Wednesday, December 31, 2008

General Motors' Predicament

After asking for $18 billion, General Motors is getting a $10 billion loan from the U.S. Government. They claim they’re running out of liquidity and they need the funds to survive through 2009. Are they right? Or is this just financial incompetence taking advantage of Congressional insecurity?

There’s no doubt GM has been using up its supply of cash. They’ve run through almost $9 billion in the first nine months of this year. That’s a cash burn rate of $32 million a day.

But cash doesn’t tell the full story. Liquidity is more than cash. It includes access to readily available credit, like lines of credit from banks that have made a legal commitment to lend.

GM began the year with $5.9 billion in committed bank lines, nearly all of which was unused. But by the end of September, the company had borrowed almost $5.8 billion under those lines, leaving only $114 million available to meet liquidity needs. 

If we measure liquidity as cash plus un-borrowed, committed lines of credit, GM’s problems look even worse. GM has consumed more than $14 billion in liquidity through September, a liquidity burn rate of $52 million a day and $4.7 billion a quarter.

By March of next year, liquidity will be down to only $4.1 billion, according to the projections GM gave Congress. With hardly any credit available from the banks or the debt markets, it looks like GM is right. They really will run out of liquidity before the end of June 2009.