Image from flickr user D'Arcy Norman
After today's annual report, I don't think there's any question of GM's staying out of bankruptcy. The company's revenue fell from $180 billion in 2007 to $149 billion in 2008, with the worst crash in the fourth quarter. Car sales have continued to plunge into the new year. The company's current asset position continues to deteriorate by about $2 billion a quarter even with massive Federal injections of cash. With cash & equivalents now down to just over $14 billion, they can't go on this way for much longer. Though no one knows exactly how much working capital the company needs on hand at any time, the estimates tend to fall around $10 billion. Dip below that, and they'll rapidly be catapulted into insolvency.
But don't take my word for it--listen to their auditors:
GM warned last month that its auditors, Deloitte & Touche, could raise those concerns, but the announcement underscored the stakes for G.M. as it sought up to $30 billion in government aid to restructure with a bankruptcy filing.
"Our recurring losses from operations, stockholders' deficit and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern," the company said in the filing.
GM has burned through $13.4 billion in less than six months. What will $30 billion buy us? Another year, at best, with no signs of a turnaround in the market for cars. Autos, like other big consumer durables, are especially sensitive to downturns like this. There's only so much food you can cut out of the budget, but you can certainly drive the 2001 Grand Caravan for another year.
Too, auto companies have a hard time downsizing to deal with crashing demand. They are, in a way, highly leveraged, as Tyler Cowen describes Asian countries:
The usual story is that these nations are "heavily dependent upon exports." But if I may wear my Don Boudreaux hat for a moment (or more), is not the state of Kentucky also heavily dependent upon exports? Is not the Cowen household heavily dependent upon exports? Why is being dependent on exports so especially bad for parts of Asia?
One answer is that Asian exports, which travel great distances, are often consumer durables and such purchases are especially easy to postpone. Services are often more robust.
Another answer is that many Asian producers have chosen high fixed costs in a way that requires steady or rising revenue over time. That is their version of being highly leveraged without taking on much explicit debt. Again a central lesson of this depression will be how many different ways there are to leverage.
Their fixed costs include not just the infamous pension and healthcare costs for retirees, but also plants, environmental liabilities for cleaning up manufacturing sites before they can be sold, and an operating structure that makes it extremely costly to shut down plants for any length of time and then open them up again. If you plan to keep operating the plant in the future, you have to do things like heat the factory to keep the pipes from freezing, and service the machines; also, the costs of reassembling a laid off workforce mount with every month that the plant remains shut down. People will not hang around a dying factory town indefinitely, though the depressed state of the Michigan economy actually does help mitigate these costs relative to a place like Japan.
Though I've been against the bailout, on the grounds that failing automakers simply don't pose systemic economic risks, some of the advocates have made a reasonable argument that it was worth spending a tiny fraction of the TARP funds to get the automakers over a temporary hump. But the hump is clearly, at this point, a rapidly inclining mountain of problems. And given the reasonable assumption that Chrysler will also need repeated future infusions, the fraction of TARP we will spend on these two companies alone no longer looks that small.
There's another problem: how long before having to compete against government subsidized bankrupts forces Ford to jump into line for funds? If we keep funneling money to GM and Chrysler, expect to see Ford at the lending window sometime soon. Their retained earnings borrowings cannot compete with an unlimited well of federal money.
It's time to stop talking about keeping GM out of bankruptcy, and start talking about what measures might be necessary to keep GM as a (smaller) going concern rather than outright liquidation. One thing to look at is warranties: consumers are understandably worried about buying a car where the warranty may not be good in a year. There may be a government role in guaranteeing that coverage.
"One answer is that Asian exports.....are often consumer durables": the clue is in the word "durable".
I would not place any special significance on the fact that the auditor raised a "going concern" flag. Under SAS 59, the auditor is required to include that language if there is "substantial doubt" about whether the company can continue as a going concern. It would be remarkable if the auditor didn't raise that flag in these circumstances. However, the fact that the auditor did raise the flag is not a prediction as to what will or won't happen.
They should completely liquidate Chrysler. I think that's what Cerebrus would do if they weren't being bailed out. There's nothing of value left there, from what I read.
Without any Chrysler sales, presumably some of that volume would go to GM and Ford (and the imports, of course). And it might send a clear message to all involved in restructuring GM that time is up.
NotMyPresident will save you, GM! Bailouts galore!
