GM Takes (Another) "Big Bath," Loses $15.5B in Q2

General Motors took a "Big Bath" on Aug. 1. GM announced a whopping $15.5 billion net loss for the second quarter, including a laundry list of $9.1 billion in special items, for everything ranging from a $1.6 billion write-down on the value of off-lease vehicles, to $197 million related to settling a strike at supplier American Axle.

In a weeklong seminar for journalists I attended years ago at the University of Pennsylvania's Wharton School, the professors called this kind of quarterly report a "Big Bath."

In my layman's terms, the theory is, "If you're going to take a bath, make it a big bath. Chuck in every piece of bad news you can think of. That way, you get as much bad news as possible out of the way at the same time. Each individual piece of bad news gets less attention, than if you announced them one at a time."

The trouble is, GM keeps taking Big Baths.

Just in the third quarter of 2007, GM reported an astounding $39 billion net loss, nearly all of which was related to a $38.6 billion write-off for the value of tax credits the company had accumulated.

GM pooh-poohed that result, arguing that it wasn't a quote-unquote "real" loss, and anyway, the company could some day restore those tax credits, and boom, they'd be back on the books.

The way it works is this: GM for years had hoarded deferred tax credits for use on a rainy day â€" actually, for a sunny day, for when GM was profitable. At that time, GM would be looking to offset some of those profits, in order to save money on taxes.

Those deferred tax credits represented real value on GM's books â€" but only if there were profits to stack them up against. After three years with no profits, accounting rules last year required GM to write off the value of the deferred tax credits, since they're worthless in the absence of profits, or the near likelihood of profits. True, GM could resurrect the value of those deferred tax credits, but only after it has enjoyed at least three consecutive profitable years.

That's looking like it could be a while.