Monday, December 15, 2008
The Real Value of A Bankrupt Company's Cars
For the past few weeks, CNBC's mediocre auto- and airline-correspondent, Phil Lebeau, has been shouting to anyone who would listen, that the value of cars made by an auto maker which files for bankruptcy will fall precipitously.
On Friday, he was screaming about the value decline in Oldsmobiles, once GM decided to discontinue the nameplate.
I was talking with my business partner at length on Friday afternoon about the failed auto bailout bill, and brought up LeBeau's continuing assertions.
As I related his ongoing bluster, something occurred to me regarding the entire topic of used car valuations.
Perhaps LeBeau has it backwards.
Maybe the true value of all these GM cars is actually lower than their present value. The only thing propping them up is the thin reed of possibility that the company won't file Chapter 11.
With CEO Wagoner having caused GM's stock to fall from nearly $60/share five years ago to than $4 now, why wouldn't you expect the resale value of the firm's cars to plummet heavily, as well.
To worry about the loss of additional resale value of GM products is really sort of moot at this point. The company is, on a valuation basis, so near dead that everyone knows there is unlikely to be an independent GM in another twelve months.
Thus, any further drop in resale values is probably to their true value, from a current, artificially high value as the firm tries to get Congress to give it a temporary stay of execution.
All this handwringing about resale values and warranties seems to me to be beside the point. Few people buy GM products anyway, and those people must be purchasing GM cars and trucks for reasons other than resale value.
To try to turn well-functioning Schumpeterian dynamics on its head, and refuse to let a failing auto maker, or two, die, because of the likelihood of their products' values falling to their true level, seems ludicrous.