"One thing to look at is warranties: consumers are understandably worried about buying a car where the warranty may not be good in a year. There may be a government role in guaranteeing that coverage."
Do you mean temporary, as in the gov't guarantees the warranty on those cars that are made during the restructuring period, or permanently, where the gov't guarantees the warranty on all cars made/sold in the US?
If its the former, aren't we given the company some incentive to cut costs by making crappy cars? Sure it will hurt their reputation, but they could get away with blaming it on transition. If its the latter, isn't that a blatant subsidy?
That just made me really hungry
Based on what I've observed from the Obama administration so far, I don't think they're going to let GM go into Chapter 11. I hope I'm wrong.
We get hung up on the word "bankruptcy" let's just say GM is going to go into Banana. While in banana it will be restructured and streamlined and when it comes out it will be a new leaner, meaner, more competative company.
That's my plan.
Mmmm ... bananas and toast ...
I know this type of question isn't exactly en vogue, but could somebody glance over Article 1 Section 8 of the Constitution, http://usconstitution.net/xconst_A1Sec8.html
or any other article or section for that matter, and point out to me where it gives the federal government the authority to give and/or loan tax proceeds to prop up failing corporations? I'm having a hard time with this one.
Noah,
Article I, Section 8, Clause 3:
“ The Congress shall have power . . . To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;
It's kinda broad...
"And given the reasonable assumption that Chrysler will also need repeated future infusions..."
Don't ya mean Chrysler-FIAT?
http://money.cnn.com/2009/01/19/autos/chrysler_fiat.reut/
Think of it: a corporation with the expertise of not just Chrysler but FIAT as well!
jmo says: "...and with the Indian tribes"
Well I guess that means GM is covered through Pontiac but Chrysler and Ford are totally SOL.
Mister Nomer:
Did you have to post that? When Bearded Spock hears that Chrysler is using Fiat money, he'll go ape!
8-)
--CF
mister,
GM now a wholy owned subsidiary of Foxwoods Resort Casino LLC.
Then again:
"The Foxwoods dealers union have also pushed the state of Connecticut to improve the conditions of their workplace. Workers and union organizers pushed to have legislation that would ban smoking on the casino floors of Foxwoods and Mohegan Sun. The sponsor of the casino smoking legislation, state Sen. Mary Ann Handley, D-Manchester, is the co-chairwoman of the legislature’s public health committee. The bill did not pass during the 2008 legislative session. [7]
Currently, the Mashantucket Pequot and the UAW are negotiating on a contract under the Mashantucket Pequot's tribal law.[6] As of December 18, 2008, these negotiations have resulted in at least 21 dealers returning to work following a massive layoff of 700 employees in October 2008."
Am I the only one here who saw the movie Americathon?
Ok, the argument made for spending TARP funds was that it was worth it to get GM over a temporary slump? At the time even the first payment was made, who actually believed that the auto industry was in a temporary slump? I'm betting even housing comes back before cars do.
All automakers are simply going have to become much smaller, for a quite a while.
re: Americathon - No, wiredog - I saw it too. I'm currently waiting for the great weed out, or whatever that marijuana-fest was called.
Mmmm.. I need to put it on my Netflix queue.
Megan,
It seems that you've got your way. GM and Chrysler will die a brutal death as will the American Auto Industry. Ya happy?
It's time to stop talking about keeping GM out of bankruptcy, and start talking about what measures might be necessary to keep GM as a (smaller) going concern rather than outright liquidation. One thing to look at is warranties: consumers are understandably worried about buying a car where the warranty may not be good in a year. There may be a government role in guaranteeing that coverage.
Why should there be a "government role in guaranteeing that coverage"? How would that be any different than guaranteeing any other warranty from a bankrupt company? Oh, right, it's that "stimulate demand" mantra rearing its head again.
So let's just have the government guarantee that nothing we buy will ever break!
Come on Megan. Sheer nonsense. And I say that as someone who just bought a new Chrysler product--ridiculously cheap, and at 0% financing, but with full knowledge of the risk.
Dear Basic Fact,
I can't speak for Megan, but I know that I feel pangs of sympathy for people who will see their way of life change dramatically, but I'll be happy if I don't see mountains of my earnings seized to prop up a dying company just so GM employees can pretend that they're contributing to creating something of value.
The writing has been on GM's wall for a long time. They refused to change (partly through management stupidity, but partly because of UAW stubbornness) and now reality will force them to.
I take hope in the fact that they won't completely liquidate (as Chrysler may), but I don't have any illusions that they'll persist in their current state.
