Posted on 12/04/2008 12:46:12 AM PST by Thorin
The carmakers got hit by the unfortunate combination of the credit collapse, the surge in oil prices, and the recession. At some point, the recession will be over and there will be a great, pent up demand for cars. The goal is to make sure the American automakers are in a position to meet that pent up demand, which they won’t be if GM goes bankrupt. Ford knows that, which is why Ford is supporting GM, even though it doesn’t have the same immediate need for cash. I believe ensuring the survival of an American auto industry is in the national interest and worth taking the risk represented by those loans. There is no guarantee the loans will work, but the alternative is far worse in my judgment. But the Big Three have been restructuring and have presented a credible plan for further restructuring.
No, I don’t think there’s some conspiracy here. Just a lack of disclosure, and a possible violation of SEC regulation FD.
What else they can do is go Chap11 now, with a government backstop on their most important liabilities: warranties, bonds and suppliers. Then they go into a furious round of cost-cutting.
There is simply no way that their bailout plans are viable. They completely ignore the fact that the US consumer isn’t going to buying their cars or anyone’s cars. Therefore, in the next two years, they simply must shed cost. Their ideas in the bailout plans to shed costs are simply not going to cut it - and quite frankly, they’re completely lacking in detail how they’re going to accomplish these cost-cutting measures.
First, the combination of credit collapse, high oil prices and recession aren’t an unfortunate combination. They were a predictable combination. America has always had a recession or darn close to it whenever there has been a shock in oil prices - since we started depending on oil.
The credit collapse was seen going back to 2005 by astute analysts, and the auto company execs should have taken note of how many people were using HELOC’s on houses with 0% down. A HELOC on a house that was bought with 0% down is a loan made on completely ephemeral “capital,” and isn’t sustainable in the long run.
But they didn’t pay attention.
They could see that they were bleeding cash back as far as 10 years ago. But they refused to get aggressive and chop as hard as they needed to while they had cash to survive.
Go back and look at the history of credit downgrades on auto company bonds - and you’ll see the outside market had a pretty grim assessment of the auto companies all the way back to 2003. I used to own GM and Ford paper back in 2003 - it paid me over 8% YTM and I held it back then because I did the homework on their balance sheets to see that if I held five-year paper in 2003, I’d be clear of the wreck I anticipated would happen by 2010. The only change in the glide path due to the credit collapse in my analysis was to move the date at which I would lose my principle in from 2010 to late 2008. My last note paid off in June of this year. Yea, I’m pretty lucky, but as I said, I did some homework before sinking that money into the US auto companies.
So, before people here start huffing “Oh, you just want them to die” — I’ll say for the record that I put up six-digit sums of money to show that I believed in them back when they started the turn-around plans. I loaned them MY money - not the taxpayer’s money. MY money.
As we got into 2007, tho, I was getting genuinely concerned that the auto makers simply “didn’t get it.”
Now I’m absolutely convinced that they don’t “get it.” Their management needs to be fired, post haste, because if I, a bond investor in GM and Ford could see this turn of events coming down the road in 2003, and I was in the middle of the sagebrush of Nevada at the time, then there’s something really wrong when the execs who are right there can’t see the problems right there on their own 10-K’s.
You’re making a completely unfounded assumption that there’s going to be a pent-up demand for cars when we get out of this.
People may WANT a new car, but with tighter (much tighter) credit standards (from GMAC included, BTW — a FICO score of 700 is a significant departure from their past credit qualification criteria) they’re probably not going to be able to afford a car.
“The” thing that people are just not getting here, in the macro sense of the US economy, is that guys like Fisher, Minsky, et al, who wrote about debt deflations and chained debt collapse, were on to something. We were able to kick this can down the road a long, long way, with ever greater funding from off-shore, the Fed and so on, but now the piper is calling his due. There’s no way out of this now.
The great credit-financed consumption spree is over.
Supporting the US auto industry (among others) is a Good Thing - but let’s be honest with ourselves here. Just as the investment banks went away because their business models no longer made sense, so will the current auto companies. If we push them into Chap11 and start cutting, we can create an auto company that will be able to compete when the economy finally turns around.
