Is One Automaker Default Almost a Sure Thing? 16 comments
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Bloomberg is reporting Auto Industry Default Risk Soars to 95% on GM, Ford.
One of America's three biggest automakers is almost certain to default within the next five years, according to UniCredit SpA analysis of the market for credit-default swaps.
Contracts to insure $10 million of General Motors Corp. (GM) debt cost a record $4.7 million upfront plus $500,000 a year, indicating an 84 percent chance of default, while Ford Motor Co. (F) has at least a 75 percent risk, according to UniCredit data. Combined with Chrysler LLC, the probability that one of the three will be unable to fund its business is more than 95 percent.
Contracts on Dearborn, Michigan-based Ford, the second- biggest automaker, cost $3.9 million in advance and $500,000 a year. Credit-default swaps on Auburn Hills, Michigan-based Chrysler loans are $1.9 million upfront and the annual $500,000 charge, UniCredit prices show.
"There might be a default at any time," said Jochen Felsenheimer, the Munich-based head of credit strategy at UniCredit, Europe's fourth-biggest bank. "The costs imply there is close to 100 percent probability that one of the big three will file for Chapter 11 bankruptcy."
Auto Sector Credit Default Swaps
The above chart is thanks to Chris Puplava at Financial Sense. (Click to enlarge.)
Automakers Want A Handout
There is no way GM or Ford can raise money in this market. The "solution" of course is to ask for a taxpayer bailout just as Fannie Mae received. Indeed, the Detroit 3 ask up to $40 billion in loans.
Detroit's three automakers are urging Congress to make as much as $35 billion to $40 billion in low-cost loans available during the next two to three years to assure that the companies survive long enough to retool and build a new generation of fuel-efficient vehicles.
Chief executives Rick Wagoner, Alan Mulally and Robert Nardelli -- of General Motors Corp., Ford Motor Co. and Chrysler LLC, respectively -- talked Friday and agreed that access to capital is their most critical short-term need during this volatile period of high fuel prices and slumping SUV and truck sales, sources told the Free Press.
Top lobbyists for GM, Ford and Chrysler followed up Sunday with phone calls to leaders of Michigan's congressional delegation -- including U.S. Sens. Debbie Stabenow and Carl Levin, plus Reps. John Dingell and Sander Levin -- to drive the point home. All three Detroit companies are hemorrhaging cash and having trouble borrowing.
On Monday, Democratic presidential candidate Barack Obama proposed $4 billion to help Detroit's automakers build the cars of the future. Obama's advisers called it a first step.
Yes it's serious. It's serious how much money is being thrown around. And none of it will help. GM, Ford and Chrysler are pathetic basket cases, but so are many banks and financial institutions. And the best thing for basket cases is to let them go bankrupt.
Keeping weak institutions alive at taxpayer expense cheapens the dollar and deprives other more legitimate businesses of the capital they need. This is one of the things that prolonged the Japanese deflation for what is now known as "The Lost Decade".
Does this mean massive inflation is coming? No, it doesn't. The destruction of capital is happening at a far greater pace than money is being thrown around. Inquiring minds may wish to consider Yes, That's $2 Trillion of Debt-Related Losses, a Barron’sinterview and video with Roubini.
So Obama asking for $4 billion for GM is a drop in the bucket compared to $2 trillion in writeoffs. So is the $150 billion "stimulus" package. Yes, there will be more and more stimulus packages, and every one of them will be a waste of money. And just as happened in Japan, the total of these stimulus packages will not match the destruction in credit and lending at banks and financial institutions.
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This article has 16 comments:
In practice, the creditors will become the new owners of GM and Ford. Or, the junior partners under the real owners, the retirees of the UAW. A bankruptcy judge might or might not also allow the companies to reduce their pension and health care obligations.
But there isn't any way in a warm place it will put either company out of business.
If both went into bankruptcy, however, it would mean nearly half a trillion in debts left with uncertain payoffs and haircuts. Every dime of it owned by somebody - much of it by banks, others owned by other people's pension funds, etc.
Half trillion dollar bankruptcy are not to be embraced rashly as though it were all some morality play but otherwise without consequence. Nobody has any idea how many other enterprises would fail in direct consequence, if these giants can't pay their debts.