Regards,
--Colin Fraizer
Clay et al,
There is no risk to GM warranties. GM has, last I saw, 170 days of inventory on its storage lots. That's worth 80 billion.
GM spends about 4.5 billion a year on warranty claims. The vast majority of those claims are during the 3-36,000 mile bumper-to-bumper period rather than the 5-100,000 mile powertrain period. So, bond holders have 80 billion in inventory that will sell for 60 billion with a warranty and 30 billion without. They will continue to honor past and future warranty claims.
I guess it's chapter 13 time for GM.
jmo,
Cool. I hope you're right. What about Chrysler? Hopefully I overestimated the risk.
My point is simply that Megan has been wishing for this day to come for months. She thinks it will prove a point. The reality however, is that it will not prove anything. The free market that she talks about doesn't exist now, if ever. There are many reasons for GM's failure which have been elucidated ad nauseum on her blog, among other places, however, what she and her ilk have never admitted is that all of these games are rigged in some way. Toyota got subsidies from Alabammy tax payers to set up jobs in their state (eerily, the per job subsidy ended up very close to the per job cost in Obama's stimulus bill). They set up factories in a state that is so desparately poor that they will allow any company offering jobs to piss on their workers to their hearts content. Taken in the absence of an overall strategy the discussion about GM's survival has simply reinforced the same irrational view that says that GM failed because of its labor policies or because it failed to make cars that people want to buy. These ideas are as bankrupt as the idea that Toyota has been more successful without government favoritism. Really Megan? Really?
There is a worldwide glut of cars, which nobody wants to buy. In this era where a repeat of the Hawley-Smoot tarrifs is a real possibility, it would be great if the United States did NOT lead the way into a world where every country subsidizes its own carmakers, and the world drowns in a bigger and bigger glut of unsold cars. It's fine with me if the government helps individual auto workers stay in their homes, borrow money, or whatever. But this is really the time to say goodbye to GM as a company. I'm old enough to have lived through the 1980-1982 recession, and golly gee, the Detroit automakers were front-and-center in that one as well. The world has so many excellent car companies, with names like Honda and Toyota, and these excellent companies have plenty of plants in America. They also have plenty of VOLUNTARY buyers in America. I hope Obama doesn't give the Republican extremists some LEGITIMATE grounds to complain about him. Obama can try to string along GM, like Bush tried to string along Iraq, and the results will be just as bad.
Regarding Posted by Basic Fact | March 5, 2009 3:58 PM
So, has Scent of Violets so ruined his own "reputation" with ridiculously wrong comments that he pretends to be Basic Fact?
Yes, and if I were an Alabamian I would oppose those bills, just like as a North Carolinian I opposed North Carolina making bribe offers that South Carolina did to get a BMW plant. (In NC, it was the business-friendly state Democrats that made the bribe offers, incidentally, while the minority Republicans complained about it.)
But I don't really get your point. What I care about it my money being wasted. I don't care so much if other states or other countries are willing to use their money to subsidize me. The poor state of Alabama was willing to use its own money to make cars cheaper for everyone else in the world. Very odd use of their money, but I wouldn't complain about it as much as taking my money to make cars cheaper for everyone else in the world.
Whereas GM didn't... so are you saying, BasicFact, that GM hates poor Americans, since they'll set up factories in wealthy US states, poor foreign countries, rich foreign countries, but not poor American states?
Note that those workers and those states would rather be "pissed on" by those jobs than have what they had before, which was no job or even worse.
John,
Making cars cheaper only helps the bottom line. It doesn't make cars cheaper as thats a cost push assumption which doesn't work. If it did, why would Mercedes Benz or BMW receive a premium for their undifferentiated competing product over Toyota for example?
What I'm saying is that the whole capitalist system on the large scale is about who gets more federal subsidies and tax breaks and unfair access to markets. Its all a scam in which Alabammy sells out labor in Michigan for the benefit of Toyota shareholders. Since there is a glut of car producers already, consumers don't benefit nary at all.
After all of this occurs, the "leaders" of the industry, become lobyists or congressmen, or their sons do (John Dingell that means you) and they cut another deal which advantages their big business at the expense of smaller businesses and taxpayers.
I'm not a pro GM guy. I'm just saying that its all a rigged game and those of you who claim it isn't are just deluding yourselves. Given that fact, I think that any argument about saving GM or against it, must be looked at in a larger context, not just at the last 10 years of poor results.
