Novice Investing - Car Wreckage

Date: Monday 01st 2008f December 2008 03:49:44 PM

Car Wreckage - 03/17/2006

By: Novice Investing Staff

The sad story has not ended for General Motor Corporation (GM). This is the company that saw its shares plunged to 20 year low in 2005 amid mounting losses for the 2005 fiscal year. Now, its loss was even larger than expected.

General Motor revealed that its loss was $ 2 Billion larger due to 'accounting error'. As a result, it has to delay filing its annual report on Form 10 K due to an accounting issue. This is a big problem. We'll talk about the loss later on. The problem is that General Motor's $ 32 Billion debt requires the company to submit its financial statement no later than 15 days of the deadline of filing with the SEC. As you see, debt holders rule in this kind of situation. What is the implication for shareholders? Plenty.

Bondholders can force the company to declare bankruptcy should it violate the debt covenant. This 'accounting error' seems to qualify as debt covenant violation. If it takes GM more than 15 days to file, watch out. General Motor shares still fetch $ 20 at this point. Therefore, shareholders do not think that the company will be forced to file for bankruptcy soon.

Another point is the severity of the loss revision. While we do not have the details of the accounting error, $ 2 Billion difference is a lot of money. Granted, General Motor has sales in the hundreds of billions, should it be able to hire a better accountant for this kind of thing? The puzzling $ 2 Billion revision will surely attract the attention of regulators. Make no mistake about it. We do not think that General Motor commit any fraud. But, the severity of the revision will make people to think that something is truly wrong with General Motor.

General Motor Corporation has already enough mess from its business operation side. Coupled with this accounting issue, buying the company's stock price will represent a big gamble of your investment money.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding General Motor Corp. (GM) or any other securities.

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