GM Submerged in Red Ink

Shares slide as the automaker records its biggest loss ever.
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If its recent labor deal means a brighter future for

General Motors

(GM) - Get Report

, that wasn't immediately evident on Wednesday, when the largest U.S. automaker reported its biggest quarterly loss ever.

Hampered by a massive accounting-related charge, along with continued turmoil at GMAC's mortgage business, GM reported a net loss of $38.96 billion, or $68.85 a share, for the quarter. That compares with its loss of $147 million, or 26 cents a share, for the same quarter last year.

The results reflect a one-time accounting charge of $37.4 billion on a valuation allowance against GM's deferred tax assets and a $630 million drop in earnings from GMAC, its former in-house finance business. Those items buried an improved performance at GM's core automotive operations in North America, though that business was still in the red.

Shares of GM recently were down $1.33, or 3.7%, to $34.83.

The valuation allowance, announced late Tuesday by GM, was triggered by its cumulative three-year losses, troubles at GMAC and a worsened outlook in the U.S., Canada and Germany. The charge requires the company to account for the fact that deferred tax benefits on its balance sheet may not be used.

"The tax loss adjustment is not a big deal," said Peter Morici, a business professor with the University of Maryland, in a note. "GM was too optimistic about future profits so it will not be able to use the accumulated losses against taxes as planned."

GMAC, meanwhile, weighed on results since GM still owns 49% of the financing firm. GMAC, now majority owned by Cerberus Capital Management, is suffering a dramatic reversal of fortune amid the U.S. housing slump. Residential Capital, GMAC's home-lending unit known as ResCap, reported a third-quarter loss of $1.8 billion last week.

GM's results also included a gain of about $3.5 billion from the sale of its Allison Transmission unit, along with charges of $1.56 billion in pension service costs, $387 million for restructuring efforts and $350 million related to bankruptcy proceedings at

Delphi

, GM's chief auto parts supplier and former subsidiary. Delphi is struggling to win financing in a credit market that has largely dried up.

Excluding items, GM swung to a loss from continuing operations of $1.6 billion, or $2.80 a share, from last year's income of $497 million, or 88 cents a share. Analysts were expecting a loss on that basis of 25 cents a share, according to Thomson First Call. Estimates on Wall Street

dropped off precipitously in recent days in the wake of GMAC's surprise loss.

While GM CEO Rick Wagoner was quick to point out that the extent of the company's losses were due to accounting factors, analysts were unwilling to go along with that story.

"Things are bad and getting worse

at GM," said Bear Stearns analyst Peter Nesvold in a note to clients on Wednesday morning.

Nesvold said the real driver in GM's losses is "the deteriorating outlook for autos and mortgages" in the U.S.

The domestic auto industry is grappling with a consumer spending slowdown amid soaring oil prices and an epic slump in the U.S. housing market that is resulting in a spike in mortgage defaults.

For years, GMAC was GM's main engine of profitability as its automotive operations struggled to contend with market share losses to low-cost, foreign-based competitors. The sale of GMAC to a private-equity firm was partly designed to free the business from GM's deteriorating credit ratings, but now the company is mired in losses from the mortgage mess.

On its top line, GM said its revenue for the third quarter fell 10% to $43.83 billion from last year's $48.89 billion. Automotive revenue rose 8.9% to $43.13 billion, beating analysts' expectation of $40.29 billion.

In North America, GM reported an adjusted loss from continuing operations of $247 million, down from last year's loss of $660 million. Net sales in the region slipped 0.7% to $26.61 billion.

Despite the improved performance, Morici said GM's losses in North America "were much larger than expected," which is why GM did not hit Wall Street's targets.

"These losses cannot merely be tagged to a tougher operating environment, and appear to transcend the gains made in the new UAW contract," Morici added. "All this raises questions as to whether GM's North American operations will become viable, or just less sick, with the new labor agreement."

Overseas, the automaker continued to flourish in emerging markets. Its global automotive operations swung to an adjusted profit for the period of $122 million from last year's loss of $455 million.

Adjusted profits doubled at GM Asia Pacific, while its sales climbed 42%.GM Latin America reported adjusted earnings up 86%, and its sales rose 35%. In Europe, the automaker's adjusted net loss widened to $90 million from $39 million, due to weakness in Germany, and sales rose 17%.