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Insolvency is philosophy, illiquidity is fact Take a look at a snippet of GM's last-quarter balance sheet (courtesy of Yahoo! Finance). It's the part that contains what accountants quaintly call "Shareholder Equity": [Follow original link to see the graphic.] Yes, the accounting value of the firm's equity is negative 41.7 billion dollars. Now, answer me this. Is GM insolvent? There is no definitive answer. It's a philosophical question, a matter of opinion. The market says GM's equity is worth $15B dollars. All we can say with any confidence is that GM is liquid, it has not yet failed to pay its bills, it is capable of borrowing to finance its operational needs despite a balance sheet with no vital signs. The patient walks and breathes, so it is not dead. Somehow. There is a meme going around the blogosphere, and now the mainstream-press-o-sphere, that the Fed is helpless in the current crisis because the problem is one of solvency, not liquidity. Here's Paul Krugman (hat tip Mark Thoma): In past financial crises... the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working... Why not? Because the problem with the markets isn't just a lack of liquidity -- there's also a fundamental problem of solvency. Here, here, Dr. Krugman. And you too, Dr. Roubini. And Michael Shedlock. And Kevin Drum. I agree with you all. From the tiny legal entities known as asset-backed securities, way up through to a couple of large money center banks, there are a lot of entities out there which, by my Victorian standards, are simply insolvent. But by those standards, GM oughtn't be able to fog a mirror, let alone borrow money from people. It's the living dead, a zombie, to use a term fashionable when discussing Japan but never, ever appropriate to the hypercapitalist U.S. of A.
Take a look at a snippet of GM's last-quarter balance sheet (courtesy of Yahoo! Finance). It's the part that contains what accountants quaintly call "Shareholder Equity":
[Follow original link to see the graphic.]
Yes, the accounting value of the firm's equity is negative 41.7 billion dollars. Now, answer me this. Is GM insolvent?
There is no definitive answer. It's a philosophical question, a matter of opinion. The market says GM's equity is worth $15B dollars. All we can say with any confidence is that GM is liquid, it has not yet failed to pay its bills, it is capable of borrowing to finance its operational needs despite a balance sheet with no vital signs. The patient walks and breathes, so it is not dead. Somehow.
There is a meme going around the blogosphere, and now the mainstream-press-o-sphere, that the Fed is helpless in the current crisis because the problem is one of solvency, not liquidity. Here's Paul Krugman (hat tip Mark Thoma):
In past financial crises... the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working... Why not? Because the problem with the markets isn't just a lack of liquidity -- there's also a fundamental problem of solvency.
Here, here, Dr. Krugman. And you too, Dr. Roubini. And Michael Shedlock. And Kevin Drum. I agree with you all. From the tiny legal entities known as asset-backed securities, way up through to a couple of large money center banks, there are a lot of entities out there which, by my Victorian standards, are simply insolvent. But by those standards, GM oughtn't be able to fog a mirror, let alone borrow money from people. It's the living dead, a zombie, to use a term fashionable when discussing Japan but never, ever appropriate to the hypercapitalist U.S. of A.
Then it's indeed a question of opinion as to what the inability means. But there is a conceptual difference between a temporary mismatch between resources and debts, and a long term inability to pay one's debts. The first kind can be solved by liquidity injection, the second cannot.
So, after the failure of the recent liquidity injections, one can infer that we are no longer in a temporary mismatch situation. In the long run, we're all dead. John Maynard Keynes
i.e. GMAC profits are less than GM Auto losses.
I do know they make crappy cars no one wants to buy, even with cheap loans as an inducement. She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
I do know they make crappy cars no one wants to buy, even with cheap loans as an inducement.
Amen. Ditto Ford and Chrysler. Be nice to America. Or we'll bring democracy to your country.
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