Wednesday, December 24, 2008

GM's Continuing Woes Heighten Shareholder Worry

Credit Suisse has just announced it is downgrading General Motors stock because -- get this, the bailout that everyone says is necessary will ravage the equity in the company.

Credit Suisse analyst Christopher Ceraso said in a report that the terms of Friday's government bailout of the auto industry will weigh on GM, with bond holders, the United Auto Workers and company executives all working to reach a compromise agreement. "It will become increasingly clear that the enormous sacrifice of value on the part of the union (upward of $10 billion) and bondholders (about $24 billion) will require the complete or near-complete elimination of the existing GM equity," said Ceraso in the report.

GM stock fell 21 percent on Monday to a little over three dollars a share. The drop occurred partly as a result of this news from Credit Suisse. And yet there will still be people racing out to invest in this giant of a company. Personally, I do not think the unions are making enough sacrifices. The company and the unions put the firm in this position in the first place -- no one else. The unions with their outrageous pension demands, and past leaders who went along. But this is common knowledge and no one seems to care.

What a I getting at? Sure it is tough enough for employees. But it is shareholders who will bear the brunt of this onslaught. Shareholders, in case you didn't know, are the last to be paid when a company sells product.

The vendors are paid, senior management and execs are paid, employees are paid, and if there is anything left -- the profit -- it is doled out to the entity responsible for keeping the entire thing afloat -- the shareholders. Yet these most important of people are the last to be paid.

Onc hell of a Christmas present....

One more reason why more and more investors are moving money out of the markets and into commercial/investment real estate. So they will be the FIRST to be paid.

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