Wednesday, November 7, 2007

Looking for Real Money at General Motors

General Motors today announced an astonishing financial loss during the latest quarter — a loss so big it amounted to twice the company’s total value.

One of the world’s largest auto makers, GM is worth around $20 billion according to the stock market. GM already had a negative net worth last quarter, so the loss of $39 billion would seem to give it a book value of negative $43 billion — a head-swimming number that you have to look at several times before you realize it is not a mistake. That works out to something like negative $75 per share — again, not a misprint. You would think any company that owed so much would be bankrupt, but GM says no one there is losing any sleep over it. It turns out it wasn’t real money, but a mysterious and hard-to-explain tax-related asset that expired. CEO Rick Wagoner put it this way: “No impact whatsoever on our cash position, no impact on our ability to use the tax offsets in the future, and from my perspective, really no change whatsoever in our outlook or optimism about the future of getting the business turned around.”

The problem with this explanation is that the losses, all $39 billion of them, are entirely real. GM was actually losing money faster than it reported for the last several years. It made its losses look smaller than they were by accumulating this mysterious no-cash-value tax-related asset. They just now reached the point where the accounting rules they follow said they couldn’t stretch out this imaginary asset any longer. So the losses didn’t really occur all at once, but they really did occur. And the fact that these losses occurred does have an impact on cash flow and does cast a shadow over the company’s future prospects.

One reason companies get themselves into trouble is that they start making distinctions between “real money” and “pretend money.” It’s no surprise, then, when the “pretend money” seems to disappear while no one is watching. Yet all money is real. If you have to say it’s there, then it exists. It doesn’t matter if a company tells you they’re only losing funny money or Monopoly money — it’s still money and the company’s managers are showing an insufficiency of skill in losing it rather than gaining.

The world has placed a great deal of confidence in General Motors — that is the only way any company that is $43 billion in the hole can keep going. The sooner the people at General Motors start to see the confidence the world has in them as a real thing — not a mere abstraction, but something they can actually use, as real as the “real money” people have entrusted them with — the sooner they can make the company relevant in the world again.