GM update - applying common sense

Friday, May 06, 2005

Having read globaltrader's technical considerations about the moves in GM shares I want to apply some common sense about the "surprise" downgrading by S&P. A rating does not happen overnight, as S&P's chief analyst confirmed on Bloomberg TV, saying the company had been closely watched for several months. When somebody owns 3.9 percent in a Dow component, he cannot be surprised by a downgrading, unless he is a rich heir-fool who spends his days enjoying whatever. This is certainly not the case with KK, one can rightly assume. In my knowledge a company gets informed by the rating agency that an up/downgrade will be published beforehand. All under the wrap of confidentiality.
As we all know the rating agencies blundered quite a lot of times in other prominent cases like Enron and Worldcom and got heavily criticised for issuing their downgrades quite belatedly. These agencies have to defend a reputation that makes them thick bundles.
It is all hypothetical, but who agrees with the following scenario:
The rating agency dives into megacorp's books and sees the necessity of a big downgrade. As megacorp happens to be a Dow component - it once was the world's biggest company by market cap - the agency and the company know a lot is at stake in both the share and the bond market. The company of course will want to buy time with the agency as every cent of credit will from that moment on come at a much higher risk premium (interest rate).
The agency will tell the company it can't wait with the publication as such a hot potato can easily burn a big hole into the veil of confidentiality and into the reputation the agency still enjoys in the general public. Megacorp, seeing a big tumble ahead, calls its biggest shareholders, all in strict confidentiality, to tell them what is going to happen.
Shareholders don't like to see a further meltdown after the 50 percent fall since 2004 at all, who knows which credit lines they have to serve? So a shareholder draws a plan to save his megacorp stake from further losses and goes public with a shout of "Gimme more of the same", rightly assuming that the public will start thinking he knows due to his insider status that there is some value others don't know about.
KK so far has not said from where he will take 868 million dollars the purchase would afford. His current stake of 22 million shares is certainly not the kind of adequate collateral for any creditor with a brain bigger than a peanut.
The plan has worked so far with the 52-week low having been ironed out again nicely. But into what will it develop? This depends on how tightly the SEC sits on its ears, I assume. End of hypothesis.


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