Nine Bailout Surprises from GM and Chrysler

Back in December, economist Mark Zandi of Moody’s Economy.com 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 (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 (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 (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

Comments

[deflation r...:]

I was expecting to be surprised.

Feb 19 06:23 AM

[PeteK:]

Four months ago, it was called a "Black Hole."
Now it has become a super Black Hole.
The Giant sucking sound just get louder and louder.

Feb 19 06:33 AM

[atlasman:]

Nothing a simple CH11 cannot fix. It worked for the steel industry and airline industry (multiple times), it will work for the car industry. Government ownership is by far the worst possible solution.

There is this arguement that CH11 would decimate sales as people would avoid car companies in CH11 for fear of warranty and resell price issues. I got news for Chrysler and GovernmentMotors, they are already in this state and people will continue to avoid them until there status if fully resolved.

Feb 19 07:13 AM

[DougP:]

A clarification: GM and Chrysler were asked to provide their "worst case" scenarios, which they did. That doesn't mean that they expect to need that much help. Of course, it's very possible they could need all that money, but we really shouldn't be surprised that if the companies are asked "How much is the MOST you think you'll need to survive?" the number will be a big one.

Feb 19 08:08 AM

[Mister Jimmy:]

So let the industry fade away? It's interesting that other industrialized nations are not allowing that to happen to their auto industries. Let them fall into bankruptcy? That will be far more expensive to the American economy, and taxpayer. However, Rick, you and the rest of the "contributing authors" on Seeking Alpha may get just what you've been advocating for many months.....and will no doubt be criticizing the result.

Feb 19 08:22 AM

[303820:]

ATLASMAN...CH11 worked wonders for the steel industry...it put a lot of retired people in the streets...eliminated their pensions...their health care benefits...and shipped their jobs to China, Brazil, Poland, japan,India and all of those cheap labor countries...It worked beautifully for the fat cats on wall street...The airline? ch11 worked so well that they have to file over and over! and, guess who's paying for their pensions and health care...you and I!

As for Chrysler and GM they are in the shape they're in partly because of people SPREADING CH11 PROPAGANDA to keep costumers away from their show rooms...Rumor is that the Chinese are behind the "death to Detroit" push so they can start shipping their cars to USA

Feb 19 08:24 AM

[atlasman:]

303820 -

The reality is that we live in a hyper-competitive global economy. There is nothing that can be done to unwind this fact. US became the largest economy in the world because it could build better things more economically than anyone else. The big 3 became the big 3 because their products yielded more value than any other car company. Sadly this is no longer the case and the the result is unless they make significant changes which does not appear to be the direction they are headed, they will either end up in CH11 or be nationalized (Ford may be an exception). I consider CH11 the better of the two inevitable options as I do not want my children to have to further subsidize them.

Instead of focusing on favored industries or favored constituencies (i.e. car industry and people that bought mortgages that they could never afford), my preference would be for the Government to think about changes it could make that would make all US-based industries more competitive. This does not involved trillions of dollars like the Obama administrations (and Bush before him) is pursuiing. I believe this whole mess can be mitigated by sensibly reviewing and suspending all of the laws that make doing business in the US more difficult than it need to be. The most obvious examples include Sarbanes-Oxley and our current tax system. However there are hundred if not 1000s of laws and regulations that were designed to fix a specific problem but instead just made life more difficult for everyone else and make us in the end a little less competitive.

Believe me, as someone who has a retired father living on a pension which is at risk and who has worked in an industry that has been devastated over the last decade, I am not unsympathetic to the plight of people effected by global competition. However, I am very realistic about the reality we all face and strongly disagree that further subsidization is the solution. We compete and win, or die. Just like our forefathers.

Feb 19 09:20 AM

[TB3:]

Unfortunately the decisions being made now are not economic nor are they financial, they're political (will the tie between the Democrats and the UAW override all other considerations). In the world of special interest groups who wield influence all out of proportion to their real importance to the country's well being, the decisions that will ultimately be made will be made for the wrong reasons and thus a positive outcome will be fortuitous at best.

Feb 19 10:33 AM

[Miken:]

You were surprised by these things? You haven't been paying attention.

Feb 19 11:57 AM

[terder:]

So, a couple of questions: 1) Name at least two of the "many analysts" who think Ford "will end up asking for nearly as much federal aid as GM". Your statement as-is is unfounded/uncited. 2) When was the last time a consumer bought steel and whether or not the company was in CH11 was a concern of theirs in that transaction. 3) Any comparison of an auto manufacturer to an airline under CH11 is absurd. An airline doesn't need to support an exchange of goods/services beyond the transaction date, whereas a manufacturer has an understood commitment to provide ongoing assistance. A $199 flight vs. a $35,000 machine - not even in the same ballpark.

Feb 19 01:14 PM

[Karen Consumer:]

Bankruptcy is definetly the only way for the auto makers to survive. We are over-saturated with cars available for purchase, but over-extended to the point where no one will (reasonably) loan money to purchase these new vehicles.

