Jason Nissé, Business Editor: Listen, and you'll hear the squeal of GM's brakes

America holds its breath as auto giant heads for a financial smash
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The Independent Online

General Motors faces going bust. Don't take my word for it. Suppliers, rivals, analysts and even GM insiders are now saying that this beacon of American industry could file for bankruptcy within a matter of months. It would be the most shocking event in US corporate history - worse than the Enron scandal, worse than the near collapse of IBM (which ranks as the biggest destroyer of American corporate wealth in history). And it's all the more astonishing as GM not only has the iconic brands Chevrolet, Cadillac, Opel and Saab, it also claims to have $19bn in cash - nearly £11bn - on its balance sheet.

The thing is, Rick Wagoner, GM's chairman and CEO, has been going through money faster than a fashionista in the Stella McCartney section of H&M. Two years ago, GM had $29bn of cash. Now Mr Wagoner has a union agreement which means that laid-off workers are paid at 75 per cent of their basic salary - which costs $500m a year; a company pension, benefits and healthcare programme that GM cannot afford, and despite striking a deal to cut $1bn a year, the bills look like going up, not down; one big supplier is in Chapter 11 bankruptcy, and another faces collapse.

Those suppliers face a strike - a move which would shut down GM in the US and cost it $2bn a month. Mr Wagoner also needs to get rid of about a quarter of his workforce, without prompting a strike at GM itself. He is having to heavily discount Chevrolets and Cadillacs to sell them. And, to cap it all, GM is no longer the world's biggest auto maker - that is now Toyota.

To try and steady a share price that has slipped by two-fifths this year, Mr Wagoner has said he might sell a majority stake in its financing division, GMAC. This could bring in more than $10bn, but leave a big hole in GM profits. Without GMAC, and with an urgent need to pay off the auto workers it either employs, or used to employ, the cash pile will be eaten up. If GM is still haemorrhaging cash after this, Chapter 11 will become more a reality than a possibility.

Without wishing to give you a tutorial on insolvency law, Chapter 11 isn't like any UK form of insolvency. The managers remain in control and use Chapter 11 to protect themselves from creditors, reorganise the business and emerge from it in a healthier state. Most of the US airline industry has been in Chapter 11 at some point in the past four years, MCI rose from the rubble of WorldCom through Chapter 11 and is now a major player in world telecoms again. But what Chapter 11 would do is harm shareholders and bondholders, many of whom were hurt heavily by GM's bond default earlier this year.

But the biggest harm would be to the American corporate psyche. How can a country claim leadership in world business when one of its manufacturing stalwarts has gone bust?

A POISONED CHALICE AT RBS

If you click on to the Royal Bank of Scotland corporate website, you will see something strange. Fred Watt, who resigned in June, is still listed as the bank's finance director. No doubt this is just an oversight, but cynics might wonder if this is the UK's second-largest bank making out that it has a finance director when there is a gaping hole at the top of its corporate structure.

Shareholders are getting concerned. Chief executive Sir Fred Goodwin is variously described as "driven", "difficult" and "a megalomaniac". What is clear is that in a world where good finance directors are at a premium, what might have been seen as a plum job is curiously unattractive.

The longer this goes on, the more people become worried about the direction of RBS and question Sir Fred's leadership. But a giant bank without a chief executive or a finance director is too frightening to contemplate.

j.nisse@independent.co.uk

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