Following up on the troubles at General Motors, check this link where you will see that GM has $300 billion in debt. More importantly, you can also see that GM has a debt to equity ratio of over 10.
The significance of a debt to equity ratio as high as 10 can be found at this link to www.investopedia.com where we learn that:
Foreign nations are plenty nervous and have been announcing that they will be selling U.S. bonds to diversify the holdings of their central banks: Russia, India, China, South Korea, and Japan.
Fed Chairman Alan Greenspan and the US are truly in a no-win situation. Greenspan must raise interest rates to stem inflation and make Treasury bonds more attractive to foreign countries. If he doesn't raise rates, the US will continue to lose the financing from foreign countries that has been fueling our economy. Yet if he raises rates, GM and others will go belly up. Note that for every one point that interest rates rise, refinancing GM's debt will cost an additional $3 billion in annual interest payments.
If GM fails, it would mean default on their debt of $300 billion dollars. That would make the Enron, World Com, and LTCM debacles look like a tea party in comparison.
Given the above, my initial reaction was to expect two possible outcomes, that GM would eventually file bankruptcy or they would become a takeover candidate by the likes of China. But after further consideration, I couldn't see a reason why any thinking investor would be interested in buying GM at any price with the excess baggage of $300 billion in debt. Upon further reflection it becomes apparent that it would be much more expedient to simply stand by and let GM enter into bankruptcy proceedings and then buy them at a discount. After bankruptcy, the stock holders lose everything and the bond (debt) holders might be lucky to get pennies on the dollar.
In any event, GM will be well worth watching as the end-game is sure to unfold over the next twelve months.