Actually after reading Megan's desperate posts yesterday trying to excuse her Judith Miller-like misreporting, I think the headline is "Megan McArdle Is Toast".
"Since there is a glut of car producers already, consumers don't benefit nary at all."
Are you insane?
jmo,
My point is, they've already benefitted. There's not much more to squeeze out of it, and the inevitable consolidation to follow is certainly not in their interest.
If GM can't survive this recession, that's bad news for a variety of other industries as well. Newspapers and airlines typically have a hard time turning a profit under the best of circumstances. If the automakers current problems are rooted to the fact that there's too many cars out there, what does that say about everything else produced by an economy dependent on conspicuous consumption, waste and no one saving a damn cent? If you're a conservative-libertarian-whatever; and you've been opposed to bailouts on principle alone, you'd best not gloat at GM's demise. Possibly and very likely, your industry is next. Then you can explain how Milton Friedman was right all along to the guy standing in front of you in the bread line.
Yeah those poor Alabamy workers, making $48 an hour.
It's like the Jungle down there!
Please dude, please.
I would love to see GM go into Chapter 11 and get reorganized as a lean and mean Chevy-and-Cadillac machine. I expect it to happen the day after Citi goes into FDIC receivership, i.e. not real soon.
Let's get one thing straight: ripping on GM while imagining the Japanese companies are just humming along is nonsense. Toyota, Honda and Nissan are hurting big-time, too. Imagining that only American companies make SUVs is b.s., too, since Toyota (Lexus) make super-gas-guzzling SUVs, too.
GM's refusal to make changes should be a business case lesson for everyone. Sooner or later reality will refuse to be denied.
Here's a hint, GM: Why do you continue to offer a whole range of cars (some of them competitive with each other), which have to undergo changes every single year? Each and every year all of your many factories have to re-tool to build the same inter-competitive cars, along with new parts and a stream of other changes for each one. Is it too much to, say, roll out the 2009-2010 Buick LaCrosse instead of a 2009 model which you'll fiddle with in just one year and have to re-tool your plant to institute those stylistic changes?
This is a tangent, but... one key reason SUVs became so popular in America is the idiotic design of CAFE fuel economy regulations that (in effect, if not by plan) heavily taxed large station wagons unless they were built on truck frames.
I'm actually modestly hopeful that Obama has enough sensible economists around not to make mistakes quite that egregious with the already-a-marginal-idea carbon cap that's coming, but I certainly wouldn't put it past Speaker Pelosi...
But Ford went before Congress to ask them to subsidize GM and Chrysler. Ford said they'd need no help - as long as GM and Chrysler got help. How can that be?
Hint: This is nonsense:
So yeah, Ford disagrees with this, as do, no doubt, the million or so people employed in various branches of the automotive industry, and the companies dependent on the demand from those workers, etc.
But it's nice to see McMegan at least wave her hands in the general direction of the concept of systemic risk. That's a big conceptual breakthrough.
The only way to save America is to let failed companies go bust. Otherwise, we're going to go down the toilet in a really painful and horrible way.
Nobody's gloating about this, other than the straw man on Basic Fact's lawn.
We can argue about what caused it, the unfairness of modern capitalism, and pretend that "most likely" every industry is "next."
But none of that answers the question of what could be done to save GM or Chrysler. Rather than subsidize the manufacture of more cars that won't be purchased, I'd just as soon get started on tearing them down in an orderly fashion.
I'm much rather pay generous unemployment, transition, and retraining to autoworkers, than to pay them to do make work (not to mention wasting resources, energy, and causing pollution).
“ The Congress shall have power . . . To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;
It's kinda broad...
Maybe it is if you don't speak English and understand what "regulate" means. We seem to have forgotten these days that regulate = to make regular, i.e. to establish rules. "GM gets a bajillion dollars of tax money because we feel like it" is not a rule governing commerce among the several states by any stretch of the imagination. Any congresscritter or execute who claims otherwise is in violation of their Constitutional oath.
GM needs to go bust. Restructure and then reboot. The entire state of Michigan is being stripped down to the studs so why not one of the companies that was working the crowbar. Ashes to ashes, rust to rust.
Ford rules!
All this anger over GM and meanwhile Paulson took the job at Treasury, sold his Goldman stake at the top of the market, avoided paying taxes (due to a law which enables him to defer paying them as long as he holds the money in Treasuries, and then goes on to a cushy retirement worrying about endangered waterfoul. Meanwhile we get live in the ashheap that his fraud helped create. What a great country.