Leave them as they are and keep pumping in money that allows them to dawdle and delay on doing what is necessary, and when the economy turns around, we’ll have companies that still won’t be able to compete.
“What else they can do is go Chap11 now, with a government backstop on their most important liabilities: warranties, bonds and suppliers. Then they go into a furious round of cost-cutting.”
That’s a possibility. But it looks like, from today’s hearings, there will be a loan bailout outside of Chapter 11, as once in Chapter 11 they could be stuck there forever. Well, it will be interesting to see what comes out of this tomorrow, if we find out tomorrow.
“You might also appreciate this article: http://www.takimag.com/blogs/article/whats_good_for_general_motors_is_still_good_for_america/";
Thank you Thorin. I indeed did appreciate this article as this guy is saying almost exactly what I have been saying on these threads. In fact I will probably quote parts of it in future comments on threads. Thanks again. You made my point for me through this article, and I thoroughly enjoyed reading it.
The criteria for exiting Chapter 11 are easy and obvious. Companies go into Chap11 and exit it all the time. The ones that don’t are the ones that should eventually simply go out of business forever - eg, pick any US airline other than Southwest.
What are the criteria for exiting Chap11? Simple: showing the BK court that you are:
1. Solvent - not just as a mere blip from an angel pouring in cash, but able to fund your operations through internally generated cash flow.
2. That you’ve quieted past creditor claims.
3. That you have a business plan that does not depend upon the largess and faith of your creditors going forward - ie, that your present and future creditors are now expecting to be paid timely, not having to be strung along to get their payments.
Once the court is shown these things, then the company is typically allowed to exit.
People keep acting as tho Chap11 is a graveyard. It isn’t.
Chapter 7 is the business abattoir, morgue and graveyard for the remains.
Chapter 11 simply buys breathing room. It isn’t the end of the line.
The failure of the Big Three to enact Chapter 11 now, before it is too late, practically guarantees that at some point, when the bondholders, suppliers providing credit and other claimants grow weary of their non-performance, some one (or more) of the creditors will haul the auto companies into court and demand (and get) Chapter 7: a dissolution and sale, with creditors paid off at dimes on the dollar.
Or it could happen as a result of a chain reaction - a failure by the Big Three to pay their suppliers results in a supplier filing Chap11 or 7. And at that point, the BK court for that company can come after the auto companies for payment of receivables. And the auto companies better cough it up at that point, because their bankruptcy filing will be in the judge’s left hand, while he has his right palm outstretched, demanding payment.
This one point I want to drive home to everyone who persists in the idea that somehow, if we’re just fuzzy-cuddly enough and “care” enough about Americana that we can rescue the Big Three: nope, that is not how things will work here. The high rate of credit-financed vehicle sales are NOT coming back - any more than the housing valuations at 6 to 7 times median household incomes. What you’re seeing is a debt deflation in the US happen. The last time we saw this in earnest was the 1930’s.
Here’s a paper I highly recommend people read:
http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf
It isn’t filled with economics gibberish, or complicated mathematics. Rather, it is a breezy review of prior economic collapses in the US based on over-production propped up by debt-financed consumption. The point I want to make to people is that “we have been here before.” And NOT just 1933. 1873 is frequently mentioned in Fisher’s paper there - because it was the previous “big” collapse - again, financed by debt. In many ways, this collapse bears more parallels to 1873 than 1933 - real estate, government interference and bonds were at the heart of 1873’s collapse.
The Big Three need to slash, with a chainsaw at full throttle, as much fixed expense as possible. US auto sales won’t be going back to pre-2007 levels for a long, long, long time. They need to admit the truth to themselves, get their cash flow cut back to what it takes to service the future market, and get lean, fast.
“The Big Three need to slash, with a chainsaw at full throttle, as much fixed expense as possible. US auto sales won’t be going back to pre-2007 levels for a long, long, long time. They need to admit the truth to themselves, get their cash flow cut back to what it takes to service the future market, and get lean, fast.”
They will be doing this but with an oversight committee or an individual oversight person outside of bankruptcy court, according to the gist of the hearings today. As long as Obama is in office, the Big 3 will be given a loan bailout because he owes the Unions for helping bigtime in getting him elected.
