Why is Detroit MI such a dump

US auto industry: GM or the Detroit black hole

In return, the US Treasury Department will hold 72.5 percent of the automaker when it emerges from bankruptcy protection. The rest goes to the United Auto Workers union and to unsecured creditors, mainly bondholders. The latter will also receive warrants with which they can secure up to 15 percent in GM, depending on how the company's market value increases.

Roughly speaking, if the government's stake were equal to $ 50 billion in debt, GM's total post-bankruptcy capital would need to be at least $ 69 billion. And more, if one assumes that the bond holders exercise their subscription rights.

Even in its best days in 2000, the carmaker's market capitalization was only around $ 60 billion. Back then, Motown number one had reported earnings before interest, taxes, depreciation and amortization (Ebitda) of about $ 21 billion. Low gasoline prices had fueled profitable SUVs in those days, GM had eight brands and a massively expanding financing business with GMAC that brought in a third of the bottom line.

The New GM, as the government calls the shrunken entity, will only be marginally involved in the financing branch. It will have sold the Pontiac, Saab and Hummer brands. And she has probably lost control of the European business, which generated sales of $ 34 billion last year, as well as of the areas in Latin America.

To serve taxpayers, the new mini-GM would have to show results enough to support a total company value of at least $ 95 billion - the sum of a market capitalization of $ 69 billion plus consolidated debt and preferred stock $ 26 billion. If you apply market valuation multiples of five times the profit, this means that the New GM must create an Ebitda of about 19 billion dollars annually.

This would require an increase in annual sales to around 150 billion dollars - almost 50 percent more than the entire company is likely to convert this year. In addition, GM would have to catch up with a lush Ebitda margin of 14 percent and thus set a brand that Toyota had ever achieved in its best fiscal year. It takes a great leap of faith or daring hopes to believe in such a scenario.

Of course, the US government is not a professional money manager. The decision that lay ahead of her wasn't about whether to invest in GM or some other business that would generate acceptable returns. The government had to choose between two evils: on the one hand, it was able to slip GM taxpayers' money in the hope that a brief visit to the bankruptcy administrator's workshop would produce a well-groomed, successful automaker. Or she could run the risk of having to clean up an even bigger mess if a liquidated GM had dragged the entire American automotive sector into the ditch with it.