The Future of GM & It's Stockholder's
Wall Street once again punched 401(k)s in the gut Thursday. And Michigan investors are left wondering if GM stock, sadly trading at far less than the cost of a McDonald's Happy Meal, could end up worth nearly nothing.
No one in Detroit wants to imagine this dire scenario, but everyone, especially General Motors Corp.'s loyal shareholders, better believe it. It may be possible to save GM, but it's unlikely to save existing shareholders.
Worries about how GM itself could survive contributed to a meltdown on Wall Street. The Dow Jones Industrial Average fell 4% and lost 281.4 points to close at 6,594.44 on Thursday. The once-powerful Citigroup traded below a dollar.
GM stock fell more than 15% and closed at $1.86 a share, down 34 cents. The automakers have had their struggles, but we're beyond bad times and deep into what some call the Great Depression. Consumers don't want to spend $3 on fast food, let alone $30,000 on an SUV. After the financial fallout with housing and stocks, people will learn to make do for quite some time.
GM stock was risky last June when it was about $13 a share. In October, it was reported that the bond market was betting big time that GM would have to file for bankruptcy. GM bonds were trading at a level that represented an almost 100% chance of bankruptcy. The outlook wasn't good for GM stock, either.
On Thursday, GM announced that its independent auditors have raised doubts about the automaker's ability to continue its business, saying the company could be forced to file for bankruptcy without additional government help and success in restructuring the company. A bankruptcy could be avoided, but some speculate that it seems to be inevitable.
There are two things could happen here, both bad for GM shareholders.
The government could help and more drastic cuts could be made at GM, but as part of the deal, GM might issue lots more shares and dilute or lessen the value of shares already held by investors.
Or GM could file for some sort of bankruptcy. GM likely would not completely go out of business in a bankruptcy, but GM shares would be worth pennies on the dollar.
Is it too late to sell GM shares if you own them at $2 a share or so? No.
Depending on how much you own, you might get some money after commissions. If you owned the shares outside of a 401(k) or IRA, and you sold at a loss, you could deduct the losses on your federal tax return. If the stock is in a 401(k), you could sell, too, but not get a tax break.
With GM now seeming to admit that it's closer than ever to filing for bankruptcy, what should individuals do?
People have to finally realize that they are indeed gambling, and this is a bet that might not pay off. The fact is with the billions of dollars from the Federal Government that GM has already received in loans and the billions more required to keep it afloat, much of which will likely have to be repaid to the Government at the end of this month under the terms of the first bailout package. A new debt free much more viable and competitive company could be created to replace it.
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