If they went into Chapter 11, they would end up in Chapter 7 in no time flat as no banks would give them bridge loans to keep going. It would only work with guarantees from the gov’t to back warranties, health benefits, etc. Either way you do it, the taxpayer will get hit in the nose financially. If they go bankrupt, tons of people will be out of jobs and on unemployment with many a mortgage foreclosure to follow, and the ripple effect throughout the economy will trash our already fragile recessionary state of affairs.
The other reason the gov’t isn’t going to let the auto companies fail is because during wartime they provide the manufacturing capability to produce our wartime machinery and vehicles. Who would you entrust this to if our U.S. car companies fail? Toyota? Kia? Also, the Big 3 are squawking that the gov’t bailed out the banks and those weren’t even loans, just free handouts of money. So there are the implications of the gov’t bailing out the white collar workers but not the blue collar ones. Will be interesting to see what decisions will be made here. The GAO (gov’t accounting office) also said that the Federal Reserve could bail out the auto companies without going through Congress for authorization, if they wanted to. We will know shortly what will happen, won’t we.
First, the government could be the lender for the bridge loans - AFTER they go Chap11. I want them in Chap11 so that it isn’t the Congress appointing some union hack as the “oversight” on spending cuts. They need someone who isn’t beholden to either management or the UAW in there making the cuts.
Second, if the Congress backed the liabilities after the Chapter11 filing, then the companies could be run by a court appointed special master, because the creditors won’t be able to run the company as “debtor in possession.”
As I keep saying, Chapter 11 is a tool that buys time. The longer they put it off, the more certain a Chapter 7 is. And I’ll explain it to you one more time: Bailout or not (because the amount of money they’re asking for is completely insufficient, esp. in GM’s case) - if a creditor deems their payment schedule insufficient or the failure to pay timely causes a creditor to go into their own bankruptcy, GM is headed for bankruptcy, whether they want to go there or not.
Since even now, at this late hour, GM isn’t being honest and fully forthcoming with the public, Congress or their own creditors, they’re begging for someone to take them to BK court. Just begging.
There are only two choices for GM (and Chrysler, but especially GM) here: a bankruptcy on their terms, or a bankruptcy on someone else’s terms. There is no third door that says “no bankruptcy at all.”
Lastly: the US auto companies now have no significant involvement with the defense industry any more. Those days are long gone, for two reasons. First, the auto companies can’t and won’t devote significant chunks of their manufacturing facilities to contract-based equipment. Why? Because the UAW won’t own up to the fact that when the contracts end, the employment ends. Taking on a defense contract is as good as putting your head in a labor cost noose from the Big Three’s perspective.
Second, the level of technology and integration in modern defense systems, not to mention the level of tooling, effectively means that unless you’re planning on bidding on one contract after another, you’re no longer in the defense game. This isn’t like building Jeeps or some other piece of purely mechanical, throw-away equipment any more. We don’t just build M1 Abrams tanks or Bradleys and push them into a scrap heap when they wear out. They come back into the contractor and are completely refurbished and up-fitted with the latest C3I systems, and then re-issued. There is no scrap. The difference between weapons systems now and 60 years ago is night and day.
Who do I trust to produce our material for war today? Defense contractors: FMC, Boeing, Lockheed-Martin, General Dynamics, Hughes, etc.
Not GM.
And that’s pretty much the way GM wants it too — after all, they sold GM Defense to General Dynamics in 2003 (for about 1.1 billion bucks). GM is now out of the defense industry except for peddling SUV’s and fleet vehicles.
Look at a list of the top 100 DOD contractors. Where are the Big Three? Nowhere on the list.
BTW - I found a very recent Chap11 filing analysis for your consideration: Pilgrim’s Pride Corp:
http://www.wattpoultry.com/PoultryUSA/News.aspx?id=28672
NB that a bank did supply a bridge loan - once they were in Chap11.
There isn't enough money on the entire planet to 'save' them.
L
The govt oversight board they are discussing is the absolute worst idea yet. Once the govt controls the restructuring it will be political and not economic. Do we really want our auto makers building Yugo's?
The only way the hard decisions get made is with a real threat of extinction. So far they aren't ready to make those hard decisions. Instead they just keep trying to raise the fear level to get bailed out.
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