GM going Bankrupt?

Martin D. Weiss, Ph. D. discusses how General Motors is nearing bankruptcy. In this issue of Money and Markets, Dr. Weiss takes a closer look at how GM's declining sales reflect the fastest fundamental shift in U.S. buying culture ever recorded in the history of the auto industry.

Jupiter, Fla., (PRWEB) July 16, 2008 - Martin D. Weiss, Ph. D. discusses how General Motors is nearing bankruptcy. Dr. Weiss takes a closer look at how GM's declining sales reflect the fastest fundamental shift in U.S. buying culture ever recorded in the history of the auto industry.

General Motors is now nearer to bankruptcy than at any time since it nearly failed in 1920. Even Wall Street estimates GM has a 75% chance of going broke within the next five years, based on the actual trading of specialized insurance contracts called credit default swaps. That's three to one odds the company will not survive.

The company's shares are down, the lowest since July 1954. General Motors was a $66 billion company with nearly half of the U.S. auto market. Currently, it's a $5 billion company with less than one-fifth of the U.S. market. GM is not alone; Ford's 5-year probability of failure is 70%, according to the trading of default swaps, and Chrysler's chances of survival seem to be even slimmer.

Despite Standard & Poor's history of inflating credit ratings and delaying downgrades, GM, Ford and Chrysler are on S&P's CreditWatch list, implying a 50-50 chance of even deeper downgrades within three months. GM's sales are deteriorating at a rapid pace: down 13% year-over-year in February, down 13% again in March, down 22.7% in April and down 30% in May. June's lesser decline (only 8%) was no solace. These sales declines reflect the fastest fundamental shift in U.S. buying culture ever recorded in the history of the auto industry.

Surging gas prices has been disastrous for Detroit's Big Three. But the more enduring threat to Detroit is contracting credit markets. Long before most people had heard of subprime mortgages, the Big Three auto finance companies, General Motors Acceptance Corporation (GMAC), Ford Motor Credit Company, and Chrysler Financial, were pushing subprime auto loans. They blanketed the nation's airwaves with ad blitzes for zero-interest deals; encouraged buyers to borrow with terms longer than the expected life of the car; and created an industry that's so addicted to easy-credit sales for its survival, it had to revive some of those incentives in June, despite the credit crunch.

Nearly one in five auto loans or leases today is subprime. More than half of those will end up in default, according to the National Bureau of Economic Research. GMAC also lunged and plunged into the high-risk home financing business through its mortgage unit, Residential Capital, a company with a 100% chance of default, according to the current pricing of default swaps. With $32.8 billion in subprime loans, Residential Capital has booked losses of $5 billion in the last six quarters.

The problem is that General Motors owns nearly half of the parent, GMAC. Worse, if GMAC has trouble borrowing, it will be unable to dish out easy credit to GM's customers. And if GM's customers can't get car loans, they can't buy cars.

All this has happened before the recession deepens, before interest rates go up significantly and before the consequences of these corporate failures. But don't forget Fannie Mae. This supergiant isn't just on a collision course; it's already the subject of government contingency plans for a takeover that would obliterate shareholders and devastate taxpayers. According to Fannie Mae and Freddie Mac's own year-end 2007 statements, Fannie Mae has just 1.6 cents in core capital to cover each dollar of mortgage and debt exposure while Freddie Mac has only 1.9 cents. According to government regulators who owe their very existence to the two mortgage giants they regulate, this is adequate. According to analysts, accountants and auditors, it is not adequate.

That's why William Poole, former president of the St. Louis Federal Reserve, recently declared that the two companies were already insolvent. And that's why Weiss believes investors have driven their share prices down as quickly as they did Enron and WorldCom's six years ago. Fannie Mae is down 88.5% from its peak; Freddie Mac, 89.6%.

"Fannie Mae and Freddie Mac may escape the fate of Bear Stearns, a Wall Street crisis of confidence that delivers instant failure. But can they escape the unfolding reality on the ground millions of additional home foreclosures this year and next? Its common sense, by the time a home they've financed is foreclosed, the mortgage has long been in default. And when the mortgage goes into default, Fannie or Freddie is on the hook," Dr. Weiss states.

To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?GM-Fannie-Lehman-Too-big-to-fail-Or-too-big-to-save-1963

About MARTIN D. WEISS & MONEY AND MARKETS    

Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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