dow could be drag down if gm goes belly up GM fears cast long...

dow could be drag down if gm goes belly up GM fears cast long shadow
Commentary: The unthinkable is playing out

By David Callaway, MarketWatch
Last Update: 12:01 AM ET Nov. 17, 2005
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SAN FRANCISCO (MarketWatch) - For generations of investors who lived and prospered on its shares and dividends, it was unthinkable.



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For hundreds of thousands of its employees and former workers through the decades, it was unimaginable. And on Wall Street, as little as five months ago, it was unspoken.

Now it might be unavoidable.

The markets are beginning to price in the possibility that General Motors Corp. will declare bankruptcy sometime next year.

Even as Chairman and Chief Executive Rick Wagoner races to shore up the flagging auto giant, its debt sitting at junk-bond levels and its shares (GM:
General Motors Corporation
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Last: 21.29-1.32-5.84%

8:01am 11/17/2005

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FinancialsMore GMGM21.29, -1.32, -5.8%) falling to an 18-year-low on Wednesday, the mood of the market on the Dow Jones Industrial Average component has shifted noticeably. See full story.

Analyst notes are starting to speculate on whether the Detroit-based company can maintain its heavy cost-burden and turn around its losses without filing for Chapter 11 protection from creditors. The market for insurance protection against defaults on GM bonds has risen sharply in the past week, according to press reports.

And Kirk Kerkorian, the legendary and outspoken investor who made a $31 a share tender offer for 28 million shares of GM earlier this year to double his holdings, hasn't been heard from in more than a month, amid speculation he might make a run at the board.

Closing down $1.32 per share at $21.29 on Wednesday, GM shares are down almost a third in just the past four weeks; are off almost 50% year-to-date; and are down more than 75% in the past five years. The shares last traded at this level during the 1987 stock market crash.

Its problems -- including increased foreign competition, enormous health-care costs for workers and retirees, and a potential strike at its former auto parts unit, Delphi Corp. (DPHIQ:
delphi corp com
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Last: 0.34-0.02-5.75%

6:41pm 11/16/2005

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FinancialsMore DPHIQDPHIQ0.34, -0.02, -5.8%) , itself already bankrupt -- are well known. And it's even made progress recently, notching an agreement with the United Auto Workers union earlier this month that would have some retirees kicking in for their health care for the first time.

But the plunge in shares in the past several days suggests a turn in sentiment among investors that sometimes can become a self-fulfilling prophecy. Suddenly, the prospect of a GM bankruptcy has gone from the realm of the unthinkable to a morbid contest of market timing.

Of course, bankruptcy protection might be a good idea for GM. Like the bankrupt airlines, the process can help troubled companies save on crushing debt and other costs until they can formulate an exit plan. And like the airlines, it could happen with little impact on its actual operations.

But the psychological impact of having what is arguably America's most famous company go belly-up may be more than the market can take in the short-term. In addition to its impact on the Dow Jones average, a GM bankruptcy could send ripples far and wide throughout the economy, starting with the auto suppliers and dealers and spreading to the financially-strapped Pension Benefit Guaranty Corp., which could have to step in and guarantee pensions for the staff and retirees.

If you're looking for a catalyst for a market breakdown, this one is definitely on your short list.

Wagoner needs a Hail Mary pass right now, something that can quickly turn around what is becoming a panic among investors about GM's prospects. The health-care agreement with the union was a major move, but has been overshadowed now by more recent news of the company having to restate earnings from 2001.

GM has denied it's even thinking about bankruptcy right now, which is reassuring. But if true, then it's the only one. To say time is running out might be a bit premature. But Wall Street has definitely started the countdown clock.