Noah,
"We the People of the United States, in Order to form a more perfect Union...insure domestic Tranquility...promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."
If congress thinks that ""GM gets a bajillion dollars of tax money because we feel like it"" will "insure domestic Tranquility" and "promote the general Welfare" I'm pretty sure the commerce clause gives them every right to give GM as much tax money as congress feels is appropriate.
You may object to how the constitution was written - and that is your right. But it does seem pretty clear on this point.
Noah,
Was Congress's appropriation of vast tracks of land to the Union Pacific Railroad to facilitate and encourage the construction of the Transcontiental Railroad, unconstitutional?
If GM goes, so do ALL the rest of the US auto manufacturers, and all the foreign plants in the US, as well. Does anyone think that the supply chain can stay in business? They will all fall like dominoes, followed by the dealerships, domestic gas stations, tire companies, muffler shops, ad agencies, broadcast television networks(how do they survive on 20% less ad revenue?) ad nauseum. Domestic steel industry? Dead. Aluminum? Shuttered plants make more money selling power back to the grid than actually making aluminum. Has anyone actually thought this through? Bankruptcy? There will be nothing left of the 80 billion in inventory after the professionals get paid. Have any of you actually been through a restructuring? Assets are sold for pennies on the dollar. I would rather see the industry nationalized, along with all the banks, before I would let a catastrophe like this occur.
People here are confusing Chap 11 with Chap 7.
When United went Chap 11 a few years ago, did all of United's airplanes vanish from the sky? Hell, when Enron went Chap 7, were we all suddenly without power?
Chapter 11 is a tool that allows a going concern to re-organize while still operating. Either GM runs out of cash, and doesn't operate, or GM goes bankrupt, and uses the uniquely American tool of Chapter 11 bankruptcy to re-organize while still selling cars and honoring some commitments.
Bankruptcy in America isn't disappearance - it's a second chance.
tsotha: That's actaully very nice.
Robert: Why does all this happen? Because you say so? I think you're vastly overstating what would happen.
If the Big 3 (or 2.5 if you like) all declared bankruptcy; they'd either get protection to reorganize (shed 1/2 to 2/3 of their workers and facilities, and dump their liabilities), or they'd be sold off to entities that would do the same thing. Either way you'd retain a rump auto industry in the US, able to nurse themselves through the recession and with plenty of potential to compete in the future.
They'd still need suppliers, dealerships, etc., all the way through the process, though again many of those would have a tough time of it. That's why recessions suck. They'd need some degree of help, and no doubt they have the political clout to get it, hopefully in useful forms rather than handouts.
The alternative is to send $100 billion a year (or more) to companies as blackmail -- pay up or we'll go away, and then you'll be sorry! And their incentive then is to ... what, suddenly get off the public teat? I don't think so.
Interesting....no mention of AIG by Megan, even though they're burning through cash at a rate which make GM seem like a miser.
secret asian man - Actually, Megan says that GM should reorganize under chapter 13, so let's hear no more of this chapter 11 bullshit. I'm not even sure GM is eligible for chapter 11.
Also, the fact that chapter 11 exists doesn't mean every company can successfully reorganize. Chapter 11 just means there is a legal mechanism to do so, if the business justification exists.
And anyway, companies liquidate in chapter 11 all the time, for a variety of reasons. Nothing requires them to reorganize there.
The $30 billion should be spent on deep, maningful retraining and relocation assistance for former GM workers, coupled with investments in high speed rail, new battery technology, non-corn based alternative fuels, etc.
Let GM go bust, see if a small, lean company can emerge from it, but use our tax dollars to fund new industries that have a future beyond the first quarter of 2010.
Please.
Oh, and the comment about further Govt bailouts ultimately leading Ford to ruin are spot-on.
Let them be liquidated as soon as possible. This union-dominated company deserves to go. I'm proud I've never bought GM cars and subsidized overpaid underqualified union workers.
I find especially humorous that GM and its fellow travelers in Congress believe that Chapter 11 would make people less likely to buy GM products. Two points for you:
1) GM makes garbage. I wouldn't buy a GM product even if the company was performing well.
2) A continuous stream of Congressional bailouts is just as poisonous as Chapter 11 to consumer confidence that GM will be able to honor its warranties and support its products.
