees.

Edit: Added links to both Ford and GM Ratios and Returns.

[Thrill]

1. GM also got in the Sub Prime nonsense

Ford also doesn't have all these ridiculous brands

[spinbaby]

6. I think that's the dirty little secret

Where GM got into trouble was in its financial division.

[uponit7771]

11. Yeap, GMAC would be able to give GM milk money if it were solvent...

...and wasn't allowed to get greedy with the rest of em.

[redqueen]

2. What... no demagoguery?

What a refreshing subject line and post. Thank you. :)

[Egnever]

3. I think you have outlined exactly what obama is looking at

He clearly intends to let gm hit bankruptcy he has as much as said so in letting the idea out that the government will honor the warranties.

Too many here look at only the surface of what is done on a given day and then scream bloody murder without ever looking at these things long term.

AIG bonuses were a perfect example. It would have cost us more to take them away than it would have to pay them and yet the american people are pissed that we took the cheaper option. Its amazing really to me that so many are so short sighted.

Thanks for taking a look at the longer view. Its good to know not everyone left on this board is so easily manipulated by the media.

[MarjorieG]

4. Good post. Included NYT story about GM bondholders.

http://www.nytimes.com/2009/03/31/business/31sorkin.html?_r=1&ref=business

Found today's NYT story about the bondholders, more speculative than mom and pop investors, really helpful.

(sp)

[Median Democrat]

21. Corporate Counter Spin - Analysis On MSNBC - Notice Something Missing?

Here is a story on MSNBC, which takes a very populist in tone as described in your NYT's article. However, look at the author, "Big Money," a business site, yet it is expressing concern about workers? Second, do you notice what is NOT mentioned? The word "Bond." An entire article on who loses from a GM bankruptcy, but not a single mention of GM's bond obligations?

This strikes me as the corporate media falsely claiming to stand up for the American worker when such concern is just a Trojan horse for protecting a flow of federal money to GM's bondholders. If GM's continues to operate, it will still have workers. However, its debts may be discharged.

http://www.msnbc.msn.com/id/29962730/

[MarjorieG]

24. I've been reading how this manuever is to get bondholders to comply, keeping company operating.

That what you're saying?

[Romulox]

5. Cool. Now do AIG.

:hi:

[Median Democrat]

7. The links I provided can be used for AIG, But I Would Caution..

That AIG is in a different line of business than Ford or GM, so the ratios and effects of bankruptcy are entirely different.

GM can use bankruptcy to reorganize and still operate as a car company. AIG can't declare bankruptcy, then continue to insure financial products, because bankruptcy fundamentally destroys its business unlike a car company, which still makes cars after reorganization.

Finally, unlike AIG, which is being wound down, I do not think the President's goal is to wind down, and sell off chunks of GM, which I think is a good thing.

This is why it is somewhat knee jerk for folks to compare the two companies. It is a way to vent and express anger, but I am glad that President Obama can see the difference.

[Romulox]

8. LOLOL. In other words, your comparison falls apart when applied to others. nt

[Egnever]

9. Are you thick?

Its two completely different situations. Both bad but they can not be handled exactly the same. AIG doesnt make anything they have only paper assets GM has real tangible assets the difference between the two companies is vast.

Try to think a little past the outrage the media tells you to have.

[dionysus]

10. actually, the only one comparing the auto companies to AIG is you...

:hi:

[Romulox]

14. Me, and every other editorial page in the country.

Do try to keep up.

[dionysus]

20. uh, this thread wasn't about AIG, but nice try skip.

:rofl:

[Lucky Luciano]

51. Dude, you are way off...different industries do need to be looked

at differently as it is totally apples and oranges with the same ratios. Financials such as AIG are incredibly complex and the ratios are useless because of all the adjustments you have to make to the vanilla definitions to get a meaningful number. All industries take vanilla definitions and revise them to be more suitable to the particular industry.

Look up current assets and current liabilities and tell me that you would expect a supermarket and a jewelry company to have the same ratios. If you tell me this, then you are totally discredited.

[Median Democrat]

13. I Have No Idea What Your Point Is. That A Car Company Is The Same As A Financial Products Firm?

What is the relevance of a comparison between GM and AIG? You might as well compare motor oil to orange juice, and scream, "Aha! you can't drink motor oil!"

