There's something about Thursdays. If General Motors' announcement last Thursday that it had lost $30.9 billion in 2008 wasn't a milestone in the company's history, today's news surely is. In its annual report filing, GM's auditors expressed doubt that the company can continue as a "going concern," to sustain itself.
Whatever happens next — be it soon or not — could transpire very quickly. On June 1, $1 billion in convertible debts (which have nothing to do with open-air motoring) will come due. If GM's overall debt picture isn't redrawn by then, the game is likely over.
What are GM's odds at this point? I'd say next to zero. If it's any consolation — and it is to the Outsider — things have changed since this crisis arose last year, and it now appears that, if GM fails, it will happen for the right reasons. The wrong reasons involved the perception that American automakers don't know how to make good cars, and that the Japanese are geniuses.
Detroit's Three Stooges
When all of this began, the reaction stunned Detroit, illustrating a major reason they've been losing market share and stumbling for years: Many Americans, including much of the West Coast and Northeast, view the domestic automakers as our very own Three Stooges, whose products "no one" wants to buy. "All of the foreign brands make good cars and they're doing fine."
Chrysler and GM insisted that they were merely canaries in the coal mine, and that the whole industry was in peril, an argument that got them nowhere. They also made the case that they have some world-class cars, and here they did meet with some success, due in part to the uprising of people who live between Detroit and the coasts, as well as a full-court effort to educate lawmakers, a campaign whose effect was already evident when the second round of Congressional hearings took place.
As for the coal-mine argument, the rest of the industry has been making it for the canaries by coming down with a persistent cough and signs of disorientation. In the interim, one automaker after another has requested — and in many cases been granted — assistance from their home countries: Germany, France and the U.K. came first. Russia levied stiff tariffs on imported cars to prop up its domestic companies, leading to protests in Vladivostok last December at which riot police beat some of the estimated 500 demonstrators. (And you think you hate Pontiac? Drive a Lada someday.)
Need a Cough Drop, My Darling?
If none of that convinces you, Toyota has posted its first loss in history and begun layoffs. On Tuesday of this week, everybody's darling requested a loan from the Japanese government. Today Honda and Mazda followed suit. Bear in mind, Americans, that these are countries that have propped up their domestic automakers all along in ways we don't. At minimum, government-funded healthcare relieves a substantial burden that cripples our "Stooges" especially, because they have been shrinking for years and each of their current workers supports between three and six retirees.
The Detroit Outsider is quick to point out that a company's failure is a company's responsibility, and that's true for the Detroit Three. It's their fault that they've been shrinking. All the same, the situation seems less fair than ever.
What We're Waiting For
While Ford has been working out deals with the UAW and working its debt obligations — smelling even more like a rose than before — Chrysler and GM have been in a holding pattern. They're seeking concessions from the big, bad UAW (which is not the problem) and from their bond holders. The UAW ultimately will do whatever's necessary to stay alive, and have begun to do so. Bondholders, on the other hand, are holding out for more money in a debt-for-equity swap. They've been asked to take a third of the $27 billion owed. A sizeable contingent thinks Chapter 11 will bring a higher return. The foot-dragging has been blamed on the lack of a car czar or task force that the parties were counting on for arbitration. That is scheduled to begin today.
It doesn't matter.
The D.O. knew that Chrysler and GM would be back for more money. The amount requested, though, really spells it out for you. They want $16.6 billion on top of the $13.4 billion already granted. This will not end. You don't need an accountant to calculate what a third to a half of the $27 billion in convertible debts will mean. All the layoffs, closings and UAW concessions amount to a few hundred million here, a couple billion there — sometimes over the course of a year or more. GM is burning a couple billion dollars every month. (Bear in mind that the company's $31 billion loss last year included several months of decent, if not record, car sales before the bottom dropped out.) Even if the car market were to rebound soon, GM would be back for more money, time and again, just to stay afloat. The car market isn't going to rebound soon, for reasons I'll detail separately.
Numbers don't lie. Though people do, sometimes the numbers are so large, no amount of obfuscation can conceal them. I'm reminded of how President Obama helped to break the logjam on the stalled stimulus package. To paraphrase, he pointed out that opponents were holding it up over issues that represented a few percent of all the funds in the bill. Those are numbers that speak to anyone with grade-school math skills. The same is true here. No president wants to sign a major corporation's death warrant in his first 100 days (or his last 100, apparently), and I suspect Obama will continue to sprinkle funds here and there while the players work on a plan that's less likely to trigger the Great Depression II. Ultimately, GM will probably have to face facts and do the right thing: fall on its LeSabre.
