The Obama adm cannot let GM go. But GM's bonds?

Let’s face it. After 8 years of Rick Wagoner’s management, GM is definitely worse than it was before. The roots to this terrible outcome cannot be related just to the economy downturn that is affecting the car markets. The lack of vision toward the customer’s needs is the main issue for what now seems to be the big problem to avoid: GM failure.

But is Wagoner the one to be blamed? He is the one who eventually decided to bet on the big SUV (Hummer, Suburban) and on dedicated production lines. On the other hand, Toyota was massively switching to the Hybrid vehicles and was refurbishing its own production line making them capable of flexible production (i.e. producing different vehicles within the same line with just little adjustments).

And now? For sure, the Obama administration can’t afford to lose 2.5 million jobs. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50 percent, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years¹. So a transition that may involve filing for bankruptcy² and eventually a new reorganization of the company could be the final ending of this trouble story.

So what’s next? Are GM’s Bonds a safe place? Well, accordingly to the last price the Market doesn’t think so. A note that I was looking after, traded on the European market and maturing on June the 30^th, only 90 days ahead, is now trading at 79 cents on the dollar, while it was trading at 92 cents on the dollar at the closing bell on Friday the 27^th. But if the Obama administration will give a good spin to GM, the odds could turn favorable, the Market re think its view and eventually GM’s Bonds could become a better place to be.

Applying the skills that you gain with your MBA is great. Reading through companies books and valuating their commercial paper and bonds while trying to forecast their financial needs, understanding their strategy and seeing how they eventually behave in the marketplace. This is not only fundamental to developing your own idea of the company and their financial situation, but it’s also a lot of fun! So enjoy and have a great week!

¹ http://caps.fool.com/Blogs/ViewPost.aspx?bpid=112060&t=01000420523245711617

² http://online.wsj.com/article/BT-CO-20090330-704856.html