Are you just ranting or trolling or do you have a point? I just want to see if you can make a reasoned argument before putting you on ignore.

[Romulox]

15. The relevance is that two insolvent companies are treated VERY differently by the gov't

"What is the relevance of a comparison between GM and AIG?"

Read a newspaper. :hi:

[Egnever]

17. wow just repeat whatever the op eds told you to say eh?

no critical thinking whatsoever.

Sad

[redqueen]

22. Sad, but all too common around here.

You'd think more people would have caught on by now.

[Romulox]

52. You have no idea what the relationship between the US Government, GM, and AIG is

and *I* lack critical thinking skills? :silly:

[amandabeech]

25. Apparently, you are unable to make comparisons except the most simple.

Try again.

[Egnever]

28. You mean like GM = AIG?

Not sure I get what you are trying to say here.

[amandabeech]

29. All I've done all afternoon is explain, and my fingers are getting tired.

Check my other posts, then get back to me.

[Egnever]

31. Links?

[amandabeech]

33. Use the search function or run down the auto-related linke here

and in Breaking News and the Economics Forum. I'm ready to fall asleep and I can't type worth a hoot.

[ieoeja]

42. Worst. Subthread. Ever.

This is a shot at EVERYONE who posted on this subthread. You challenge them to do the same check for AIG. They tell you it doesn't matter because it is a different situation. You say it's the same.

Did you do the check for AIG before posting? Did they check before going on the defensive? I am going to guess the answer is "no" to both questions.

Because I just did the check and ... there is no such thing as Current Ratio or Quick Ratio reported for AIG.


So 15 points awarded to them for being right that you can not make the same comparison.

But 15 points deducted from them for being too afraid to even try, presumably being afraid to see information that does not support the position they settled on before engaging you.

And 50 points deducted from Hufflepuff for having such a stupid name.

[Lucky Luciano]

53. This is not a very good post either because

Current assets/liabilities can be calculated from any balance sheet - including AIG's.

That said, different industries totally need to be looked at differently as the ratios have totally different meanings.

[Romulox]

54. It did tend to lay bare the fact that DUs self-appointed economics professors are mostly nincompoops

Thank you for your post. I quite enjoyed it.

[Bad Thoughts]

12. GM turned itself into a bank (Short answer)

I concentrated on market share and finance as means of being competitive.

[uponit7771]

16. Yeap, GMAC was big part of sub prime mess

[MarjorieG]

18. Hedgers bought bonds, like on every risk, but AIG has mammoth global tentacles we can't even find.

[girl gone mad]

40. Oh, please.

:eyes:

[MarjorieG]

41. You may be mad, but still true.

[Median Democrat]

19. Interesting - Sounds Reasonable - Links?

That would be ironic if what brought down GM is not its auto production operations, but its financial services division. If anything, this would support a bankruptcy and reorganization to try to separate GM from its financing division if this is the case.

Any links on stories discussing how big of a problem the financing arm is? I have seen stories talking about GMAC, but nothing really putting numbers on just how big the problem is.

[Aloha Spirit]

26. Here's the size of the federal investment, a statement from January...

Because the finance companies serve as the lifeblood of the automakers, we knew that our program would need to address the short-term needs of the auto finance companies as well. Last week, we funded a $5 billion investment in GMAC. We also committed to an additional $1 billion loan to GM to be used to participate in a rights offering at GMAC as part of its recapitalization in becoming a bank holding company."

http://www.financialstability.gov/latest/hp1347.html

[Aloha Spirit]

34. here's another story that was helpful to me.

" In September, GMAC began offering loans only to consumers with high credit scores, sparking a plunge in GM sales that increased the auto maker's need for a federal bailout.

Two weeks ago, the Bush administration agreed to give GM as much as $13.4 billion in loans to keep the company going until March. It also is providing $4 billion to Chrysler LLC, which likewise had warned it could run out of money and also has been hurt by troubles at its lending arm, Chrysler Financial."

http://online.wsj.com/article/SB123064252570542267.html?mod=article-outset-box#printMode

Also, Cerberus Capital Management ...
http://en.wikipedia.org/wiki/Cerberus_Capital_Management

Here's an interesting article...

http://blogs.wsj.com/autoshow/2009/03/30/718/

[Median Democrat]

44. Here Is Another One - GM Essentially Became A Bank?

This one is interesting because it shows just how large debt figures in GM's troubles. Talk about the tail wagging the dog. It almost as if the manufacturing of cars became an afterthought.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayfSpNRKzq_g&refer=home

/snip

CDO Writedowns

General Motors has $16 billion of bonds outstanding and owns 49 percent of lending arm GMAC LLC, which owes bondholders $56 billion, Bloomberg data show. Ford has $63 billion of bonds.

