With $13.4 billion of government money already in their pockets from last year, General Motors Corp. (NYSE: GM) and Chrysler are about to get another $7 billion. And this is before they even present their plan for viability. They're not really viable businesses, otherwise they wouldn't need our money. But GM and Chrysler, which face a deadline to present their plan today, are going to get the next $7 billion regardless of whether they meet the deadline.
Why? The choice is simple: Either let GM and Chrysler file for bankruptcy, which would likely add hundreds of thousands to the unemployment ranks, or give them 0.07% of the $10 trillion that we've thrown at the banking system with no Congressional approval since last September. Meanwhile, with the formation of the President's Task Force on Autos (PTFA), there is no way that it could have reached a decision today on the $7 billion loan even if GM and Chrysler met their deadline.
And while they will file some plan today, it will lack agreements with the two most important stakeholders -- unions and bondholders. These two stakeholders are at war with each other to meet targets to reduce debt and labor costs. One target puts auto companies on notice to make 50% of health care trust payments in stock rather than cash. Another requires them to slice unsecured debt by two-thirds by swapping debt for equity. And the companies need to match the labor costs of Japanese automakers with U.S. plants.
The bondholders think that the ball is in their court. They are resisting taking 30 cents on the dollar for their holdings because they believe that the government will not wipe them out completely by forcing GM and Chrysler into bankruptcy. At stake for GM is $28 billion in unsecured debt and $20 billion that GM has to pay into the health care trust. Chrysler meanwhile has about $9 billion in mostly secured debt and an obligation to pay $9.9 billion into the health care trust.
In short, the problem is nowhere near being solved. And as I suggested last night on MarketPlace, with the number of stakeholders involved from the industry and PTFA, a solution is tough to see unless a miracle happens and people suddenly start buying GM and Chrysler vehicles.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
2-17-2009 @ 8:16PM
Dale Matthews said...
I think they should take a pole on how many will buy there product if they get another bailout then a pole on how many will buy there products if they go bankrupt I,ll bet there would not be much difference
Dale Muncie In.
x gm worker
2-18-2009 @ 6:27AM
Dean said...
It is mathematically impossible for either GM or Chrysler to sell enough cars to ever repay this debt to the government, EVER!
I have been loyal and have bought american cars for thirty years, hell I own twelve cars right now, ALL AMERICAN.
The car business is a global market, with many good choices, and American car makers have been asleep for the last thirty years and have lost market share. They belong OUT OF BUSINESS. New car American companies or a company will emerge from the wreckage of this modern day debacle of making and selling cars.