source: http://www.newstatesman.com/Economy/200501310021

The business - Patrick Hosking junks General Motors
Patrick Hosking
Monday 31st January 2005

General Motors is less a car-maker these days than a bank, but a bank with debts in excess of $300bn. Now the penny is finally dropping on Wall Street, writes Patrick Hosking

To understand the disturbing imbalances in the US economy, look no further than General Motors. The idea of GM as a proxy for wider American capitalism is well established. "What's good for General Motors is good for America," its chairman Charlie Wilson is supposed to have told the US Senate in 1953, and the quotation (not entirely accurate, but close) passed into folklore. To some Americans, especially in and around Detroit, GM virtually embodies the US. Just after 9/11 it launched its "Keep America Rolling" campaign, which put across the idea that it was a patriotic duty to go out and buy a new Chevvy.

GM, the biggest corporation in the world in 1953, is still a decent-sized company, employing 325,000 people and churning out parking lots-worth of Chevrolets, Pontiacs, Buicks, Cadillacs and Oldsmobiles. In Britain, it makes Vauxhalls and on the Continent Saabs and Opels. Yet it is no longer primarily a car firm. GM is rather a vast agglomeration of financial assets and liabilities with a small car-making operation on the side. It makes more money from financial services than from car manufacturing. Its debts, however, now total $301bn - which is roughly the GDP of a medium-sized European country such as Belgium. Its unfunded healthcare promises (to workers and former workers) are $57bn - more than twice its entire stock-market value. It plugged the vast deficit in its pension fund last year by getting deeper into debt to bondholders.

GM's entire sales pitch has been built on lending Americans the money to buy their cars. The "Keep America Rolling" campaign offered no less than five years' free credit to buyers, a perk which cost the firm $3,600 for every car it shifted.

There are other little local difficulties. GM has a 10 per cent stake in Fiat's car-making division. Now Fiat is threatening, under a deal agreed five years ago, to force it to buy the other 90 per cent. That would add another $10bn to GM's mushrooming debts.

The penny has already dropped on Wall Street. Standard & Poor's, the influential credit rating agency, warns that it might have to downgrade the company's credit. But its bonds are already in the lowest category of "investment-grade" quality. A downgrade would entail them being reclassified as junk bonds. That would force many institutional bondholders to sell. Pension funds generally aren't allowed to own junk - or "high-yield" debt, as the banks delicately call it.

It is a measure of the surreal world of the financial markets that the main concern is not that one of America's biggest employers is looking fragile, but that the flood of paper reclassified as junk could destabilise a corner of the bond market. Some investment bankers are changing definitions so that GM's potential junk won't be defined as junk in the indexes. Black can become white if it ensures the smooth running of the capital markets.

GM's problems chime exactly with a new report from Edward Chancellor, author of Devil Take the Hindmost, the story of investment bubbles through the ages. In Crunch Time for Credit? (out on 1 February), he argues that both America and Britain are in a huge credit bubble, which will eventually burst with hugely destructive consequences. The cheapness and abundance of credit has created the illusion of prosperity and boosted property values and shares. Puffed-up property values have in turn provided security for more loans. "An Englishman's home is no longer just his castle," writes Chancellor. "It is also a leveraged hedge fund, a pension fund, a cash machine and a source of limitless credit creation."

Central bankers have fanned the flames by slashing interest rates. Alan Greenspan, chairman of the US Federal Reserve, comes in for particular censure from Chancellor. The dismantling of credit controls in the 1970s and 1980s has allowed the banks free rein to splurge credit to almost anyone who wants it.

Companies such as GM have been inflating the bubble, borrowing colossal amounts and encouraging US consumers to do the same. GM today is just as much an iconic symbol of US capitalism as it was in Charlie Wilson's day. But then it was a manufacturer; now, to all intents and purposes, it's a bank.

The Financial Services Authority has often been left looking leaden-footed by its US counterparts. Eliot Spitzer, the New York State attorney general, has arguably done more to improve standards in London than the 2,000 FSA officials in Canary Wharf. Now the German regulator, BaFin, claims it has "concrete evidence" that Citigroup - working mainly on the FSA's home turf in London - manipulated the bond market last year. It has asked for a criminal investigation. Yet the FSA's inquiry has so far produced nothing.

Patrick Hosking is investment editor of the Times
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