Nine Bailout Surprises from GM and Chrysler

 |  Includes: F, GKM, GM
by: Rick Newman

Back in December, economist Mark Zandi of Moody’s told Congress that bailing out the Detroit automakers could ultimately cost $75 billion to $125 billion. So when GM and Chrysler asked for a mere $17.4 billion late last year, it seemed like a bargain.

Then GM got another billion or so as part of a bailout for its car-financing arm, GMAC (NYSE:GKM). And now, GM and Chrysler have asked for almost $30 billion more from a variety of programs, pushing the total for just these two companies close to $50 billion. That doesn’t include Ford (NYSE:F), which many analysts think will end up asking for nearly as much federal aid as GM.

Surprised? Get used to it: Deepening gloom has become a recurring theme of Bailout Mania, as troubled firms dribble out their bad news in droplets and everything turns out worse than expected. Here are some of the major surprises contained in the “viability plans” submitted to the government by GM (.pdf) and Chrysler (.pdf):

Both need way more money than previously acknowledged. In its 117-page viability plan (.pdf), GM says it expects to burn an astounding $18 billion in cash in 2009, one reason it may need a total of $30 billion from the government by 2011. Chrysler says it will have to declare bankruptcy by March 31 if it doesn’t get an extra $11 billion in government aid, for a total of more than $15 billion. At this point, it seems prudent to assume that they’ll need billions more after that.

GM’s best-case scenario looks a lot like bankruptcy. Even if GM doesn’t declare bankruptcy, its shareholders will nearly be wiped out: The automaker would grant many of its bondholders equity in exchange for debt, and the government would expand its ownership. Those moves would severely dilute the value of GM shares. Standard & Poor’s forecasts that the value of GM’s shares will fall to 50 cents within 12 months – its lowest possible price target.

GM is seeking other bailouts. GM’s biggest problem is that its North American operations have been losing money for years. But it turns out GM’s global operations are doing worse than expected, too. GM is now forecasting a gigantic $14.2 billion pretax loss for 2009, which Credit Suisse analyst Chris Ceraso says “is more than twice our current forecast of a $7.0 billion loss in 2009.” The shortfall mostly comes from worse-than-expected results in Europe, Asia, and other regions, one reason GM is also seeking up to $6 billion in aid from the governments of Germany, the United Kingdom, Sweden, Canada, Thailand and possibly other countries.

GM is slashing its portfolio of 8 brands. Critics have been urging GM to do this for years, and GM finally seems to be listening. The Hummer division has been on the block since last year, and GM now says that by April it may decide to phase out the brand altogether if no buyer surfaces. Saab is now officially for sale, too, and GM will shut down Saturn by 2011 unless somebody materializes to buy it. Pontiac will become a “highly focused niche brand.” That leaves Chevrolet, Buick, Cadillac and GMC as GM’s core brands.

GM’s pension is in trouble. A healthy pension used to be one of the few bright spots for GM: In 2007, its pension was overfunded by $20 billion. But the plunge in the financial markets has decimated the pension fund, now estimated to be facing a $13 billion shortfall. If the pension doesn’t recover, that could necessitate yet another federal bailout down the road.

Five years of pain. If GM gets all the help it’s asking for, it expects to break even by 2011. That’s under a fairly pessimistic assumption that annual car sales will amount to 12 million, 30 percent below peak sales of about 17 million in 2006. GM doesn’t expect to have “free cash flow,” another important sign of health, until 2014.

Chrysler admits its prospects are weak. In its own 177-page viability plan (.pdf), Chrysler says it can stand on its own for awhile – as long as it gets another $11 billion in government aid, on top of the $4 billion it’s already received. But “to be viable on a longer term basis,” the company says, “we believe it is critical that Chrysler continues to pursue strategic partnerships/consolidation.” In other words, Chrysler’s days as an independent automaker are numbered, unless the Obama administration wants to make it a permanent government agency.

The Fiat deal is a fig leaf. A few weeks ago, Chrysler announced plans to partner with the Italian automaker Fiat (FIATY.PK), as a way to get quick access to small-car technology and expand its global reach. But that deal “is contingent upon Chrysler restructuring its debt, obtaining concessions, and receiving adequate government funding.” In other words, the U.S. government needs to finance a deal in which an Italian company puts up no cash and gets access to U.S. markets, so it can compete with … other companies that American taxpayers have just bailed out. That’s a mighty tough sell. And Fiat isn’t even Chrysler’s first dance partner: Chrysler's plan makes clear that it would prefer a deal with GM, and failing that, Nissan (OTCPK:NSANY).

You can kiss your money goodbye. Chrysler’s plan says that if the firm is forced to liquidate, “first-lien” lenders would get back about 25 percent of their money, while the lowly American taxpayer would only get back about 5 percent of the $4 billion they’ve already given Chrysler. So in less than three months Chrysler has devoured its first round of bailout money, and we can’t expect to get it back unless we dole out more money. Now there’s a deal you couldn’t possibly refuse. Or accept, for that matter.

Disclosure: no positions