To Hell with GM. I guarantee that now that it's been bailed out with my extorted tax dollars, I'll never voluntarily buy its products ever again. Ditto for Chrysler.
Actually, Megan says that GM should reorganize under chapter 13, so let's hear no more of this chapter 11 bullshit. I'm not even sure GM is eligible for chapter 11.
11 U.S.C. 109(e):
"Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 may be a debtor under chapter 13 of this title. "
I now return to my hermitage.
And no one could see this coming? Look, I'm an idiot, I work for a small publishing company with a BA in Communications who got a 2.0 (barely) in economics 101. But even with my small nub of a financial brain I (and everyone in my office) called this the first time the autos came to Washington hat in hand. All you are doing is pushing the inevitable. I was off by 3 months, I thought they would last till June but knew there was no way, given their poor management and stupid union contracts that they would make it past the summer.
And here is the other sentiment from us in the mob. Let them die. Same with Bank of America, AIG and whatever other run company which allow greed and speculation to blind their management. No one seems to understand that we are in an economic transition, the titans of the past are dead, propping them up like some bizarre Weekend at Bernie's episode until the corpses rot away is insane. We cannot get to the new economy while we try and save the wolley mammoths.
There is this seemingly incredible lack of faith in the ability of Americans to innovate and move forward by our government. If AIG fails do they think no one will fill the void? If BoA disappears will not those accounts find their way to other banks, smaller albeit but better run and more fiscally secure. Why is bigger always better in America?
I guess we are getting what we deserve.
What do you mean, they're toast? You mean, because they LOSE $1500 on EVERY car they sell? And I'm hearing folks say that Chapter 11, is the only way. So what have we been doing? EVERYBODY, who's head wasn't up their Obama, KNEW, and SAID that the ONLY WAY for the Auto Companies to SURVIVE, was BANKRUPTCY. And NOW, we're being told by the 'EXPERTS', that Bankruptcy is the ONLY WAY? Who's running things? I'm a LANDSCAPER and I KNEW that there was no other way. How many BILLIONS went down the rat hole? And for what? To keep the UAW afloat. Go into Chapter 11, and reorganize. #1-THROW THE UAW OUT! They don't like it? TOO BAD. It would take about 5 MINUTES, to replace the whole lot of them.
Is there a way to report on the going concern language of an audit opinion that DOESN'T involve triumphantly touting the loss of millions of jobs and an entire American industry? Assuming you feel that millions of people facing an uncertain future is a bad thing of course.
Bonus points if you can do this while assigning blame to all key decision makers, just not the icky blue collar ones. Hell, do that and one could even consider the final product journalism, instead of whatever disgusting chest thumping nonsense this is.
I've asked this in other threads and now I ask it again: does anyone know of any car company that went into Chapter 11 bankruptcy that came back out alive?Because otherwise, anybody who talks blithely of GM "reorganizing " under chapter 11 might as well be talking about centaurs, pink unicorns, and other mythical beasts.
As MM has rightly pointed out, no one is going to buy a $40,000+ product from a car company that just said" We're reneging on our contractual obligations" (A warranty is a contractual obligation). The person who MIGHT buy GM today is certainly not going to buy GM if it declares bankruptcy tomorrow, for good reason.
Under that dynamic, a GM that is pushed into Chapter 11 tomorrow is probably on its way to Chapter 7 and liquidation in 6 months, with assets being sold off for pennies on the dollar and all plants shutting down. Six months after THAT, you get millions of autoworkers looking at foreclosures and street riots.
Now I'm willing to listen to those who say it won't happen like that if such argumentation is accompanied by relevant case studies and reasoned analysis. What I've gotten so far, is "Chapter 11 is a magical pixie dust always leads to leaner, meaner reorganized companies" and "it serves teh evil UAW right". Some better arguments, please.
In the modern times, consumers will not tolerate being forced to buy, or subsidize, products they don't like. It's not just an issue of car features. Many people don't want their kids driving GM cars for reasons of vehicle safety. This is simply the way free markets work. People buy one car, versus another car, for all kinds of reasons. Here's hoping Obama doesn't hitch his star to the Chevy Volt.
I believe Studebaker filed for bankruptcy in the 1930's and managed to survive manufacturing automobiles until 1966.