A default by one of the automakers would trigger writedowns and losses in the $1.2 trillion market for collateralized debt obligations that pool derivatives linked to corporate debt, Felsenheimer said. Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to data compiled by Standard & Poor's.

CDOs are securities that repackage pools of bonds, loans and credit-default swaps and divide their cash flow into notes of varying risk and returns that are sold to investors. CDOs backed by mortgages caused most of the $52 billion of losses and writedowns at Merrill Lynch & Co. and contributed to more than $482 billion at financial firms worldwide.

Need Capital

Banks and automakers are included in most CDOs of corporate credit-default swaps, and losses may force investors to sell the securities, said Felsenheimer, who forecast on Aug. 1 last year that the collapse of the subprime mortgage market would infect other credit markets.

``For both there is no easy way out of the current mess,'' he said. ``It is becoming more and more obvious that we will feel the effects of the crisis for several more quarters rather than months.''

GM, Ford and Chrysler are seeking as much as $40 billion in low-cost loans from the U.S. over the next two to three years, the Detroit Free Press reported today, citing people familiar with the matter. The chief executive officers of the three companies agreed their biggest need is access to capital to ensure they can retool to make fuel-efficient vehicles, the Free Press said.

/snip

[Aloha Spirit]

50. Yeah, it was an epiphany for me when I read on DU last October I think...

that GM's profits are mostly from the auto loans/GMAC, not the manufacturing.
I was like... wha???
And then they stopped selling cars, so their lending dried up, so they had to get bailed out.

Here's their 2008 sales, link from wikipedia
http://media.gm.com/servlet/GatewayServlet?target=http://image.emerald.gm.com/gmnews/viewpressreldetail.do?domain=2&docid=51161

Here's a piece on GMAC becoming a bank
http://www.nytimes.com/2008/12/25/business/25gmac.html?em

And on 2008 losses... I'll cut and paste because the link requires registration:
http://www.autonews.com/article/20090203/ANA05/302039872/1142

"GMAC said today that its global auto finance business posted a net loss of $1.31 billion in the fourth quarter and $2.07 billion for 2008. Those figures compare with net income of $137 million for the fourth quarter of 2007 and a $1.48 billion profit for all of that year.

GMAC's auto finance margin suffered as its lease and loan volume plummeted, its funding costs soared and vehicles -- mostly cars -- depreciated, CFO Robert Hull told industry analysts.

"The environment hurt our ability to help our customers," Hull said. "We tried to balance the needs of our customers while coping. We halted leasing and all loans to buyers with scores below 700."

Raising its minimum credit score eliminated nearly half of GMAC's traditional auto loan business, Hull said. After the captive got a $6 billion federal bailout, GMAC resumed making vehicle loans to customers with credit scores of 621 and higher on a scale of 300 to 850.

"We are returning to markets we left behind," Hull said. "It will take time to win back customers, but this is the first step."

GMAC set aside $425 million to cover sharp depreciation on vehicles coming off lease. It reserved $510 million to cover losses on dealer inventory financing, SmartBuy balloon note contracts and traditional retail auto loans -- more than double its provision for those credit losses in the fourth quarter of 2007.

"Lower used-car values were the largest if not the primary driver of the loss," Hull said. "Consumer loans collapsed, and we severely curtailed originations."

GMAC also had significantly higher losses because of escalating loan defaults and sharp depreciation on repossessed vehicles. Growing unemployment, especially in the United States, pushed up delinquencies.

[Festivito]

55. Yup, ya betcha. /nt

[kestrel91316]

23. GM has more actively been paying its executives excessively

and probably hiding money in Swiss banks accounts, too. And they insisted on making Hummers, too. Costly POS's they are.

[amandabeech]

27. Ford got really serious about restructuring before GM did.

Billy Ford (yes the same family) tried to do it in the early '00s, but he didn't have the expertise.

Instead, he brought in Mulally who had turned around Boeing. Ford has scrutinized every aspect of it's business plan since Mulally came in 2003.

