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Morgan Chase and Goldman Sachs better open trading offices in Dubai
The Plot Thickens at GM with SEC Subpoenas
By Nat Worden
TheStreet.com Staff Reporter
Thursday, October 27, 2005
http://www.thestreet.com/_yahoo/markets/natworden/10249751.html?
cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
The Securities and Exchange Commission is investigating General
Motors' handling of retirement benefits and its relationship with
bankrupt parts supplier Delphi, the automaker said in a government
filing.
GM, which posted a $1.3 billion third-quarter loss last week because
of spiraling labor costs, confirmed it has received a subpoena from
the agency and is cooperating with the probe.
"These matters include GM's financial reporting concerning pension
and other post-employment benefits, certain transactions between
General Motors and Delphi, GM's recovery of recall costs from
suppliers and supplier price reductions or credits, and any
obligation GM may have to fund pension and OPEB costs in connection
with Delphi's proceedings under Chapter 11," the company in an SEC
filing.
The company didn't elaborate on the probe.
Given its recent performance and debt downgrades, legal scrutiny is
the last thing GM needs right now. The company is sensitive to
perceptions its solvency is at risk, with a spokesman reiterating to
Reuters overnight a statement by CEO Rick Wagoner that Chapter
11 "is not an option."
Still, concerns about the risk sent the stock down $1.98, or 6.8%,
to $27.19 Thursday and led to a flight-to-quality rally in the
Treasury bond market.
Argus Research analyst Kevin Tynan said the subject of pension
accounting is broad enough that it's possible the SEC's probe will
not be a huge issue for GM.
"The way the pension accounting code is written is the problem,"
Tynan said. "You can do a lot of creative stuff and still be within
the rule there, so I don't think anybody will be led off in
handcuffs on this one. It may mean they overstated some income or
under-stated some debt, and the resulting restatements will
certainly hit the stock, but I don't think this is anything
criminal."
Accounting for pension liabilities involves some fairly complex
modeling that includes assumptions about future returns on
investment, interest costs, healthcare costs, mortality rates and
other factors. In 2003, GM was facing payments totaling $15 billion
over four years to shore up its under-funded pension liabilities. To
avoid paying increased pension insurance premiums, it sold a $13.1
billion issue, using most of the money raised to make the payments.
Wednesday's Wall Street Journal reported the SEC issued a subpoena
to GM's competitor, Daimler Chrysler, last month seeking information
from the company on accounting methods it has used for pensions in
North America. The newspaper reported the subpoena appears to be
part of a wider probe into pension accounting that has led
regulators to request information from Ford, Boeing, and a number of
other large U.S. companies on the same topic.
That hardly means GM is in the clear, however. Last week, the
company announced that it reached a deal with the United Auto
Workers that would allow it to slash its multibillion-dollar health-
care costs by cutting benefits for UAW-protected blue-collar workers
and retirees. Reaching such a deal was held up by GM as the
cornerstone of its plan to stem its collapsing sales and earnings.
Still, Tynan said the deal was not substantial enough.
"What happened at Delphi showed that the UAW is unwilling to make
the kind of deep concessions that are really needed for GM to avoid
Chapter 11 somewhere down the line," Tynan said. "It was a moral
victory for Rick Wagoner in the short-term, but it's only $3 billion
before taxes, and they've already lost more than that so far this
year."
Whatever optimism the agreement may have provided shareholders
probably disappeared with the latest news of stepped up scrutiny
from regulators.
"This is one more distraction and another black mark on GM after all
the problems they're already dealing with. But I don't think it's a
nail in their coffin," Tynan said.
In a separate matter, GM said the SEC and a federal grand jury have
subpoenaed its finance subsidiary, GMAC, in connection with the
ongoing investigation of insurance industry practices. The requests
pertain to "loss-mitigation insurance products such as finite risk
insurance."
Such policies have been the subject of an extensive state and
federal probe that has touched companies including American
International Group and Berkshire Hathaway. In general, regulators
have sought information on the economic rationale for corporate
coverage that has occasionally been used to burnish financial
statements.
GM's stock closed down $1.87, or 6.4%, to $27.30.
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