To Noah Yetter:
'Helping' GM would come under broad Article I powers allowing Congress to tax and spend for the general welfare--this is Congress' most basic and important role. The commerce clause is less on point here, but is also applicable.
http://en.wikipedia.org/wiki/Taxing_and_Spending_Clause
Instead of giving public money to companies which produce cars few people now want, why not force them to re-tool part of the assembly lines to produce energy infrastructure products? For example wind turbines or wave turbines - then sell them at subsidized prices to utilities and private users. In WW2 the car plants retooled to tank, plance and weapon production relatively quickly, why can't they do it now?
Just for fun, let's look at a similar case: Terry Schiavo.
Terry Schiavo did something stupid and her brain stopped functioning. GM did lots of stupid things, and hasn't shown much brain function since then.
Terry Schiavo had enough of her brain function for certain autonomous functions to continue without central direction. GM keeps producing the same cars without regard to whether people want them or not.
Terry Schiavo lasted years past when she would have died without artificial help. GM has lasted years past when it would have died without government help.
Lots of people who are characterized as being stuck in the past thought that Terry Schiavo should have been kept on life support forever. Lots of people who are stuck in the past think GM should be kept on life support forever.
It's time to pull the feeding tube from GM, and let it die a natural death.
Chrysler is dead. Chrysler LLC is not the old Chrysler Corp. Chrysler LLC is what Daimler-Benz did not want. Chrysler has three decent vehicles: the 300M/Charger, Jeep Wrangler (the REAL Jeep), and the minivan. They are not going to recover because they were nothing but refuse to begin with.
GM is bankrupt. GM has been making brain-dead business decisions since the 1970's. GM has no strategy, no focus, no plan. Just lots of uninspiring cars.
Ford may survive. Ford has a good plan and is making good cars. But is it too little, too late?
Chrysler should probably be put on the auction block. GM needs chapter 11. As a last resort, GM and Chrysler could be nationalized, Conrail style. Continued bailouts for these companies are throwing good money after bad.
Ford could actually use a bailout, but the strings attached could drag down Ford like the other two. What if the greens in Congress don't like the next F-150? **sarcasm** I'm sure a hybrid model would go over great among truck buyers.
I'm going to pose a crazy question here: are we worried about GM as a business entity or GM as a political entity?
Because GM the business entity is immaterial in the big picture. If GM goes out of business tomorrow, the demand for cars won't nosedive. The other companies will benefit. You know, the free market and all. If the current problem is that 3 big car manufacturers have way too much infrastructure for the current demand for cars, the market dictates the one should go out of business allowing the other two to survive and prosper. If somebody else wants to pick up some of the pieces, so much the better. I have literally no idea why anyone not owning or working for GM should be concerned about their solvency. That there are millions of jobs connected is a lie. There are thousands of jobs. We are VASTLY overestimating the number of automotive manufacturing jobs there are at stake here.
The others they are claiming are fungible- a dealership in Tuscon can just as easily sell Fords or Nissans if there is such a demand for that cars in the area. If not, having that dealership is just sucking the life out of the more viable neighbors that could be doing better.
Glad to see GM going down in flames. They deserve it, and I'm sure all the GM folks know it. There is a backlash against any company that has their tin cup out, begging for more money. This is why the Fed doesn't want to release information on who their lending to. The recent sales figures for all auto manfactures were down but the Big Three lead the list. Just shows the American public will not be fooled, hate a freeloader, and the Fed is right in their concerns.
Concerning warranty on a new car: a third party is the obvious answer, not the government but an insurance company (Allstate?) or a auto repair chain (NAPA?). You buy the car for $44,000 from bankrupt GM and purchase the 100K miles bumper to bumper warranty from State Farm or GEICO or Mr Good Wrench for another $6,000 So now you are covered, are you not?
There is a simple reality.GM isnt selling enough cars to to employ the number of workers it has employed. They must either sell more cars by lowering the price of their cars thru wage cuts, benefit cuts and reduced executive bonuses;or they must reduce the size of their operations thru layoffs and downsizing of their operations.You can defy the law of gravity only so long before you hit the ground. In the abscence of making one or both of these tough adjustments, it is insane for the govt to send public tax dollars to "save" the auto industry whlie inventories of unsold cars pile up for the indefinite future.Why pay people to build something that the the public isnt buying.
dollar for dollar gm cars are as good as any. they can not compete do to legacy costs and snobs that like to try to push them down. unfortunately bankruptcy makes a ton of sense for gm. they can come back and be better then ever. i am not sure if the democrats have the balls to let them go under. as soon as one pensioner has one small problem because of less pay from a gm pension it will ba all over the news and the obama followers will all want someone arrested.
