How can a company, even a huge company, lose $39 billion in a single quarter? That's what investors are puzzling out after General Motors announced it is recording a huge accounting charge related to losses that have piled up over the past three years.
GM didn't actually bleed $39 billion in cash—that would be catastrophic, given that its third-quarter revenue was just $26.6 billion—but the big automaker had to set aside $38.6 billion for a kind of reserve required by accounting rules. GM has been restructuring its U.S. operations since 2004, all the while accruing something called "deferred tax credits." Now, the company's auditors have determined that a weak financial position means GM may not be able to claim those credits and must account for their value. The overall loss is the biggest ever at GM.
CEO Rick Wagoner insists that the megacharge won't affect GM's cash flow or everyday operations. "It's not a disaster," he said on CNBC, "but it's obviously not at all robust." He pointed out that if GM returns to profitability, it can utilize the credits and reverse the charge.
But the markets aren't buying it, sending GM stock into a mild decline. That's because there's plenty of other bad news. Just a few years ago, General Motors Acceptance Corp., the financing arm that's 49 percent owned by GM, was the company's life preserver, with robust profits from loans relating to the housing boom. Now it's an albatross, contributing a $757 million loss in the third quarter—virtually all of it attributable to mortgage write-offs.
And as with other troubled lenders like Citibank and Countrywide, nobody is boldly proclaiming that the worst is over. GM also reported a net loss of $247 million from its automotive operations, a disappointment since analysts had been expecting a small profit.
The accounting write-off reflects GM's own bearish view of future profits—if the company saw good times around the corner, the odds of utilizing the tax credits would be higher and the company wouldn't have to build a reserve against their value. "If the company were about to return to robust profitability in North America," writes Credit Suisse analyst Chris Ceraso, "we suspect it might have been able to hold off the auditors for a few more quarters."
The sources of GM's pessimism: "ongoing weaknesses" at GMAC and a tough auto market in the United States. A further crimp on earnings is declining vehicle sales overall due to the housing bust and credit crunch.
It has been a stutter-step year for GM, which enjoyed a long-awaited bounce after a September deal with its unionized workers that helped lower healthcare and labor costs. The deal improved GM's long-term competitive position against Toyota and other importers, prompting a stock run-up that peaked with shares at about $43 in mid-October—the best showing in three years.
Now, the shares have drifted down below $35. That's well above the depths of early 2006, when GM announced staggering losses, but if the company's out of the breakdown lane, it's still struggling to get up to comfortable cruising speed.