Case Study

9-293-123

REV: JULY 3, 2008

PETER TUFANO

Liability Management at General Motors

Stephane Bello, an analyst in the Capital Markets group at General Motors (GM), oversaw liability portfolio analysis activities for America’s largest domestic automaker. In February 1992, GM was planning to raise $400 million through a public offering of a noncallable five-year note, with a fixed interest rate of 7 5/8%. Guided by the firm’s stated policy on liability portfolio management, the current structure of its liabilities, and his best reading of likely trends in the bond markets, Mr. Bello had to recommend to senior GM Treasurer’s Office managers whether to modify GM’s interest rate exposure on the issue and, if so, which transaction to select. Mr. Bello had been in the Capital Markets group at GM for one year, and during that time was responsible for analyzing the management of GM’s interest-rate exposure and making recommendations about how GM could lower its borrowing costs through prudent use of interestrate derivative products. Before taking this position, Mr. Bello had worked for two years in GM’s European Regional Treasury Center, engaged in foreign exchange and corporate financing transactions. Before joining GM, he had worked in a commercial bank for over a year. Mr. Bello could advise that the firm merely issue fixed-rate debt and not engage in any related transactions. He could also suggest that GM engage in a wide range of derivative activities, which included transacting in interest-rate swaps, caps, Treasury options, or swap options (swaptions). He had solicited competitive bids for each of these instruments from several bankers. His recommendation would hinge on his judgment of the future level of interest rates and volatility, the future shape of the yield curve, and the interest-risk exposure each instrument would create in light of the overall interest-rate management program at GM.

Background on General Motors and the Auto Industry

In 1991,...