But if we let GM go into Banana, what are we going to do if a monkey accidentally eats GM while it's in the banana?
My big question is when GM will file for bankruptcy. I own a small (tiny) company that builds machines. GM has asked us to build one that will consume our whole company for two months. If they file for chapter 11 between the time we deliver and the time they get around to paying (typically 60 days) then we are out some major expenses in raw material plus two months of labor that potentially could have been doing something that did pay. On the other hand if we take the job and GM does pay that keeps my company humming along for another few months without any layoffs or cuts. It is a tough choice. Before anyone points out that after chapter11 they will still pay a negotiated portion of their debts, I counter that 35% two years later is not helpful for keeping us afloat now.
Forget about zombie companies, it seems like 99% of ya'll are victims of zombie logic.
Yes, the economic perspective offered by so many of you does have some truth to it. But I don't understand - if the code of economic rules and logic just failed us so monumentally, then how on earth can we be expected to trust our common judgment when it relies on the same code of economic rules?
I just don't understand what insightful frame of reference everyone suddenly developed AFTER the economy tanked - 'everyone's an expert'.
Since when did promoting "general welfare" come to mean stealing from our children to give to incompetents?
Ok, maybe I really am clueless. My husband works for a GM dealership here in Indiana. Yes, the state was hit hard by foreclosures, loss of jobs, etc... He tells me that in Jan for about two weeks everything slowed down. He is a mechanic, there was little work back there and sales dipped. After those two weeks, he said the first thing he noticed was someone came in and bought the new Corvette ZR1, after that sales and service were back to normal. When I go to meet him on Fridays for lunch its business as normal, customers are buying, customers are looking, customers are having service done. Could this just be for some dealerships or is there more to this story? We keep hearing how GM has lost millions of loyal customers. Why aren't we seeing it then?
Here is another quick thought. My father worked and retired from GM. He always said that GM would not do business with a company that was in Chapter 7,11, or 13. They saw it too risky. Are other companies suppose to turn a blind eye to GM woes or should GM be treated the same as they treated other companies?
I hate to say it but they can keep all those tiny litte cars (Cobolt, Aveo, Focus, Fiesta, etc...) I don't feel safe driving in a tin can even if they got 100mpg I wouldn't drive it. I will trade fuel milage for my piece of mind in safety. I had a 2004 Cavalier, I kept it less than 6 months and traded it even for a 2003 Monte. I still have a 2001 Tahoe that I love dearly, no one but my husband or I drives it, not even the kids for any reason. My daily driver is a 2008 HD Diesel. I live on a farm, its a dream to drive with or without a trailer.
I really think it is high time for a quantum shift in the entire automotive industry. Why must we be a yearly cycle of models? Look at airplanes. The workhorse 737 has gone through incremental improvements and has variants, but it has "looked" the same for a decade or more. Frankly I think folks would be very happy with functional, durable and easily repairable vehicles that they could keep for 10 years or more.
When GM fails, it'll take the rest of this country with it. Then, there's no turning back. The next 1/2 century will be interesting at best. Good luck America.
Another answer is that many Asian producers have chosen high fixed costs in a way that requires steady or rising revenue over time.
Of course, all modern economies also require steady or rising revenue over time. It's not the isolated assumption of a few foolish businesses. It's the underpinning of modernity.
There is a simple reality.GM isnt selling enough cars to to employ the number of workers it has employed.
Not true. GM's problem is that it loses money on every car it sells. The trouble is it's costs are too high, due to contracts it signed decades ago with the unions. GM sells tons of cars and trucks. It's still the biggest auto maker on the world. Volume of sales is not the problem and increasing volume is not the solution.
GM SHOULD FILE A CHAPTER 7 AND CHRYSLER SHOULD FILE CHAPTER 7. CHRYSLER HAS CREATED A BIG MONSTER OF A CHRYSLER 300. NO ONE IS LOOKING FOR THOSE KINDS OF CARS ANYMORE. THE BIG V8 GAS GUZZLERS. THE US CAR COMPANIES ARE ON THEIR WAY OUT BECAUSE OF LACK OF FORESIGHT AND BEING GREEDY.
i WILL BE SO HAPPY IF I DONT HAVE TO LOOK AT THAT STUPID BOWTIE ON GM CARS. i HOPE THEY FOLD ALSO.
WHAT A BUNCH OF JERKS!!