Bailout Countdown

One of the big dates on the US Auto calendar this year is March 31.  That’s the current deadline for GM and Chrysler to sort out their relationships with the various stakeholders in their future solvency.  Whether or not that deadline will be extended (this is my current favorite reason why it will be) is a matter of speculation, but the fact remains that the next 14 days will be critical for the future of the industry.  All of the other issues that the industry has (crumbing market share, deterioration of brands, meeting changing government regulations, volatility in oil prices, etc…) are all secondary until we find out what happens on March 31.

What are the possible outcomes?

Well, Congress could authorize some sort of loan.  This didn’t happen the first time the Big Three CEO’s traveled to Washington.  You could argue that they would have stood a better chance if they hadn’t flown in as Brahmans in corporate jets with their hats turned up to catch some of their presumed portion of cash flowing from the treasury fountain.  Instead they were soundly rebuked.  When they returned, ironically as we’ll see in a minute, all driving hybrids all the way from Michigan and bearing plans detailing their approach to returning to sustainable profitability, they were denied again but got a reprieve when congress authorized  a loan from a fund originally intended to fund research into fuel-efficiency technologies – there’s  the irony!

Another possibility is that the GM and Chrysler somehow, miraculously produce a plan and come to agreements with their stakeholders (bond holders, the US Government and their own labor unions) that allows them to stay in business WITHOUT further government assistance.  I haven’t found anyone willing to say that that will happen, although GM didn’t need a $2B bridging loan a couple of weeks ago, which was a nice piece of PR for them.  It remains to be seen what Ford will do going forward since they haven’t yet received any government funding.

And then there’s bankruptcy.  Rick Wagoner thinks that Bankruptcy would be far more expensive for the American taxpayers than other options and there were a couple of articles (one from the WSJ and the other from Nationjournal) that I came across today with that discussion.  Wagoner reiterated his opinion that bankruptcy will seriously undermine consumer confidence in his brand.  Robert Lutz, the retiring GM Vice Chairman of Global Product Development, has admitted that the brands (specifically Pontiac and Buick) are already damaged.  Well, it probably wouldn’t be good to damage them any further then since sales figures are currently at levels not seen since the early 80’s.

Still, Edmund’s Editor-in-Chief Karl Brauer proposed last week that the protections afforded by a traditional bankruptcy could be positive for GM.  I won’t go into all of the details of the WSJ piece (but it’s a good read) and will just point out that many US taxpayers (myself included) have taken a bunkering down approach to the current economy.  Consumer spending and confidence have decreased and we are wary of taking on future national debt to prop up industries that we aren’t sure can survive.  We look at bankruptcy for GM as a way to wash our hands of the situation and ask them to hash it out alone.

The problem is, says Wagoner, that it doesn’t work that way.  I think we can all assume that a bankruptcy at GM (once the largest company in the world) would be complicated and expensive.  Part of the Chapter 11 process is what is called Debtor-in-Possession financing (DIP) which can only be provided by the government (because who else would lend money into such a situation?).  So much for washing our hands of GM and getting on with our lives.  Mr. Wagoner goes on to admit that he expects that GM will require billions (that starts with a “B”) of dollars of additional capital (so much for returning to profitability in the short term) over the coming year(s) to survive, but the DIP situation as well as the fallout to the huge network of suppliers that depend largely on GM for survival would be worse, according to Wagoner.  So, I guess we’re all on the hook at least to some extent and might want to start rooting for GM.

Still, GM admits that it needs to eliminate brands, close some plants, layoff still more workers while renegotiating the contracts of workers that are retained, and secure concessions from bond holders (one current proposal is to swap equity for debt, which is a tough sell at current GM stock values) in order to persist.  Whether we call it “bankruptcy” or simply carry out a structured reorganization and call it something else (as Karl Brauer suggests) becomes an interesting question.

As I said, it will be an interesting 2 weeks.