As treasurer of General Motors Corp., Walter Borst thinks his most important job is to keep his company flexible, able to negotiate through the economy's ebbs and flows, able to grow when the opportunity can be seized. But despite GM's successes in recent years in improving the company's cash flow and upgrading its product line, the auto giant has a big problem. Thanks to the stock market's sell-off and the 45-year low in interest rates, the second biggest company in the United States in terms of revenue is facing one of the nation's biggest pension liabilities.

GM is hardly alone shouldering such a burden: Standard & Poor's Corp. estimates that the total pension underfunding of S&P 500 companies stood at $226 billion in mid June. Still, GM's liability was $19.3 billion at the end of 2002 and growing so big that it seemed to overshadow everything else the company was achieving. In October 2002, S&P had cut GM's credit rating because of the pension shortfall, and investors seemed to focus on nothing else. "We felt that GM was becoming a little bit of a poster child for this issue," Borst observes. "There was a significant overhang for the company,"

Borst and assistant treasurer Sanjiv Khattri knew it was time for GM to take action. While the bond market's record low rates served to aggravate the pension underfunding, they also made GM's cost of issuing debt extremely attractive. Add to the low rates the relatively wide spreads over Treasuries at which GM's bonds were trading, and the prospect of going to market was as good as it was going to get. The remaining question: How much to sell? "We could have talked about doing a $2 billion financing, but $2 billion on $19 [billion of underfunding] wouldn't really have moved the wheel too much," Borst says. But he and Khattri admit they might not have gone as high as $13 billion and ultimately $17 billion were it not for GM CFO John Devine, who "encouraged us to be much more aggressive than we had initially contemplated" in terms of the deal's size, Borst says. And why not? In its recent downgrades, S&P made it clear that pension underfunding would be synonomous with corporate debt, so there was little balance-sheet downside to substituting longer term obligations for short-term pension IOUs.