Geez, talk about a bad day at the office.
Embattled General Motors (prior posts here) conceded in its delayed regulatory filings filed yesterday that it had found “material weaknesses” or “significant deficiencies” in the company’s accounting controls, and that the company’s financial statements for 2002-2004 and for the first three quarters of 2005 “should no longer be relied upon” because of accounting errors. The company filed corrected statements for those periods with the SEC yesterday.
In addition, the company announced that it may have a bit of trouble peddling its valuable financing unit because of the complexity involved in arranging such a deal and, oh by the way, several years worth of results for that unit need to be restated, too. Then, this NY Times article questions whether GM current management has what it takes to pull the company out of its tailspin.
But to top it all off, GM announced that it had received a subpoena from a federal grand jury investigating its handling of payments or “credits” from suppliers, and that it had received a subpoena from the Securities and Exchange Commission in connection with a previously disclosed investigation of GM’s transactions in precious-metal raw materials. That makes six subpoenas from the SEC and two subpoenas from federal grand over the past six months.

Despite its mounting problems, GM remains reasonably liquid and is in just the beginning stages of a large layoff plan. However, should GM’s board continue to postpone what increasingly looks like an inevitable need for a reorganization under chapter 11 and risk that depletion of the company’s liquidity levels during such a postponement will make such a reorganization even more difficult? Or would authorization of a chapter 11 case while the company still has decent liquidity reserves breach the board’s fiduciary duties to GM shareholders?
The WSJ’s Holman Jenkins chimes in today with this column ($) on what GM needs to do:

Getting rid of the Jobs Bank not only helps cure GM’s rational incentive to underinvest — it also helps cure its rational incentive to overproduce, churning out cars that command just enough of a market price to meet GM’s fixed labor bill even if they fail to generate any profits.
Don’t underestimate the importance of this factor. Dumping these cars on the market, especially through cheap fleet sales, undermined the pricing and image of all GM cars, then undermined it again when these fleet vehicles reappeared on used-car lots a year or two later. Optimizing production volume under GM’s crazy labor guarantees was such a puzzle that an economist in the company’s R&D department even published a research article on it in 1995. A year earlier, GM had actually found itself hiring temps and paying overtime to meet demand for hot cars even as it paid 8,300 UAW workers at other factories to stay home.
Much inveighing over Detroit’s “addiction to incentives” over the years has missed this fundamental point. “Incentives” are just gimmicks for rationalizing the fact that GM was obliged to produce cars to generate cash flow regardless of whether they made any money for shareholders. As the company began to spell out in a briefing Monday, unwinding its jobs-for-life commitments would enable GM to alter this basic approach to the car business. Bluntly put, GM would be able to build fewer cars and charge more for them.

There are no easy answers these days for GM board members.