Thursday, March 05, 2009
Saturday, February 28, 2009
Wither the Detroit Outsider?
The Detroit Outsider has returned. Occasionally the D.O. will have to go dark, but the timing and duration of this hiatus has been unfortunate. There are reasons the Outsider was gone for two months and returns now. They include one or more of the following.
- The D.O. was involved in complex real-estate proceedings.
- The Outsider has given up sloth for lent.
- The Outsider's real job is even more covert than this one and cannot be divulged. He can't even tell his wife.
- The Outsider's real job is that of a contractor, and this site is merely the alternate universe to which he occasionally vanishes when he's supposed to be finishing your kitchen.
Friday, December 19, 2008
Perspective on the Chrysler/GM Bridge Loans
The Detroit Outsider is amazed by the Bush Administration’s agreement to $17.4 billion in loans for Chrysler and General Motors, mainly because it’s a good plan. It has some fundamental flaws, but they’re flaws that can be addressed and revised by the Obama administration come March.
This agreement is basically a punt to Obama – and that’s exactly what was appropriate and prudent. Doing nothing wasn’t an option, and a broad, sweeping long-term agreement with no foresight into the complexity and dynamism of the industry’s future would have been premature and would tie the next president’s hands – in short, exactly what you’d expect from the current president. His record suggests that he would be more likely to take his ball and go home, or to deflate it and shred it, rather than punt. To be realistic, this is exactly what was best for W, because it makes him the short-term hero at little political or economic cost, and he also holds no responsibility for future failure (which is highly probable). Even this self-interest represents some deft strategic thinking, and that is as unexpected as anything. The Detroit Outsider will go out on a limb and say this is George W. Bush’s finest hour.
Aspects of this agreement are good, some are bad and some are both. What’s good about it:
The funds come from the Troubled Asset Relief Program – the original $700 billion Treasury Secretary Paulson granted to the financial sector, which means a few things: First, no additional taxpayer money has been allocated, which should calm anyone with bailout fatigue. Second, it underscores that this move was primarily to protect the economy, as was the justification behind TARP. Third, it represents a little equity for the working class after hundreds of billions of dollars were thrown at Wall Street with no hearings or public CEO flogging. Finally, it doesn’t rob the $25 billion Department of Energy fund set aside the for the purpose of retooling for more efficient cars. (The Detroit Outsider knows this would have been a moot point if the companies had been allowed to collapse, but at least it looks better and is a reprieve for environmentalists.)
The amount granted is relatively small, $17.4 billion, and will come in two installments starting with $13.4 billion ASAP. This is lower than the original $25 billion requested (later upped to $34 billion), so taxpayer exposure is at least limited. This is partly because Ford is no longer part of the deal. Being in better financial shape and confident that it can weather the storm if the others don’t collapse and shock the system, Ford is wise to distance itself from the two companies in crisis. It bodes better for their image and investment prospects.
There’s no “car czar.” There’s mention of a designee, which presumably is Henry Paulson. That’s a little worrisome, given the TARP’s ineffectiveness to date, but there’s very little time left in his tenure, and at least Bush hasn’t appointed someone who can’t be removed and who might be the wrong person – either a bad pick in general or someone who wouldn’t operate well within a new administration.
Then there are the aspects that are both good and bad:
Threat of Chapter 11: It’s good that the government isn’t ruling out a forced bankruptcy at the end of March 2009 because it pressures all the players into making concessions. If they know that they might end up with nothing, they’re more likely to make the sacrifices necessary for long-term viability. The specter of bankruptcy is also bad, though. For one thing, these companies need private investment. They can’t become viable on taxpayer money and restructuring alone. GM’s investment prospects rise along with federal support. If it appears that the government is committed to keeping the company afloat, investors will see GM as a safer bet. As structured, the agreement is equivocal, to say the least. Then there’s the issue of time and resources. Given a finite loan, Chrysler and GM are being asked to devote resources both toward becoming viable and toward planning for possible bankruptcy protection. Can you do both?
Chrysler is included in the loan: On the downside, Chrysler is a privately owned company with the least assets and the most questionable future, which makes this assistance – though it’s only a loan – even more extraordinary in a capitalist system. On the upside, it once again supports the argument that this is about protecting the industry and thus the economy. The collapse of a U.S. automaker, private or public, would have the same consequences.
