Will The White House Save GM?

By Jason Simpkins

The U.S. government is looking for ways to facilitate a merger between General Motors Corp. (GM) and Chrysler LLC, in the hopes of keeping the once vibrant industry afloat during a time of crisis. But Uncle Sam’s credit card is close to maxed out and a bailout for the auto industry could open the door for other troubled industries to come calling.

Detroit’s “Big Three” automakers – GM, Chrysler, and Ford Motor Co. (F) – are in need of government assistance after being pushed to the brink of bankruptcy by slumping sales and increased foreign competition.

GM has been in talks with Cerberus Capital Management LP about buying Chrysler since September. But GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left GM with few options other than appealing to the government.

GM spokesman Greg Martin said Monday that the company has asked the U.S. Treasury to broaden recently passed legislation, intended to bolster banks and financial institutions, to include auto companies.

“We believe the federal government should consider using all the tools available to it, including some recently enacted, to support industries that are in distress and that are essential to the U.S. economy,” Martin told the New York Times.

Earlier this month, Congress gave the Treasury Department the authority to spend up to $700 billion to take equity stakes in ailing financial institutions and buy up troubled assets. While automotive companies would not be eligible for cash injections, the government could end up purchasing bad auto loans from the financing subsidiaries of Detroit’s automakers, an anonymous source told Reuters.

Meanwhile, the Energy Department could release $5 billion in loans to GM to help it finance the merger. The money, according to The Wall Street Journal, would come from the $25 billion approved by Congress last month to help domestic manufacturers make more fuel-efficient cars.

The White House Tuesday confirmed that the Bush administration has been in talks with GM.

"I can tell you we’ve been in contact with automakers, GM and others," said White House spokeswoman Dana Perino. "And beyond that, I’m just not able to comment on any of those discussions."

GM desperately needs funding, as the company lost $18.8 billion in the first six months of the year, and is hemorrhaging about $1 billion in cash each month. That has raised the prospect of bankruptcy for the company. GM had $21 billion as of June, but a merger with Chrysler would give the company access to another $12 billion in cash.

Should any of Detroit’s Big Three go bankrupt, the consequences for the U.S. economy would be severe. Together, the companies employ more than 200,000 Americans, and support millions more U.S. workers indirectly through suppliers and dealerships, The Times reported.

The unemployment rate hit 6.1% last month and continues to rise. Some analysts anticipate the jobless rate could climb as high as 8.5%-10% next year. With a jobless rate that reached 8.7% in September, Michigan has the highest unemployment rate in the country.

Original post

Comments

[rh13:]

"Merging with Chrysler would give the company another $12 billion in cash." How, exactly? Cerberus would give GM $12 billion as a goodwill gesture? Wouldn't the merged company have an increased need for cash? Doesn't Chrysler need cash? Will Chrysler's cash needs be subordinated after the merger? Won't the integration of operations require investments? I doubt that the merger would give GM any cash. In fact, I think it would go the other way; GM would need more cash.

2008 Oct 30 10:42 AM

[Paul Killinger:]

I used to think Daimler was the dumbest company in the world for buying Chrysler. I was wrong. They look like geniuses now for getting out with ONLY a 50% loss.

2008 Oct 30 05:48 PM

[Ames Tiedeman:]

Ford is in bad shape. I am not sure how they are going to regain their lost market share. Their cars are just not up to the task. Quite sad for America.

2008 Oct 30 06:17 PM