A Consensus Forming That Existing General Motors (GM) Common Shares Are Worthless
On Friday, it become very apparent to us that the common equity in General Motors (NYSE: GM) will become worthless. We advised shareholders of GM that they have 60 days to sell at whatever price they can. Despite this warning and details from the Treasury's term-sheet for GM, shares of GM closed up nearly 23%. Absolutely incredible!
Today, Credit Suisse is making a similar case. The firm downgraded GM from Neutral to Underperform and cut the price target to $1, saying the U.S. bailout will mean the complete or near-complete elimination of the existing GM equity. The firm cut their price target from $2 to $1.
Credit Suisse said, over the next two months, as bondholders, union representatives and the company management meet to hammer out concessions, they think it will become increasingly clear that the enormous sacrifice of value on the part of the union and bondholders will require the complete or near-complete elimination of the existing GM equity.
We made the case that because GM will have to reduce their public indebtedness by not less than two-thirds through conversion of existing public debt into equity or debt (a "Bond Exchange") and other appropriate means, there will be little if anything left for the shareholders. With $36 billion in long-term debt (plus billions in other liabilities) and a current market cap of just $2.5 billion, it means that current GM common share holders have to be wiped-out.
Maybe GM shareholders will finally get the point.
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