Then there’s the bad part of the plan:
The companies must prove their viability at the end of the term or pay the loan back. How does a company that’s not viable pay the loan back? Isn’t it all or nothing? The answer depends on how viability is determined. The term “positive net present value” sounds ominous, but the language suggests that there’s wiggle room here, that there are targets to hit along the way, and that these are also “non-binding in the sense that negotiations can deviate from the quantitative targets…providing that that company reports the reasons and makes the business case to achieve long-term viability in spite of the deviations,” according to a White House summary.
What this boils down to is that important decisions will be made by the Obama administration as this saga unfolds. Obama doesn’t seem to shy away from complexity, which is a good sign, but whether you’re an Obama supporter or not, what he and the industry will now enjoy is more time, and you can’t overestimate the value in situations like this. For perspective, the loan granted to Chrysler in the ’70s came together over the course of 10 months. That was one loan to one company in a much healthier economic climate. That loan was repaid, with dividends. Though it’s frustrating that Bush and Treasury didn’t act immediately, which they could have done (avoiding the Congressional circus), in the interim many questions were asked, Congress educated itself and economic and employment conditions worsened, illustrating to everyone, including reticent taxpayers, why this action is necessary. If the new plan’s $17.4 sounds like a king’s ransom, the three months is a pot of gold. Now the automakers have time, under pressure, to make their case for future viability. If they prove it, the bankruptcy threat may be softened or lifted, inspiring the necessary private investment. The plan is actually very well thought out.
The Detroit Outsider will be dissecting and exploring the many issues over the coming months, including how the government is likely to ensure this plan’s failure. More perspective will come this weekend. Thanks for checking in.
This agreement is basically a punt to Obama – and that’s exactly what was appropriate and prudent. Doing nothing wasn’t an option, and a broad, sweeping long-term agreement with no foresight into the complexity and dynamism of the industry’s future would have been premature and would tie the next president’s hands – in short, exactly what you’d expect from the current president. His record suggests that he would be more likely to take his ball and go home, or to deflate it and shred it, rather than punt. To be realistic, this is exactly what was best for W, because it makes him the short-term hero at little political or economic cost, and he also holds no responsibility for future failure (which is highly probable). Even this self-interest represents some deft strategic thinking, and that is as unexpected as anything. The Detroit Outsider will go out on a limb and say this is George W. Bush’s finest hour.
Aspects of this agreement are good, some are bad and some are both. What’s good about it:
The funds come from the Troubled Asset Relief Program – the original $700 billion Treasury Secretary Paulson granted to the financial sector, which means a few things: First, no additional taxpayer money has been allocated, which should calm anyone with bailout fatigue. Second, it underscores that this move was primarily to protect the economy, as was the justification behind TARP. Third, it represents a little equity for the working class after hundreds of billions of dollars were thrown at Wall Street with no hearings or public CEO flogging. Finally, it doesn’t rob the $25 billion Department of Energy fund set aside the for the purpose of retooling for more efficient cars. (The Detroit Outsider knows this would have been a moot point if the companies had been allowed to collapse, but at least it looks better and is a reprieve for environmentalists.)
The amount granted is relatively small, $17.4 billion, and will come in two installments starting with $13.4 billion ASAP. This is lower than the original $25 billion requested (later upped to $34 billion), so taxpayer exposure is at least limited. This is partly because Ford is no longer part of the deal. Being in better financial shape and confident that it can weather the storm if the others don’t collapse and shock the system, Ford is wise to distance itself from the two companies in crisis. It bodes better for their image and investment prospects.
There’s no “car czar.” There’s mention of a designee, which presumably is Henry Paulson. That’s a little worrisome, given the TARP’s ineffectiveness to date, but there’s very little time left in his tenure, and at least Bush hasn’t appointed someone who can’t be removed and who might be the wrong person – either a bad pick in general or someone who wouldn’t operate well within a new administration.
Then there are the aspects that are both good and bad:
Threat of Chapter 11: It’s good that the government isn’t ruling out a forced bankruptcy at the end of March 2009 because it pressures all the players into making concessions. If they know that they might end up with nothing, they’re more likely to make the sacrifices necessary for long-term viability. The specter of bankruptcy is also bad, though. For one thing, these companies need private investment. They can’t become viable on taxpayer money and restructuring alone. GM’s investment prospects rise along with federal support. If it appears that the government is committed to keeping the company afloat, investors will see GM as a safer bet. As structured, the agreement is equivocal, to say the least. Then there’s the issue of time and resources. Given a finite loan, Chrysler and GM are being asked to devote resources both toward becoming viable and toward planning for possible bankruptcy protection. Can you do both?