Mulally has a lot of critics because he has outsouced too much. I personally won't buy the Fusion until it's made here as well as Mexico.

On the other hand, Mulally saw problems coming and lined up long-term financial commitments before the crisis hit.

Because he did that, Ford has been able to refuse bailout money and thus may refuse to deal with Obama and his investment banker advisers (only one of whom drives a U.S. car and none of whom know anything about manufacturing.)

Ford also improved its cars more quickly than GM. Consumer reports has been praising Ford recently. It stated that Ford quality was equal to Toyota's. That will help Ford a lot when the economy picks up.

The best GM is the Buick. It's a reliable family car for a very good price. I looked at them recently, but ended up with a gently used Taurus that I like a lot.

Ford has fewer lines than GM and always has. It's Ford, Lincoln and Mercury. That's it. GM has Chevrolet, Pontiac, Buick, Cadillac, GMC TRuck and Saturn. Oldsmobile died a while ago.

Both GM and Ford have large overseas operations, but Ford's is stronger. Ford has been able to draw on profits overseas to help here, and may be bringing fuel efficient designs from Ford Europe here, too, if demand for small cars continues or picks up a bit. Re-entering the small car market in a big way will be difficult unless gasoline prices go up substantially.

[Median Democrat]

30. GM's Multiple Product Lines Were Always Confusing, But...

Are GM's debt problems mainly due to its failure to move product? Or, as noted above, was it due to the activities of its financing division.

Personally, I do prefer the current Ford designs to the GM designs, and my dream car has been the 1968 Ford Mustang, which is why I also like the retro styling of the current Mustang. Also, since the 1980s, no GM car has really stood out for me in comparison to Ford, which was just easier to get my arms around. I never really understood the creation of sub-brands like Lincoln and Mercury, which I have largely ignored.

Nonetheless, ignoring my personal consumer tastes in cars, it does amaze me that GM can be in such a deep hole relative to Ford. Of course, GM needs to shed debt. However, going forward, what does GM do? I am much more excited by the Ford Hybrid Fusion, then the Volt. Maybe GM can hire away Ford's designers?

In short, GM does need to restructure its debt, so that it is viable in the short term. However, as you note going forward, who takes GM in a new direction the way Mulally did at Ford?

[amandabeech]

32. Ford also has a HUGE financing arm. It used to be Ford Motor Acceptance

Corporation. I'm still it is still there.

You say that you have a hard time getting your arms around GM and you don't like the design of it's products as much. I'm with you, I like Ford better, although I like the original Saturn and its idea very much. IMHO, GM has totally misused Saturn, and I am sad that the original concept was killed--Saturn would be a good vehicle for GM to bring successful Euro cars in like Ford plans.

It's very hard to keep the advertising and separate corporate structure of all those divisions straight. That's a lot of overhead, and, frankly, there has been a huge overlap in the offerings, at least under the sheet metal. It's a larger dealer network to deal with, too.

Going forward, GM needs to shed Pontiac and GMAC. It intends to get rid of Saturn.

It needs to do a better job of getting people in to see the Buicks with snappier sheet metal and better appointments in the interior, because what's underneath is very good. Chrysler has good designers, and if Chrysler goes, which I think will happen eventually, and to which I am somewhat resigned, GM should snap them up and let them get wild.

I like the Volt, at least as a concept car, because it's engine is an electrical generator, not an auto engine. Electricity can be generated by burning just about anything, and the Volt engine could conceivably modified to burn anything that we could come up with. Maybe even cherry pits, who knows. It is really a break-through concept.

GM needs to rely on making its cars more reliable, too. It's below Ford in quality. If it can do that, and if Ford can, GM can, too. Word of mouth counts a lot in auto purchasing, and it has to have the product that gets mouths moving. GM should consult image makers for ideas on how to get people to look at a new GM because so many minds that count, like Obama's advisers, are shut. I wish them all the best and I really want them to succeed, but sometimes, I think that I'm the only one who does.

[Median Democrat]

35. Totally Agree With You On Chrystler's Designers

I am not crazy about the fact that many of Chrystler's cars are gas guzzlers, but they do have some eye candy such as the 300M and even if the Dodge Charger is not my cup of tea, it is bold. I also liked driving Chrystler's Jeeps.

