On 11 Aug 2003 15:30:01 GMT, oliver33[at]mail.com (Oliver) wrote:

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Here's another lesson:
Anything that pays more than a bank/credit union account involves some
kind of risk to principal.

-HW "Skip" Weldon
Columbia, SC

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Many years ago I told my broker to buy me some notes bearing the full
faith and credit of the US Government.

He bought me notes on the Bank for Cooperatives.

A bit later, research revealed that they did not bear the full faith
and credit, and indeed the Bank for Cooperatives later became rather
shaky.

http://www.cobank.com/about/history.html

I know there has since been restructuring, and AFAIK nobody lost any
money ever. But I learned a valuable lesson: don't rely on anybody.

blatt987[at]hotmail.com (Blatt) wrote in message news:<da3051d8.0308100659.23abcf0c[at]posting.google.com> ...
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I think the messages overall of this are:

- GM and Ford are in long term financial trouble (at the moment? I
think Ford is worse?) because of structural changes in their
industries and pension/ healthcare liabilities
- Ford is in worse shape (see KMV point below): that is what the
market is telling you
- but it is still unlikely (this cycle) that they will default on
their debt, or if they do that debtholders will get *nothing* if they
do (the above cases are of financial insitutions which can go
completely bust much more easily)
- one needs to look very carefully at what secures the debt they issue
(if anything) is it the company, the customers? You cannot simply go
by the ratings agencies (which tend to be backward looking). The KMV
rating data (which reflects market data, not just analysts crunching
numbers) is worth getting hold of.
- one has to consider how much debt one wants to have in one's
portfolio that comes specifically from the automotive sector

If you want 100% security, these are not the instruments. If you are
prepared to take some risk, then holding 10-20% of your portfolio in
these instruments probably works. You have to think about these
problems at the portfolio level.

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Just remember Barings. When ING bought the remains of Barings after
Nick Leason's fraud exhausted its capital, Barings abandoned its note
holders, who got nothing.

Yet they had been top rated. Reminds me of Silverado S&L, where
uninsured notes were foisted on naive customers who thought they were
getting FSLIC cover. They too wound up in the poorhouse.

"Les" <lester123_nospam[at]att.net> wrote in message news:<8fTWa.81576$3o3.5619150[at]bgtnsc05-news.ops.worldnet.att.net> ...
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Yes they are more risky. Although once upon a time the idea that GM
or Ford could go bust seemed ludicrous, we live in a world where
strange things happen. Both companies have very low profitability
(despite strong markets), huge pension fund deficits and significant
financial problems. GM has just borrowed $13bn (?) to invest in its
pension fund deficit: effectively accounting trickery (you borrow at
7.5% and your assumed return on pension fund assets is 9.5%, so the
manoeuvre is profitable).

My eventual endgame for GM and/ or Ford is that they go bust, to
escape the huge tail of pension and healthcare liabilities to retired
workers. This is essentially what the US steel industry is doing and
once they have gone through that Chapter 11 baptism, such companies
are entirely competitive with foreign competitors.

The same process needs to happen to the US auto industry, and it will.
Undoubtedly the government will become involved (as they did with the
Steel tariffs) this is too much of a political hot potato, but their
involvement is inevitable, even though the motor industry is no longer
the 'engine' of the US economy the way it once was.

Does this mean you should not buy GMAC paper? A much more complex
question because 1). my vision of the endgame has no date attached 2).
history (the Chrysler bailout) shows that these companies have an
amazing ability to resurrect themselves and stagger on, maybe with
less market share, but still crunching out cars (GM has been properly
characterised as a large hedge fund (ie its pension plan) that builds
cars on the side; the historic characterisation was as a consumer
finance company that happened to give its customers cars as a bonus
for opening an account).

and also 3). GMAC paper is, I think, secured by the customers' debts,
rather than by GM? in which case, the chances of being paid off ought
to be greater (you and I cannot use Ch.11 to restructure our lives
because we would lose our homes, cars etc., whereas GM and Ford can).


So as stocks or as bonds, it has always been smart to buy them when
worries are at their maximum, and sell them when things seem to be
going well. I have some concerns that this time it really is
different: if you look at WPP Group (Ford's ad agency) the CEO makes
very public statements that the car industry has capacity about twice
what demand is (the other estimate I have heard is about 40%: ie
capacity to produce 80m cars pa, and demand of 60m). Such industries,
historically, eventually have to have massive consolidation and
shrinkage. And the survivors are the financially strongest companies
(eg Toyota with ?$100bn? of cash and fixed interest investments on the
balance sheet).

You could argue in this case that 'going well' was GM being able to
borrow $13bn from bond markets. Conversely the US economy *is*
getting stronger and does seem to be recovering.

In addition, in any putative restructuring, although the equity
holders will get hozed, the bond holders usually (eventually) get most
of their principle back (anywhere from 50-100%) if not the interest.

So as an investor, that leaves me with a couple of questions re
Ford/GM debt.

1. can I stand to lose the lot? ie is my portfolio well diversified,
to the extent where I am not ruined if I don't own the things.
Probably you should not have more than 5% of your total portfolio in
any one security (or combination of securities, debt and/ or equity)
from any one company.

2. would I be better off in a high yield fund? ie a diversified
portfolio of bonds of a similar maturity. One problem with a fund is
that it experiences capital losses when interest rates go up, whereas
if you hold the individual bonds, you just hold until they mature at
par.

My answer is normally yes to 2, unless I can afford to own and manage
a portfolio of 20 1)s, or I only invest in high grade corporates (I
like the corporate paper of large financial institutions: I mean
really large. Not because they are safe, per se, (banks can disappear
faster than anyone), but because someone like Citigroup really is 'too
big to fail' from the perspective of the Fed and the Treasury.

In your situation where you hold the things, I wouldn't panic out, but
I would be looking to reduce my exposure (eg by maturation of the
securities I hold), not increase it.

I too have a few GMAC notes (2 and 3 yr). Yes they act like short term
bonds, and mine are not callable. I bought them with money allocated to
cash / money market since money market rates were so low.

p.s. - am now considering Ford smart notes. Have the same BBB rating but
interest rates a little higher than GMAC. I suppose people think they must
be more risky, or why else would they be? Any comments?

--
Have a great day, except you spammers
To email, remove the obvious

........
"TooTall" <tootall[at]tootall.com> wrote in message
news:vijmkkag1eoo1a[at]corp.supernews.com...
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I have a GM Smart note. It's like any other bond as far as I can see.
Rating on all GM and Ford is S&P BBB.


"Beliavsky" <beliavsky[at]aol.com> wrote in message
news:20021213194333.28406.00000044[at]mb-fv.aol.com...
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