Well George W. Bush is donning his Santa Cars hat this morning. This morning he announced a package of $17.4 billion in short-term loans. But he's doing it in a way which allows his successor to yank them all back on March 31, 2009. If Bush were still in office then, he'd no doubt pull back the money. But since Obama will be there instead, we don't know what will happen.
Here's Santa Cars' plan: He'll give automakers $13.4 billion in short-term financing from the TARP and an additional $4 billion could be available in February. But if the automakers are not financially viable by March 31, 2009, all the funds will be returned to the Treasury. What does financially viable mean? Santa Cars answer: "A positive net present value (NPV), which takes into account all current and future costs and can fully repay the government loan."
I am not sure Santa Cars understands NPV. But in simple terms, it means that the government will get back the loan and more -- a premium for the cost of capital and the risk of the loan -- from the the borrowers' future cash flows. By that definition, I can almost guarantee that there is no way for the industry can become financially viable by the end of March.
How so? General Motors Corp. (NYSE: GM) alone burned through $3.5 billion in cash just in the third quarter -- and it's managed to lose $73 billion since 2004. Unless it can complete a restructuring that will leave it with cash generating products, it will have a negative NPV.
And that will leave Obama with a problem -- whether to pull back the loan and watch the industry collapse or to change the deal once he's in office. Now it's time for Santa Cars to get on his sleigh and high tail it out of Washington!Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
12-19-2008 @ 11:08AM
ken said...
Once again a slanted liber personal opinion of Peter Cohen the has been.
12-19-2008 @ 12:02PM
Dan Barnett said...
No Ken,
Sheldon Liber, not Slanted Liber.
12-19-2008 @ 3:26PM
DOUG said...
BUSH WANTS THE AUTO WORKERS TO TAKE A PAY CUT. I ASKED MY BANK TELLER AT BANK OF AMERICA IF SHE HAD TO TAKE A PAY CUT AFTER THEY GOT THEIR BILLIONS, SHE SAID NO. DID ANY OF THE FINANCIAL INSTITUTIONS EMPLOYEES HAVE TO TAKE A PAY CUT? THE GOVERNMENT IS TRILLIONS IN DEBT DID THE SENATE OR CONGRESS OR PRESIDENT TAKE A PAY CUT?
12-21-2008 @ 10:45AM
Sheldon L said...
I think he meant slanted liberal, but thanks for your support Dan...
;-)