While the news from General Motors this week was troubling, it certainly wasn't surprising.

After all, when your company is losing $1.1 billion per quarter, it's probably time to take some action.

In hopes of trimming expenses, GM is cutting 25,000 jobs in North American over the next three years.

That's a lot of jobs. It's around 16 percent of GM's entire hourly workforce.

The job cuts were forced by a number of factors - the rising cost of materials, the cost of health care coverage for employees, the cost of pension obligations, and a loss of market share to Asian-based competitors.

GM says the answer is to streamline operations. The streamlining of North American operations will include not only job cuts, but the closing of a number of assembly and component plants.

GM hopes the move will save them $2.5 billion a year.

I hope GM can turn things around. The last thing we need is the world's largest auto manufacturer going belly up.

I think GM may have lacked a little automotive vision?

I mean really, what did they think, that the Hummer was going to be the vehicle of the future?

The Tahoe, the Suburban, the Yukon, the Escalade?

Some companies positioned themselves a little more appropriately with hybrids and smaller vehicles.

But, frankly, market share is only the tip of the iceberg when you consider GM's problems.

And the financial difficulty GM faces is understated by the numbers you see in the news.

A fascinating article by Nick Barisheff on HoweStreet.com, a noted investor commentary site, reminds us that while most people think of GM as a car company, it is also a finance company.

In fact, 80 percent of GM's 2004 earnings came from GMAC, its financial division.

Notes Barisheff:

"While the auto divisions posted losses, the finance division provided all of the profits. GMAC doesn't just do auto financing; in fact the majority comes from consumer credit, insurance and mortgage financing. This division provided GM with most of its profitability. ... With rising interest rates and the prospect of increasing defaults by over-leveraged consumers this is likely to change dramatically in the near future."

Basically, the finance division's profits masked the company's automotive manufacturing problems.

To be sure, foreign competition, rising labor, fuel and raw material costs were problems for GM.

But by far the biggest problem GM faces is debt.

Debt owed largely because of its underfunded pension liability.

Barisheff:

"In 2003, GM faced the largest pension fund shortfall of any US corporation - $25 billion, requiring it to float an extraordinary $17.6 billion bond issue, bringing its long term debt to over $300 billion. This still left GM with a deficit of over $50 billion in its health care fund. The magnitude of this becomes more apparent when you consider that GM's market capitalization is now just $16.6 billion."

And these financial woes, especially with regard to benefits, probably aren't going to improve any time soon.

Ed Garsten writes for the Detroit News Auto Insider.

He states that GM provides health and pension benefits to 461,500 retirees and their surviving spouses. As of last October, GM retirees and their dependents outnumber GM's workforce by three to one.

All this pension stuff is driven by investments. The better the return on investments, the better the position of the pension funds.

During the '90s, pension funds were flush with cash. But after the market downturn in 2000, pension funds were underfunded.

GM - and lots of other companies - project an expected rate of return of 9 percent on pension assets.

This warm and fuzzy projection tends to make things look a lot rosier than they really are.

Who's making 9 percent on their money these days unless it's invested in something pretty risky?

Long-term bonds are yielding below 5 percent, T-bills are under 3 percent. CDs? Forget about it. The stock market is trending down these days.

Those are the investment vehicles for pension funds.

And as more workers retire, the pension fund problem becomes a greater threat to the viability of GM and lots of large American corporations.

Remember a few weeks back I wrote about United Airlines, as part of its bankruptcy, shedding its pension liability to the Pension Benefits Guarantee Corporation?

At $6.6 billion, it was the largest pension default in U.S. history.

But when you look at the big picture, United Airlines' default looks anemic.

Companies with underfunded pension plans reported a record shortfall of $353.7 billion in their latest filings with the PBGC, Executive Director Bradley Belt told the Senate Finance Committee recently. That's up considerably from the $279 billion reported a year earlier. The total increase in underfunding is $74.7 billion, or 27 percent in one year.

Any number of factors - economic downturn, rising interest rates, rising oil prices - could precipitate a rise in the number of corporate bankruptcies.

And given the magnitude of GM's problems, it's not outside the realm of probability that GM could be one of them.

Bankrupt companies shed their pension liabilities, leaving the PBGC holding the bag.

This is not a good thing.

Barisheff:

"GM's problems point to and underscore greater systemic issues that could one day choke the life out of tomorrow's capital markets and cause havoc for the West's financial system."

People smarter than me are going to have to figure out a way to forestall the problem of underfunded pension plans.

Havoc in our financial system is something we probably don't want to endure. [[In-content Ad]]