Texas car dealerships are cooing over the fact that used cars are selling faster than they can take them in. That's not a good thing. I know these car buyers, they are paying cash, normally between 5k and 10k, because their credit is shot or they don't want (seriously, they DON'T) credit. Tote-the-note places are also booming, and even the repair shops that have taken liens on vehicles dropped off for repairs and never picked up are selling cars faster than before.

Operating at a billion dollar loss is no longer a viable option. When consumers are willing and able to buy new cars again, they're going to buy cars that are priced less than their annual salary, not equal to or more.

The big 3 have been on life support for too long. It's time to pull the plug.

Feb 19 03:47 PM

[Auto Guy:]

I agree and disagree. The big three became the big three because the car industry was consolidated during the panic of 1908, the great depression, long before we had real global competition in auto industry in the USA. GM was a fully formed company when Durant lost it to creditors in the 1920s (OK there was no Saturn until the 1980s).

I agree that while we may have "free" trade, we do not have "fair" trade among nations. Some of this is our fault by way of taxes and regulations, some of it is due to poorly thought out free trade agreements and currency manipulation. We also have the imbalance that is brought on by differing energy and manufacturing policies causing different products to be built.

The retirement and healthcare policies of the Big 3 are also a problem, but the problem is legacy costs not really the current wages and benefits. GM and Chrysler have more retired workers than they do active workers, this is not a functioning system, at least for long. Toyota and Honda do not have this issue because they came into the US after we all switched to 401Ks and because their workforce is younger, ie healthier. If the UAW has the ear of the new administration, this will all change with the Card Check legislation that will be enacted. This will effective destroy manufacturing in the USA since a government appointed person will impose a contract if one can not be reach by cooperation.

Manufacturing and Agriculture are important. We have forgotten that in the USA. It will haunt us in the future. Read Warren Buffett's article in Fortune from 2003, Thriftsville vs. squandersville (or the post on Seeking Alpha by Addison Wiggin from Nov 25, 2008). Without equal trade, our days as a wealthy nation are numbered. Time to think about it and change our ways now.


On Feb 19 09:20 AM atlasman wrote:

> 303820 -
>
> The reality is that we live in a hyper-competitive global economy.
> There is nothing that can be done to unwind this fact. US became
> the largest economy in the world because it could build better things
> more economically than anyone else. The big 3 became the big 3 because
> their products yielded more value than any other car company. Sadly
> this is no longer the case and the the result is unless they make
> significant changes which does not appear to be the direction they
> are headed, they will either end up in CH11 or be nationalized (Ford
> may be an exception). I consider CH11 the better of the two inevitable
> options as I do not want my children to have to further subsidize
> them.
>
> Instead of focusing on favored industries or favored constituencies
> (i.e. car industry and people that bought mortgages that they could
> never afford), my preference would be for the Government to think
> about changes it could make that would make all US-based industries
> more competitive. This does not involved trillions of dollars like
> the Obama administrations (and Bush before him) is pursuiing. I believe
> this whole mess can be mitigated by sensibly reviewing and suspending
> all of the laws that make doing business in the US more difficult
> than it need to be. The most obvious examples include Sarbanes-Oxley
> and our current tax system. However there are hundred if not 1000s
> of laws and regulations that were designed to fix a specific problem
> but instead just made life more difficult for everyone else and make
> us in the end a little less competitive.
>
> Believe me, as someone who has a retired father living on a pension
> which is at risk and who has worked in an industry that has been
> devastated over the last decade, I am not unsympathetic to the plight
> of people effected by global competition. However, I am very realistic
> about the reality we all face and strongly disagree that further
> subsidization is the solution. We compete and win, or die. Just like
> our forefathers.
>

Feb 19 06:47 PM

[billddrummer:]

Good article.

Several hundred pages of plans for viability, but not until 2011 or later?

What happens next year, if car sales are still below 10 million units? (A seemingly real possibility considering the depth of the global recession.)

And since GM is the largest money loser, why keep propping it up?

I know that a chapter 11 filing would destroy what little credibility the company has, lead to its delisting from the NYSE, crush the bondholders who now enjoy 40% yields, and wipe out what little market cap is left, but how does a company that predicts it will lose $1 billion a month justify its existence?

If car sales continue to sink (likely), and fixed costs remain high (also likely), no brand rejiggering will fix the essential problem: overcapacity.

Only if GM shrinks even more (merge Chevy and GMC overlap products [10 models to 5], make Pontiac a Chevy subsidiary with 2, maybe 3, models, and dump Hummer, Saab and Saturn), will the company have even a remote chance to stay afloat.

Politics don't matter as much as cash flow. Without cash flow, no company can survive unless it has a sugar daddy. Which is looking suspiciously like the Federal Government.

Feb 20 05:49 PM