As for the taxpayer rescuing the banks and automakers, it would be helpful if someone do some research on how much taxes (direct and indirect) those companies have paid in the past 10 years and how much more could paid in the future if they are helped to survive.
Nice article at investinchinastocks.bl...
Wagoner sees China as a potencial salvation market for General Motors Reply
Nice article at investinchinastocks.bl...
Wagoner sees China as a potencial salvation market for General Motors Reply
Our government might let Chrysler go down as the smallest of the three, now that it's private. But GM or Ford? Not a chance, I don't think.
The auto companies have long stalled better fuel economy standards. The US deserves better. Having one of them die will hopefully reduce their political clout.
I did my masters (of public health) in Michigan, and I know it would be devastating to the state's economy. But there are bigger things to worry about.
Emerging markets like China are definitely a huge growth market, and if GM or Ford can turn their US operations around or at least keep them solvent for a few years, then I think they would make it, for better or worse.
Either way, I hope the US government doesn't throw away any more than $4b on the automakers.
Bad money after good leads to MORE, not LESS pain than allowing a bankruptcy court to consider the actual equities in a reorg. The company that can emerge from bankruptcy is the one that deserves to emerge; if it is much much smaller, or tightly focused on where it can actually compete successfully, how is that not a better outcome than where taxpayer dollars are used to continue to prop up a business plan and model that has simply outlived its used by date?
I would prefer that at least there be some honesty as to the use of the taxpayer funds: let the failing carmaker fail, and provide the discontinued workers (and pensioners) some direct relief. But giving the keys back to the same guys who got you there is the equivalent of handing the keys to the drunk driver who has just run a school bus off the road and and saying "please drive carefully ... this time".
Are we entering a new paradigm where workers actually have to think about whether they are being overpaid for the value they are adding (instead of worrying about how to justify more overtime, and more days off? Man, we entered it a while back - check out Bangalore, Shanghai, Korea etc. The fat and slow will lose. Our country has moved into stretch pants and recliner rockers. I'm all for being socially responsible (and giving direct benefits to those who need them) simply as a cost of civilized society (no moral judgments required). But enabling the corruption and waste in financial leadership under the guise of "protecting the workers' pensions" helps nothing, and doubles the bill when it comes.
Its nonsense to think that one of these companies can just disappear and the economy can be running smoothly. It will have huge ramifications across the country, and will hurt the GDP much more than the cost of the bailout. Not to mention that you will give up on any chance of the US regaining its leadership in the auto market.
BrianZach is correct. In addition to employees of the big 3, think of the number of employees working for suppliers depending upon domestic auto manufacturers, families, neighbors, businesses supported by these people, etc. This compounds the overall impact of a bankruptcy.
weiwentg points out the potential impact to the Michigan economy, however, it goes well beyond a single state. Auto manufacturers and hundreds of suppliers have plants, engineering facilities, and operational offices located throughout the country. No the country is no longer is directly dependent upon GM or any other auto manufacturer, but it is certainly greatly affected. I shudder to think of the economic upheaval without my employer, GM. An economy cannot be 100% service based. You need some agricultural and manufacturing to complement these services.
*Opinions expressed are personal and not necessarily those of GM.
GM is spending a $5 million party at the Detroit auto show to show its line of vehicles that is currently not selling well. It's kind of the Microsoft way of doing business, if it doesn't sale, throw money at it until it does. I would rather see GM use that $5 million by working on bringing in practical vehicles they sell elsewhere and innovate.
But by probably waiting for a "lending hand" from the government and the bad antecedents it already set, it feels GM is not that motivated to work it out on its own. It's a tricky situation but I would rather see that company use that money with research instead of partying.
To put it in perspective, the Apollo program cost the U.S. government $20 billion over a period of 10 years, and it put men on the moon and spurred revolutionary technologies such as integrated circuit miniaturization and fly-by-wire controls.
Even after adjusting for inflation, $19 billion per year for 10 years from the Big Three would have been equal to the the expenditure of the Apollo program. What does the Big Three have to show for it for the past 10 years (1998-2008)?
Considering that in the past 10 years Detroit spent the same amount on R&D as the 10-year Apollo Program, you would expect them to put out revolutionary things!
I remain unimpressed.