Chrysler is included in the loan: On the downside, Chrysler is a privately owned company with the least assets and the most questionable future, which makes this assistance – though it’s only a loan – even more extraordinary in a capitalist system. On the upside, it once again supports the argument that this is about protecting the industry and thus the economy. The collapse of a U.S. automaker, private or public, would have the same consequences.
Then there’s the bad part of the plan:
The companies must prove their viability at the end of the term or pay the loan back. How does a company that’s not viable pay the loan back? Isn’t it all or nothing? The answer depends on how viability is determined. The term “positive net present value” sounds ominous, but the language suggests that there’s wiggle room here, that there are targets to hit along the way, and that these are also “non-binding in the sense that negotiations can deviate from the quantitative targets…providing that that company reports the reasons and makes the business case to achieve long-term viability in spite of the deviations,” according to a White House summary.
What this boils down to is that important decisions will be made by the Obama administration as this saga unfolds. Obama doesn’t seem to shy away from complexity, which is a good sign, but whether you’re an Obama supporter or not, what he and the industry will now enjoy is more time, and you can’t overestimate the value in situations like this. For perspective, the loan granted to Chrysler in the ’70s came together over the course of 10 months. That was one loan to one company in a much healthier economic climate. That loan was repaid, with dividends. Though it’s frustrating that Bush and Treasury didn’t act immediately, which they could have done (avoiding the Congressional circus), in the interim many questions were asked, Congress educated itself and economic and employment conditions worsened, illustrating to everyone, including reticent taxpayers, why this action is necessary. If the new plan’s $17.4 sounds like a king’s ransom, the three months is a pot of gold. Now the automakers have time, under pressure, to make their case for future viability. If they prove it, the bankruptcy threat may be softened or lifted, inspiring the necessary private investment. The plan is actually very well thought out.
The Detroit Outsider will be dissecting and exploring the many issues over the coming months, including how the government is likely to ensure this plan’s failure. More perspective will come this weekend. Thanks for checking in.
Wednesday, December 17, 2008
Waiting for the Other Shoe
The Detroit Outsider is going to level with you: While our fearless leader was in Iraq, lame-ducking projectile footwear, not a lot happened in the charlie foxtrot between Detroit and Washington, DC. Even the D.O. needs an occasional break from wrestling with Ghidorah.
It’s not that there aren’t a million issues to address. Quite the contrary. The Detroit Outsider is anxious to get as much on the record as possible before the situation plays out, if for no other reason than to set the stage for later claims of “I told you so.” (The D.O. is very popular at social gatherings.) What better way to land the position of Car Czar in the Obama administration?
Because this forum is in its nascent stages, I don’t want to remain silent for too long, and even if the government acts, this topic isn’t over anyway. It’s just beginning. So I’ll tease you with a list of topics you can expect in the future, which will read like the soliloquy Kevin Costner’s character delivers in the movie “Bull Durham,” though not as insipid and nauseous.
It’s not that there aren’t a million issues to address. Quite the contrary. The Detroit Outsider is anxious to get as much on the record as possible before the situation plays out, if for no other reason than to set the stage for later claims of “I told you so.” (The D.O. is very popular at social gatherings.) What better way to land the position of Car Czar in the Obama administration?
Because this forum is in its nascent stages, I don’t want to remain silent for too long, and even if the government acts, this topic isn’t over anyway. It’s just beginning. So I’ll tease you with a list of topics you can expect in the future, which will read like the soliloquy Kevin Costner’s character delivers in the movie “Bull Durham,” though not as insipid and nauseous.
- The Detroit Outsider believes that many American cars are worth saving, but that doesn’t mean all the companies are.
- The Detroit Outsider believes the government has the power to fix the American auto industry, but it is more likely to accidentally snap its neck like Lenny did to the puppy in “Of Mice and Men.”
- The Detroit Outsider believes the Detroit 3 CEOs aren’t stupid and that they don’t deserve much of the ire.
- The Detroit Outsider believes pickup trucks and SUVs were a good idea and hybrids a bad one, from a business perspective.
- The Detroit Outsider believes the automakers brought almost all of this on themselves.
- The Detroit Outsider believes America’s approach to controlling fuel consumption would have been foolish even if it had been enforced.
- The Detroit Outsider believes Oswald acted alone, though he wasn’t aware of it.
- More predicates than you’ll see in a semester of grammar and general logic coursework.
- “Everything’s Your Fault,” a play in three acts.
- More third-person references to the D.O., because it still amuses the D.O.
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