Dear Mr. Berko:

I’m a Baby Boomer who bought a new General Motors car in 1975 that had nothing but problems, and GM just ignored my complaints. I hope there are others like me who enjoy watching GM squirm under its financial problems. It’s payback time.

Do you think the unions will force GM into bankruptcy, as they have done to the airlines? What do you think of GM’s high-yielding preferred stocks for my IRA? My brother, a former negotiator for the United Auto Workers, just bought 650 shares of General Motors’ 7.5 percent preferred at $14.90 a share and they yield 12.5 percent. What do you think of them?

R.E., Mount Clemens, Mich.

Dear R.E.:

Yes, General Motors Corp. (GM-$24.06) is a sick puppy, and some observers believe that GM must make even more drastic changes to survive. And, yes, many Baby Boomers who brought problem-plagued cars in the mid-1970s while GM ignored the complaints are now gloating over the automaker’s woes.

If GM doesn’t quickly address its structural problems, including absurdly high wages and benefits, imprudent pension costs and prodigal health-care obligations, then Chapter 11 may be right around the bend in the road, just after that huge pothole.

The 7.5 percent preferred to which you refer is not a preferred or a common stock, but rather a $25 denominated, unsecured and unsubordinated indebtedness of GM. They’re really bonds that trade like stock. GM has some similar issues with a $25 par value, and most of these bonds are held by small investors who are hanging on for dear life.

They are rated as junk status by Standard & Poor’s as well as Moody’s, and many observers believe they carry an inordinate amount of risk. I do, too. But I am required to tell you that I personally own these bonds and that we have placed them — where we feel the risks can be assumed — in a number of our managed accounts. It’s hard to turn down a 12 percent or a 13 percent current return if the potential rewards can outweigh the risks by lots and lots of pounds.

I think new management blood at GM is beginning to shake things up. Bob Lutz, one of the top guys in the auto industry and formerly the big shot at Chrysler, should be getting results as soon as the current generation of 2006 models is rolled out to the public.

Lutz’s no-nonsense team of car guys is a refreshing change for the auto industry. His team is aggressive, highly focused, brilliant, unnervingly motivated and they are all “24/7” people. These attributes are unusual for auto company executives, most of whom enjoyed three-martini, country club lunches. For new management, as for the Marines, failure is not an option.

General Motors ended its third quarter with nearly $20 billion in cash or equivalents, and Lutz expects to generate better results this year with a new truck platform. GM’s new management team has cobbled a turnaround strategy that involves the introduction of new products, excising poorly performing names from the production line, reducing capacity and working with the unions to cope with the company’s $6 billion annual health-care costs plus its $60 billion in pension obligations. And if GM can get some union help, it might also be able to reduce its redundant labor costs by no longer keeping laid-off workers on the payroll.

Nothing is ever as bad as it looks to be nor as good as it seems to be. The future might bring a smaller, more flexible version of GM, which will probably grow its revenues at the average rate of inflation.

Meanwhile, I think there’s a 77 percent probability that those GM units (GMW-$15.73, RGM-$15.62, XGM-$15.78, GMS-$16.10 and others), all yielding 11.5 percent or more, will survive. That means there’s a 23 percent probability that they won’t, and a lot of that 23 percent is dependent on how intransigent the unions intend to be.

If your $16,000 investment represents less than 10 percent of your Individual Retirement Account, I have no problem agreeing with your decision. However, if that $16,000 represents a large portion of your IRA assets, then you would have to be dumber than a bowling shoe to buy those GM units. These bonds are suitable only for the high-risk portion of your IRA. To think otherwise could be dangerous to your wealth.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service