Warning: U.S. Auto Crash Ahead

Imagine you are a foreign group interested in establishing a large position in the powerful US market in these troubled times.

Would the US government like to finance your entry to the market, give you a large stake in a leading company, and also the option to buy it later if the government-financed rescue proved successful, and if not allow you to walk away having risked nothing more than your reputation and a few outdated designs for small cars?

Sorry, that gave it away: we are talking about the ‘offer’ Fiat (FIATY.PK) is making for Chrysler which otherwise faces imminent bankruptcy. It is hard to see even the naive and relatively inexperienced Obama administration falling for this one.

GM

Over at General Motors the bureaucrats are also preparing for Chapter 11 bankruptcy proceedings, though they have the luxury of a slightly longer timetable that closes at the end of next month. So it looks like Chrysler will beat GM to become the first of the Big Three automakers into bankruptcy protection.

Perhaps that is the best way forward for these two auto giants. Every other approach to keeping them alive seems to have failed so Chapter 11 is almost certainly where they will end up.

But what does this mean for optimism about green shoots of economic recovery currently doing the rounds of US dining tables? Letting two of the country's biggest industrial concerns go is no small undertaking.

Companies in Chapter 11 are protected from their creditors, that means if you are owed money by them you have a cash flow problem. And if you are a supplier then you will delay payments to your suppliers, and how do you pay your staff?

Lehman Lesson

It is a similar domino effect to the one seen in the Lehman Brothers bankruptcy last autumn, except that arguably the impact on the real economy will be more quickly visible in massive lay-offs.

There will be, of course, an invisible further hemorrhaging of the banking system as it absorbs yet another round of bad debts from the auto giants and their extended family. It is impossible to quantify but surely we are talking again about telephone numbers.

With a US auto crash coming it would be wise for investors to get off the road and take profits from what has been an exceptionally strong rally grounded in nothing more than hot-air about a recovery that is still quite a long way off. And investors would be wise to start switching from bonds to precious metals as a safe haven because bonds are government debt and the government is borrowing too much.

Comments

[elcopone:]

I agree that the Fiat deal is simply absurd. However, I'm not sure of this "crash" you speak of. Are you talking a crash of car sales, stock prices, and/or companies? It is not clear to me in your post.

I think a good argument can be made that after the short-term supplier chain disruption, the remaining OEM's could be looking at 5-25% of the US market share up for grabs. Long-term this is very positive for the remaining automakers.

Apr 27 12:02 PM

[napiray:]

The FIAT deal with Chrysler is only possible, if Germans will reject their offer for Opel. This is very unlikely after today's move, where FIAT agreed on most of the terms. Opel makes far more sense for FIAT than Chrysler. Now there is still one possibility on the deal, which is German political preference on Magna for the Opel deal. However nothing of this makes any U.S. auto crash. Sure there will be changes, sure some of the brands will disappear, sure there are to be bankruptcies, but crash? No, what is happening is actually a necessary change for the U.S. auto industry.

Apr 27 02:28 PM

[raytayzmd:]

..."auto crash ahead"???...uh, Peter, have you been off to another planet the past few months or what?...oh, wait a minute, I forgot -- you've been spending all your time trying to onload those Dubai condominiums you own...HAW!

Apr 27 02:58 PM

[Mad Hedge F...:]

Ring the alarm! General Motors (GM) CEO Fritz Henderson made known his final, final, last ditch offer to avoid bankruptcy. Owners of $27 billion of bonds will get 10% of the company. The unions will get 39% of the company. Pontiac will be axed. Six more plants will be closed, laying off 21,000 workers. What will happen to 3,900 dealers is still up in the air. With the stock now at $2, Fritz has very little to bargain with. Whatever car business survives this won’t look anything like the GM we know. Why do I think we are headed towards a Ford (F) only nation?

Apr 27 04:38 PM

[qw:]

Sensational headlines with no substance.
Saving Chrysler and GM in its present form will be a miracle, however, after restructuring they will be formidable.
If the economy improves and vehicle sales pick up Ford will get a better share of the market but by no means will be the only domestic auto manufacturer.

Apr 27 10:14 PM

[Risky Business:]

In terms of GM's stock price, the current common will be 1% of the proforma GM company (if the out of court resturcturing is successful). So why in the world is it currently trading at a $1.2B market cap, which would imply a $120B proforma market cap?!? Even if it's trading as an "option", that's a hefty call premium to pay ($1.20 premium on a 0.70 strike).

Apr 28 10:21 AM

[naidle:]

How has the stock market factored this in already? Bank stocks are going up yet if those companies collapse there will be a significant spike of people young and old underwater or bankrupt.



On Apr 27 02:53 PM Freya wrote:

> Some more "hot Air", the rally was based on a decelleration in the
> downturn with the possibility that all of the Unknowns had been revealed
> and priced in.
>
> A GM/Chrysler Bankruptcy has already been factored into the stockmarket.
> The Government will support the suppliers just as it has Guaranteed
> the Warranties. Can't fix it if the parts are unavailable.
>
> Obama's first 100 days...I can see the Headlines Now, "GM/Chrysler
> in Bankruptcy" The Stockmarket Is down, the first for a new President
> since the Great Depression, Swine Fu Pandemic sweeps the Nation,
> Gold soars.
>
> Chrysler may be down for the count but thats about it.
>

Apr 28 10:28 AM

[Chicky401:]

Fiat has not produced anything worth buying or even really talking about. I think Chrysler would be better off leaning towards the bankruptcy then having Fiat's hands in anything. Personal opinion of course. Do I think the government will let Chrysler or GM go completely bankrupt? No Obama doesn't want that kind of image. Well especially not GM, Chevy will always be around.