As for the Volt, I am concerned that its like the GM EV, which was done mostly for PR, but never seriously pushed. Hopefully, it is a viable, drivable car that is supported by the company with a good marketing campaign unlike the EV, which had NO PICTURES of the actual car in some advertisements.

[amandabeech]

48. I didn't like the EV situation either, but I think that the key to commercializing the Volt

will be higher gasoline prices. Without higher prices, I don't think that there will be sufficient demand here for very fuel-efficient cars like the Volt to regain the popularity that they had in the '80s after the '70s fuel shocks.

I hope that whoever ends up running GM, and I don't think that the current guy is more than a stand-in, will have the sense to keep the Volt going as a niche car in order to keep the technology alive and developing. Also, I hope that GM will license the technology liberally to any group that wants to really run with it.

[TwilightZone]

46. Ford Motor Credit Corp is the correct name.

For a few years, it was one of the only divisions of Ford making any money. In fact, it helped keep them afloat much longer than they otherwise would have.

When FMCC started losing money, Ford could no longer afford to remain in denial and started making significant changes. Whether they were early enough remains to be seen.

[karynnj]

36. This is a great, easy to understand summary - Thank you

[Median Democrat]

39. Just To Add - Difference Between Current Ratio and Quick Ratio

Is due to GM's unsold inventory. This is why GM's current ratio is 0.6, and its quick ratio is 0.3. However, the fact that GM's current ratio is 0.6 shows that GM's problem are not simply due to unsold inventory. GM really needs some major work to get back to solvency.

[karynnj]

43. Interesting n/t

This is to quick it back up where it deserves to be.

[quiller4]

37. Ford was able to erase much of its debt when it sold off part

of Mazda last year. That is why despite the drop in sales, Ford says it has sufficient cash reserves for the next 12-18 months and could further reduce its ownership share of Mazda to generate operating cash beyond that point.

[amandabeech]

49. Yes, I rememer that.

Ford's relationship with Mazda has been beneficial for both, I think.

I hope that they will continue to cooperate in product design in the future even though the direct economic tie is not there.

[AwakeAtLast]

38. GM has too many fingers in too many pies

Too many brands, each with their accompanying executives, offices, advertising, design, etc.

If they were to sell off or discontinue a few they would become leaner and more focused.

They should have done this at least 15 years ago.

[TrogL]

45. They make expensive, crappy cars

I've driven just about everything at one time or another. Full disclosure: I'm currently driving a late-model Subaru.

I've had some bad experiences with Ford, but a little research would have told me what models to avoid.

I've had a variety of foreign cars. I drove a Hyundai until the last piece of rust fell off. I had an antique Mercedes that used more oil than gasoline, a Mini that's still sitting in my brother-in-law's garage, an MG that I coudn't buy gas for (hi-test leaded).

I've had a couple of Dodge/Chrysler/whatevers that I drove to the boneyard.

But nothing compares to the absolute hatred I've had for any GM product. I've bought low-priced pieces of crap. I only expected to get three years out of the Hyundai and I got a lot more than that. But to pay top dollar for a vehicle that steers like a boat, can't be trusted to start in ANY kind of weather nevermind the Siberian conditions we get here, Hail Mary brakes, turtle-like acceleration, concrete seats, doors and trunks that have their own opinion of when they should open and close, wierdass parts under the hood and alignment that routinely points in four different directions....

To quote James Bond...

"Die, damn you die. Die, damn you, die, damn you, die..."

[Pirate Smile]

47. I posted on this yesterday. The WH is focused on the Bondholders.They are NOT trying to hurt the

unions or Michigan.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=8306314&mesg_id=8306314

"Aides to President Obama say a bankruptcy filing for GM or Chrysler may be the only way for the firms to force stray bondholders to agree to a deal, often called a cramdown, that could see them receive only a fraction of the face value of the original debt.

In a conference call with reporters Monday, a senior official said the bankruptcy procedure would be used to enforce an agreement, even if not all bond or debt holders can be persuaded to reduce their demands. The aide called it a way to avoid the company being blackmailed by a few creditors. "

[TexasObserver]

56. Ford has not sought a bailout. GM and Chrysler have.

Chrysler is privately controlled by a German concern, so asking it to find a merger partner makes sense. Apparently, it will be Fiat.

GM has been the car company in the most trouble since the financial crisis began. And the reason is its decisions and commitments regarding debt, as you note empirically.