Come Tuesday, and Rick Wagoner will be called a saint by some, a sinner by others. Because he will have decisively crossed the restructuring threshold by abandoning work on any further solutions and by leaving the fate of General Motors (GM) in the hands of the Obama Administration. In fact, Mr. Wagoner may be bold enough to sign off on his plan and confront Congress without a comprehensive agreement with the United Auto Workers.
The consensus opinion, founded in hard financial analysis, is that the government should steer GM into a “managed” bankruptcy. But the powerful pro-union lobby inside the Democratic Party is already suggesting that, given the deterioration in economic conditions since GM received $9.4 billion in aid, an additional $4 billion is more than justified. That, a Michigan Congressman told CNN, “will give GM time to work out viable arrangements with the UAW and with its vast dealer network.”
Few doubt that Mr. Wagoner’s restructuring proposals will be conditioned, expressly or implicitly, by potentially worsening conditions in the second half of this year---meaning, requests for more bailout funds will not be categorically ruled out. “If you look at GM’s financial forecasting models, the company is bankrupt,” said a researcher at Barclays Capital. Barclays cut its price target for GM to $1 last November, shortly after Deutsche Bank declared that GM shares will be worthless within a year.
Of course, Wall Street analysts are constructing GM’s future performance from regulatory filings, from the recent collapse in sales and from gloomy predictions of the car market well into 2010; the contents of the Wagoner restructuring plan are still a closely-guarded secret. In any event, according to one GM insider, “the company’s management has done its best to ward off bankruptcy, it can do nothing more, and the ball is now squarely in the court of the Obama Administration.”
The UAW, which is owed a staggering $20 billion in healthcare for retirees by GM, is bound to hit the airwaves early Tuesday with an abundance of doom and gloom. Estimates of job losses, in the event of a GM bankruptcy, range from two to nine million, depending upon whom one asks. In fact, UAW loyalists in Detroit are already talking about the failure of the entire $787 billion stimulus legislation unless a minimum of $4 billion is made available to GM immediately.
If only from a political perspective, it is difficult to see the White House allowing GM to enter a court-supervised reorganization in the near-term. But that is no reason for GM’s shares to be trading anywhere near Friday’s closing level ($2.50). Under one scenario, continuing government assistance will ultimately create unprecedented dilution for existing shareholders. In the alternate scenario, even the Michigan delegation in Washington will be forced to say “enough is enough”, and the advocates of bankruptcy or nationalization will no longer be deemed to be mortal enemies of American workers.
Short-GM trades turn into a no-brainer when the other, most fundamental of issues are considered. Firstly, to use plain language, Detroit is no longer competitive. Secondly, no credible analyst can testify to the financial prudence of manufacturing green cars, at least not yet. Thirdly, even granting that the most-recent stimulus legislation will move cash into the economy at an early date, it is ridiculous to assume any substantial rise in demand (even from current lows) for new cars for many months into the future.
Whatever solution Washington determines for GM, a public relations barrage is almost inevitable. GM shares may make another run into the $4-5 range. So be prepared to phase out shorts; there is no need to be cautious and pay for option contracts. The risk-reward profile in this instance is very compelling indeed.
Disclosure: Short GM.