Apr 28 11:23 AM

[ed233:]

When you think about the precident Mr. Obama is establishing concerning this whole matter of the auto industry, you have to wonder what history is going to see in the rear view mirror. Will this bizzare bail out idea look like a wise investment of the taxpayer's money? These auto companies have either directly or indirectly laid off or fired huge numbers of employees both blue collar and white collar. And there are many more to go with the intention that a large number will not be returning. Has anyone given thought to what probable percentage of the worker's jobs will be saved after the whole episode has passed? It's no secret that the manufactured number of automobiles in the future is going to be less in North America. For this Obama investment to make sense wouldn't you want to have a good idea as to the number of employee that will have a job in the future? In otherwords can Mr. Obama point to a good estimate of the number of jobs that have been saved by his making this investment to save those companies. My guess is that it might be a losing proposition given the numbers of manufactured vehicles expected to be produced to satisfy the market. The taxpayer could be on the hook for saving less jobs not to mention the precident President Obama is setting. And what about the number of other industries that are just as worthy of the same considersation that the Obama administration is giving to the auto industry. Where does it all end? LOL Looking after your money.

Apr 28 06:13 PM

[gollwoods:]

i think the U S based auto companies are being propped up to help confidence, The sales figures are so low that it is hurting all the car companies and letting G M and Chrysler slowly fade from the market is the best option. Tens of billions are owed to bondholders and a slow default is preferable to a sudden default. I think it is just apperances that matter now. the final outcome is a 95% chance of Chrysler and G M being gone.

Apr 28 07:54 PM

[DonFurio:]

Haha, what a loser this Peter is..

On Apr 27 02:58 PM raytayzmd wrote:

> ..."auto crash ahead"???...uh, Peter, have you been off to another
> planet the past few months or what?...oh, wait a minute, I forgot
> -- you've been spending all your time trying to onload those Dubai
> condominiums you own...HAW!

Apr 28 10:22 PM

[CJJ:]

Why don't you people who are so fixated on the "strength" of the foreign auto makers do some real research.
-US cars are competitive, the union promises and wages are not.
-The whole automotive sector is in the crapper. All over the world.

I'll let you all in on a little secret. We're in a really bad recession. People are wary of spending a few bucks on a meal out. Are you so dense that the car and home markets would be weak as those are the 2 biggest purchases 99% of people will ever make?

This slowdown is temporary. More Chinese people = more cars bought. More people in the world in general = more cars bought.

Wait until you can get a 50-100 mph car in the US...I'll let you all cling to your 18mph car and I'll plunk down the cash for the new car and laugh when gas goes to $10/gallon.

All these thousands of articles and millions of posts debating this stuff is just a bunch of noise.

Apr 28 11:24 PM

[CJJ:]

MPG not MPH...but you all are internet experts, so you know what I meant.

Apr 28 11:25 PM

[Suncatcher:]

Now that GM is going to be run by the US government and the union it will operate on the model of Amtrac. Does that give anyone confidence in the situation? As far as the jobs going away... if GM and Chrysler fold, i doubt it unless alot more people are planning on walking. Those jobs will generally be re-absorbed into the remaining players, albeit at lower salaries and benefits. What will be at risk during the transition will be confidence in the economy and the system, if that takes a hit so will the market and the economy. On another subject : you can be passionate about a subject without being derisive, although it is sometimes fun to see hotheads blow their corks from time to time.

Apr 29 01:06 AM

[Freya:]

Chrysler's Bankruptcy will send a warning shot across GM's bow. The Unions now know that they are Not in charge. Their Man, Obama, isn't the Man they helped elect.

naidle: By GM/Chrysler I meant one or the Other. The last line indicated what I thought would happen.

"Chrysler may be down for the count but thats about it." Well, thats it. Chapter 11 allows them to get their respective acts into gear.

Apr 30 01:05 PM

[Freya:]

Chrysler has always been my Bankruptcy pick.

Its a private Company. Its owned by a Hedge Fund.

Hedge Fund = enemy of the people = sacrificial Lamb

Apr 28 01:02 AM

[Freya:]

Some more "hot Air", the rally was based on a decelleration in the downturn with the possibility that all of the Unknowns had been revealed and priced in.

A GM/Chrysler Bankruptcy has already been factored into the stockmarket. The Government will support the suppliers just as it has Guaranteed the Warranties. Can't fix it if the parts are unavailable.

Obama's first 100 days...I can see the Headlines Now, "GM/Chrysler in Bankruptcy" The Stockmarket Is down, the first for a new President since the Great Depression, Swine Fu Pandemic sweeps the Nation, Gold soars.

Chrysler may be down for the count but thats about it.

Apr 27 02:53 PM