Despite rock-bottom price, don’t buy GM stock

John W. Schoen Senior producer • Profile • E-mail

GM’s historic bankruptcy filing this week has a Wisconsin reader wondering if the worst is over for the iconic American car maker — and if so, is now a good time to buy the stock? We suggest he put the brakes on that idea.

GM stock just fell to 75 cents per share as of Saturday (May 30). By GM going into bankruptcy Monday (June 1), can I buy now or do I have to wait until GM clears bankruptcy court? Is this the right time to buy GM stock, knowing that GM will see a turnaround in the future?
— V.P., Milwaukee, Wis.

Best to keep you powder dry, V.P. Those “old shares” are probably not going to be worth much more than a souvenir of a bygone era in American manufacturing.

When a company files for bankruptcy protection, the idea is to take all of its assets and use them to pay off as many of the company’s debt as possible. The remaining debt is wiped out, which gives the company a “fresh start.”

The bankruptcy process is designed to decide who gets paid — and how much. The list includes everyone from parts suppliers who haven’t been paid to investors who bought bonds that are backed by specific assets. In this case, the U.S. government is also looking to get paid back the tens of billions of dollars of taxpayer money it lent GM to keep it afloat while the company tried to come up with a plan to avoid bankruptcy.

Unfortunately, common stockholders are at the very back of the line. And according to its bankruptcy filing, GM has just $82.2 billion in assets to cover $172 billion in liabilities. Based on those numbers, it looks all but certain there won’t be any money left over to pay existing shareholders after everyone further ahead in line has gotten their share. (A posting on GM’s Web site put it this way: “We think it is unlikely that you will receive payment.”)

That's one reason GM shares were recently de-listed from the New York Stock Exchange. In theory, you could buy shares if you found a dealer to clear the trade. But we don't recommend it.

If you already own shares, you may get some relief once the proceeding is over. Existing shareholders can declare their losses and use them to offset any capital gains on other stocks. Shareholders will have to wait until the court officially declares “old” GM shares to be worthless.

As for whether it makes sense to invest in shares of a “new GM” — the much smaller company that is expected to emerge from bankruptcy — that’s an entirely different question. Currently there are no plans to have publicly traded shares of the new company, although that could change in the future.

In any case, the prospects for a new GM are far from certain. Car sales have to recover, and there’s plenty of evidence that the rogue consumer lending during the credit bubble drove the car market to new heights that were unsustainable. Until it becomes clearer what the post-recession car market looks like, buying stocks in carmakers will remain risky.

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